Time is one of our most essential resources. Sometimes real estate organizations fall into the trap of spending more time struggling with legacy systems rather than finding ways to optimize workflows for better outcomes.
A recent survey by BOMA International found, “Owners and asset managers stand to profit most from technology solutions that better address the breadth and strategic perspective of their roles.” How real estate professionals access vital information is key to effective and timely decision-making.
Real estate performance management software equips real estate investment trusts (REITs), asset managers, and property managers with a defined system monitoring critical metrics aligned with their organizational goals. Real-time access to variances and key performance indicators (KPIs) drives property performance towards improving net operating income (NOI).
This e-book outlines the use case for adopting an industry-specific real estate performance management (REPM) solution as opposed to a standard enterprise resource planning (ERP) program. Commercial real estate has specialized needs based on its characteristics and complexity. We demonstrate how the right REPM solution improves property evaluation processes and assists organizational growth.
Common Situations in Commercial Real Estate
Commercial real estate is complex. Every submarket, whether multifamily or medical, presents unique management and performance optimization challenges. However, asset managers, property owners, and developers all face similar obstacles when handling organizational growth and changes in management. Let’s see how a REPM helps overcome these hurdles.
Scenario 1: Organizational growth
Asset manager Scott heads a growing REIT. Several new assets recently joined the portfolio, but the legacy systems and processes are not scaling well. Each month, the property managers submit budgetary variances explanations using customized spreadsheet add-ons and macros. Over-time, these tools have become more of an encumbrance than an asset to streamlining the process. Productivity has declined.
Scott decides to find a better solution for monitoring operations performance and to improve communications with investors. Initially, Scott’s company attempts special add-ons for their existing accounting software, but adoption lags. The new features don’t integrate well with the ERP system.
Scott steps back and lists the features needed to achieve the required objectives. He discusses these needs with numerous vendors but finds these features are not native to spreadsheets or ERPs. He discovers a real estate performance management system, built with the industry’s needs in mind, has many features he needs to support portfolio growth and get productivity back on track.
The REPM Scott selects has an intuitive user interface that simplifies adoption by his property managers. The integrations work with existing systems, and the REPM automates much of the essential reporting. Soon, productivity is back on track. The open-API and integrations meant the latest portfolio acquisition easily adapted into the flexible REPM system.
Scenario 2: Solving a mystery
Gretchen is a property analyst for a limited partnership with over 20 joint venture partners. She has noticed that one of the portfolio’s properties misses its profit target in the third quarter of each year but returns to target in the fourth quarter.
The differences at the property with the lacking third quarter become apparent when looking at the variance explanations, but Gretchen’s reporting systems lack access to this information. Unbeknownst to Gretchen and the team, the property manager takes an extended vacation every August and inadequately educated his team on expense guidelines.
Gretchen faces the monumental task of consolidating the information into a single spreadsheet with over 50 tabs of information. Finding the line items that see cost overruns at that property involves consolidating variance report exports from two different accounting systems. She vents her frustration to the asset manager.
The asset manager is discussing Gretchen’s headache with a colleague. His friend works in the CFO office of a tech hardware manufacturer and mentions they experienced a similar problem until they adopted an EPM. The asset manager investigates EPMs and decides to demo a REPM solution. He sees the potential to streamline the analysis process and convinces the partnership to try it out.
With the REPM, Gretchen no longer has a headache consolidating reports from different accounting systems. The REPM automates the process, allowing her to spend more time on the work she was hired to do: performance analysis. The third quarter variance is readily apparent and rectified through communication with the property manager and staff training.
Scenario 3: Changing of the guard
Julio is a new asset manager succeeding the previous manager who served in the role over 30 years. He inherits an established portfolio of over 50 properties. Julio wants to bring an improved, data-driven approach to decision-making. He is eager to prove to investors this approach can drive net operating income.
Unfortunately, the retiring asset manager left with much institutional knowledge stored in his head. Even simple reporting tasks take longer than the previous asset manager needed. Julio constantly calls accounting to request expense data. He knows this process is inefficient, and he needs a new system.
Julio convinces the organization to use a REPM that integrates into the existing accounting platform. It pulls data in real-time and standardizes the chart of accounts at the various properties. He can easily see which properties are performing well and demonstrates to investors the value created through optimizing expenses.
Understanding Performance Management and Its Outcomes
Performance management is a broad category that includes any system or process designed to track and improve organizational performance at any level. Gartner defines performance management as “the combination of methodologies and metrics that enables users to define, monitor and optimize outcomes necessary to achieve organizational goals and objectives.”
Performance management systems include, but are not limited to:
- Application Performance Management
- Business Performance Management
- Corporate Strategic Performance Management
- Corporate Financial Performance Management
- Enterprise Performance Management
- IT Performance Management
- Supplier Performance Management
Real estate professionals benefit from the latest technological solutions that streamline links in the performance management chain. According to Nucleus Research, modern performance management solutions can increase productivity between 8-10 percent.
Think about how much time your firm spends collectively generating performance reports. If a single variance report takes three people one week to complete, that could easily be over 100 hours of labor. Saving 10 percent is like getting a whole extra day back that can be devoted to more thoughtful recommendations and strategic actions based on analysis.
Defining Characteristics of Real Estate Performance Management
Commercial real estate requires unique industry metrics and a specialized system for management performance. This is because CRE possesses:
- Tangible assets, or the physical structures
- Intangible assets, or the financial instruments (shares, liens, et al.) that underwrite the properties
To further complicate matters, many subcategories of asset classes and asset types with unique KPIs. For example:
- Office properties represent one asset type, and include properties labeled Class A, B, or C. Lease rates vary between classes and regions. Investors would watch the property’s operating income, NOI growth, and operating expenses.
