By Michael Feldman and Benjamin Bottner
For building operators, commercial real estate banking and finance seems to grow in a more linear, less volatile fashion than the standard cyclical model that tracks interest rate growth, capitalization rates and lending patterns.
Broadly, the job description of Property Management has shifted over time from an emphasis on the physical maintenance and “the bricks” of the building to an expanded importance put on the financial reporting and analysis of the Real Estate Asset(s).
The perpetual and ever-accelerating pace of the technological onslaught has instigated this shift towards the financial component of a building operator’s responsibility.
Moreover, the more technological efficiencies allow for easier banking, finance and financial reporting in operating a Real Estate investment – the more the expectations from the consumer (in this case – Real Estate Owners/Investors/Non-Operating Equity Partners) continue to expand.
This growing expectation driven from consumer demand, in turn, has created a cyclical impact on the building operators need to continually add more technological efficiencies into their operations of a building.
In other words, as more and more technological-based operational efficiencies become adapted into customary, industry standard building operations — the more the consumer (very quickly) logically expects even more new, improved technological efficiencies. The primary result: buildings will be run more efficiently not just physically but also fiscally.
Specifically, we can look at changes the banking world has made as a mini-case study to highlight the premise that building operators will need to not only continue to adopt new technologies, but do so at an increasing pace merely to stay competitive in the marketplace.
Worthy building operators, be they Third Party or Owner operators (1st party) have already accepted this premise and have been on a quest to improve our processes and procedures to stay current, efficient and be able to provide the best financial services to our clients.
One of the primary measurements of the success of any real estate investment is of course the revenue generated, which in its simplest form correlates to the rent paid by tenants (or common charges and maintenance paid by unit owners and shareholders, respectively). We compared two versions of the same process and the results were compelling:
Monthly Collection Process Of OLD:
- Printing and mailing physical paper copies of the monthly invoice along with return envelope.
- Tenant opening mail, taking out a checkbook, writing a check, finding a stamp, and mailing it back to the building operator.
- Management office receiving & opening up the returned envelope, looking up the applicable ledger and applying the payment.
- Collecting a stack of all checks received and entered that day and filling out a bank deposit slip, physically walking over to the bank and depositing the checks
- Then waiting and having to perform reconciliation to confirm the funds cleared.
AVERAGE DURATION OF PROCESS: 7.5 Days
AVERAGE AGGREGATE TIME TO FULLY EXECUTE ONE PAYMENT BETWEEN TENANT AND OPERATOR: 20 Minutes
Monthly Collection Process of NEW:
- Invoice is electronically created and emailed out.
- Tenant/Unit Owner/Shareholder (Recipient) opens email, 2-5 clicks, and logs into online payment portal.
- Recipient executes payment online, likely utilizing saved payment information.
- Funds hit an intermediary account and then are automatically transferred into the appropriate building operating account.
- Management downloads a data file from the online processer and then uploads this file into software to post receipts and automatically populate and update the ledgers.
AVERAGE DURATION OF PROCESS: 3.5 Days
AVERAGE AGGREGATE TIME TO FULLY EXECUTE ONE PAYMENT BETWEEN TENANT AND OPERATOR: 8 Minutes
Of course, there already exists multiple iterations of the NEW Monthly Collection Process that serve to further hasten user time and convenience such as ACH, credit card, recurring e-payments, and so on while concurrently putting downward pressure on the cost to building operators by lowing staffing needs.
And, as a corollary, the decision makers choosing from competing Building Operators to manage a given Real Estate Invesment(s) already widely expect these sorts of efficiencies from attractive Building Operators. For some of you, this may seem obvious. However, it is noteworthy that less than ten years ago many of the currently widely accepted payment methods outlined above were at that time scarce or nonexistent. There was really ONLY the OLD collections method.
Whether you are a building operator with tens of thousands of units (or for commercial millions of square feet of managed space) or an energetic start-up with only a few buildings under management – implementation of a new process such as tenant receivables is typically anything but seamless.
Anyone who tells you differently is either being disingenuous or speaking without experiencing.
For a multitude of reasons, the implementation process of any operating efficiency will involve some degree of trial and error to identify the right procedure for a particular operator, engage the right third party servicers to partner with to assist in the implementation, and strike the right fit between the customized demands of a building operators portfolio and the best process.
However, despite these implementation challenges (which by the way will also increasingly decrease over time) the alternative of choosing not to implement new practices for operating buildings more efficiently is an option that ultimately will only have one possible result: failure.
Technology is going to severely disrupt the building operations industry and in turn, how the banking industry interacts with its building operators at an extremely accelerated pace.
Historically, our industry has been notoriously anti-technology for some legitimate reasons. With time, an increasing number of individuals who are prepared for the computer revolution are displacing their predecessors and taking their decision making positions.
The technology already exists and will continue to improve rapidly. Decision makers for building operations have already started to adapt some of the countless products coming into the industry.
We have already seen what I term the “institutionilzation” of the multifamily Asset due in part to the growing ease and efficiencies to run this Asset type with scale. Now we are already starting to see larger groups come into smaller scale investments due to the efficiencies technology is already starting to provide.
Perhaps unfortunately the unsophisticated mom/pop investor — at least in the current connotation — will become obsolete.
If you are a building operator who is comfortable doing things as you have always done it, and you choose not to get on this bus — you should expect to get shoved off of it (probably by a robot).
Michael Feldman is co-founder & president of Choice New York Management and Real Estate Service Alliance (RESA) member. Benjamin Bottner is co-founder & director of management of Choice New York Management. Real Estate Services Alliance (RESA) is an organization with NYC-based real estate service professionals that complement one another’s expertise. The goal of RESA is to provide a resource to owners, operators, and investors for any commercial real estate question.
