Most people don’t realize how huge and pervasive the real estate industry is – certainly one of the dominant sectors in every economy worldwide. In developed economies such as the United States, real estate assets exceed the value of all publicly traded stocks and bonds. And the world is still trying to recover from the subprime mortgage crisis of several years ago.
Not surprisingly, the real estate industry is not only huge but also diverse. When asked about who works in real estate, many people will cite brokers, appraisers, developers, mortgage lenders and a few other professions. In fact, the industry encompasses dozens of distinct professions.
The huge size and great diversity of the real estate industry has created and continues to create innumerable, specialized geospatial business opportunities. These entrepreneurial opportunities will be explored throughout the forthcoming webinar series presented by Castle Consulting and Directions Magazine. Opportunities in the real estate industry, like those shown in Figure 2, can be organized into four major areas:
- Corporate real estate and finance (a focus of webinar #1)
- Using the technology to find the best properties in which to invest (webinar #2)
- Using the technology to optimize a purchase or rental transaction (webinar #3)
- Profitably managing previously acquired properties (webinar #4)
Encapsulating the Industry’s Magnitude, Diversity of Players and Adoption of Geospatial Tools
It is useful to delineate the principal components and players in the real estate industry to have a full awareness of the industry’s scope and complexity. Both private and public sector organizations have successfully been using geospatial software and databases in their daily operations for some time. These organizations have developed marketing strategies and specific entrepreneurial opportunities. Figure 3 is a summary of technology adoption by prominent industry sectors.
Notice that the vertical axis of the chart measures the percentage of the members of any given sector that have adopted geospatial technologies into their real estate operations. The horizontal axis indicates how many members each sector has. The “sweet spot” in the chart is the upper right corner, consisting of many players and a high technology adoption rate among them. Retailers and brokers fit these criteria, and are among the detailed case studies in in the first webinar in our series.
The case studies will underscore the successes of companies that have made geospatial technologies in real estate a centerpiece of their businesses. For example, Zillow.com and Loopnet.com both had very successful initial public offerings (IPOs) within 10 years of their founding.
Site and Property Selection: Efficiently Finding the Best Properties to Acquire
Figure 4 shows the organizational structure for site selection analysis. One typical, frequently used analysis progresses from analyzing real estate opportunities at the metropolitan level on down to the submarket level, then down to the trade area level and so on, until finally drilling all the way down to listings of specific properties for sale and rent.
The right side of Figure 4 indicates the availability of demand-side, supply-side and other databases at each of the five geographic levels. The second webinar explores the nine, check-marked database groups in detail:
- Demand-side databases include current and projected census-type estimates (e.g., population, income, education, age); lifestyle a.k.a. segmentation databases (PRIZM, MicroVision, Tapestry); consumer purchasing patterns, and so on.
- Supply-side databases encompass not only listings of properties for sale or rent, but also market-level information on total inventory, vacancy rates, asking rents, net absorption, and so on.
- Other databases consist of zoning, assesor parcels and other typical administrative maps; constraints (e.g., flood zones, earthquake fault lines, toxic waste sites); special areas (historic preservation districts, specific area plans); traffic maps, and a host of other considerations.
Most of the data sources are available online, and a large percentage are free.
Property Acquisition:Optimizing the Buy/Lease Transaction, Including Mortgage Underwriting
A maxim of the real estate industry is that the ultimate profitability of an investment is determined at the time the property is acquired. Accordingly, having found the best candidate properties, the focus of the next stage of analysis is on using geospatial technologies to obtain the best possible transaction. Figure 5 delineates three of the salient transaction components.
Concerning the appraisal component in Figure 5, for example, the third webinar in our series will provide specific examples of existing geospatial tools and databases that:
- Provide direct inputs to an Income Approach spreadsheet – typically a five- or 10-year Discounted Cash Flow Model (DCF)
- Enhance the efficiency and reliability of selecting Sales Comparables, and feeding all the relevant information on the selected properties into a comparables adjustment matrix
The benefits of geospatial technologies in transaction support consist not only of sophisticated analyses but also compelling presentations, that is, not only the “steak” but also the “sizzle.” Innumerable geospatial presentation capabilites are especially valuable when assembling a deal package for potential investors, persuading a lender to finance construction, and even negotiating a better price.
Ongoing Property Management:Maximizing Continuing Profits with Asset Management Methodologies
A commerical real estate investment is expensive, typically ranging from millions of dollars to even billions of dollars. With that much money in one asset, the owner or renter of the property is obliged to manage that financial asset for the highest possible return on investment (ROI). Yet ROI is not as widely and intensely pursued as you might expect, despite the availability of geospatial tools to maximize ROI.
Let’s look closely at corporate real estate (CRE), which comprises a major sector of the U.S. economy:
- Corporations account for about 75% of the capital going into commercial real estate.
- Real estate holdings are approximately 25% of the average corporation's assets.
- Real estate expenditures are the second largest operating expense, after payroll.
- The average corporation's real estate expenditures are two times its net earnings.
Except for a few scattered, enlightened corporate real estate managers, the only significant geospatial tools in this space have been of the basic property inventory and facility management variety.The main reason for this lack of activity is that corporations typically view their owned and leased properties as necessary expenses whose costs should be minimized, as opposed to viewing real estate as assets having a potentially significant ROI. Consequently, huge amounts of money are being left on the table.
Among other geospatial opportunities, the fourth webinar in our series will explain the potential CRE applications that a person with an ROI perspective could pursue, as listed on the right side of Figure 6.
To take one example, say a company owns its headquarters office building in a real estate market where office prices are projected to decline over the next five years; such forecast information is readily available from content vendors like REIS Reports. Rather than continuing to own an asset of diminishing value, the company should consider doing a sale/leaseback of the building and investing the proceeds in money-making activities elsewhere. The company remains in the same building, but shows increased profits.
There are factors other than “location, location, location” that are critical in real estate (such as timing), but unquestionably the myriad of location-specific factors determine every property’s value and potential. Because geospatial software and databases are all about location, they are incredibly useful in real estate decision making – far more so than any other technologies.
The proverbial bottom line is that sooner or later all real estate professionals will be actively using geospatial tools and databases, and very real competitive advantages are to be gained by embracing the technology ASAP.
Ed. note: Join us for the four webinars on “Geospatial Technologies in the Real Estate Industry” beginning January 24th. Some webinar attendees will be attracted to only one webinar, but everyone should consider attending multiple webinars because of the overlapping activities of real estate professionals.