- Investors in retail real estate watch metrics such as sales per square foot, occupancy %, base minimum rent change over time/base rent per square foot, and leasing spread, property operating income, NOI growth
- Industrial properties include further divisions in property types and classes, such as warehousing, distribution, and manufacturing. Investors with this asset type are less likely to track sales per square foot but do want to see operating income.
Juggling the management of this disparate and geographically varied property holdings challenges teams. A real estate performance management solution is this team-wide system that integrates strategic planning with real-time execution and key metrics to achieve investment goals and objectives.
Unique Needs of CRE
While an enterprise performance management program undoubtedly delivers operational benefits to many businesses, commercial real estate requires software to handle its unique challenges, like:
- Complex transactions
- Unique and dynamic performance metrics
- Varied organizational structures
- Sensitivities to macroeconomic cycles
Real estate assets are considered illiquid. They require specialized financing, and in some cases, pursuing creative funding. For instance, an asset manager may change the ratio of retail to residential square footage to square more favorable underwriting terms. Any financing changes require a keen eye to maximize long-term profitability.
Dynamic performance metrics
Profitability depends on capital underwriting, cash flow, and valuations. As assets move through a life cycle, their KPIs change. For instance:
- During acquisition phase, the team looks at occupancy, cost per square foot, profitability per square foot, utilization rate, loan-to-value ratio, property value growth, gross multiplier, and/or rental value growth rate ROI.
- Once a new property is stabilized, ongoing operations are monitored by watching NOI, revenue growth, expenses, vacancy rates, and variances.
- A close eye is kept on things when there is lease turnover, with the AM checking on lease events coverage ratio, tenant turnover, occupancy rates, average days-to-lease, and/or rent-ready costs.
Varied organizational structures
Commercial real estate investment management firms are organized differently from a typical corporation. Notably, the Chief Investment Officer typically heads up the team’s reporting, particularly the asset management divisions. A standard corporation relies on the Chief Financial Officer for financial reporting.
Additionally, CRE management companies divide daily decision-making responsibilities between asset managers and property managers. Asset managers tend to handle strategic operational decisions, while property managers execute the strategy and manage daily work. Some asset managers or owners outsource property management to a third party.
Finally, ownership is not cut-and-dry in commercial real estate. Properties can be held by publicly or privately traded REITs, private equity funds, limited partnerships, limited liability companies, institutional investment funds such as pensions or endowments, or a private, single owner.
The legislation outlining the owning entities impacts performance management. REITs must distribute a minimum amount of profits to shareholders every year. Limited partners receive a percentage of cash flow and proceeds when sold based on their partnership agreement. Each ownership structure adds complexity to consolidating financial performance information and disseminating it to investors.
Sensitivities to macroeconomic cycles
Commercial real estate is more sensitive to market conditions. These include:
- Federal interest rate cycles
- Local economic conditions
- Regulatory burdens
Acquisition and disposition decisions vary due to the constant shifting priorities. A local economy experiencing sudden explosive growth in senior housing will cause real estate professionals to look at different metrics than a market with a waning industrial sector. This impacts operational decisions, such as considering redevelopment of properties or new investment opportunities.
What CRE Performance Management Needs
To perform effectively and positively impact property management workflows, the right solution must:
- Support portfolio management first, the organization second. This means it must facilitate the key decisions at each major stage of an asset’s life cycle. The REPM is a tool used by asset management, not accounting or finance arms.
- Adapt to organizational structures. A limited partnership would configure their REPM differently than a REIT and differently from a vertically integrated investor.
- Be flexible to evolving organizational needs. Ideally, portfolios grow. A REPM must easily integrate new systems when mergers and acquisitions occur, or if the organization changes its investment strategy due to market shifts.
Ideal REPM Features
Based on the above factors, the components of a REPM solution become clear. The ideal system:
- Integrates operational intelligence with financial data
- Makes information available to the entire firm
- Monitors meaningful CRE performance metrics
- Connects strategic planning and execution
- Automates key real estate performance workflows
- Manages the drivers of NOI
Integrates operational intelligence with financial data
Commercial real estate professionals rely on operational communications from sources “on the ground,” like property managers and contractors. REPM solutions combine this valuable operational information with financial performance data: the budgets, revenue reports, expense reports, and so forth. Paired together, the REPM standardizes and structures the data to help make broader comparisons and provide context for the financial reporting. To help, REPMs include features like:
- Data integration: The platform must have a robust set of connections to and from a vast collection of industry systems.
- Dedicated customer support: Because third party systems are continually evolving and making changes to their data pipes, the REPM provider must offer ongoing support to keep the integrations up-to-date and minimize platform downtime.
- Standardization of charts of accounts: It is often the case that CRE portfolios contain properties managed on different accounting platforms with different charts of accounts. Consolidation of performance data requires robust mapping to a standard chart of accounts, while still preserving a view into information through the native chart of accounts.
Makes information available to the entire firm
Siloed information restricts collaboration and decision-making. REPM tears down the silos, so property analysts, accountants, property managers, asset managers, and other stakeholders clearly see property performance. When all parties understand performance, it is easier to align decisions around strategic priorities and collaborate with stakeholders for better-informed decisions. Key REPM features to support information sharing:
- Collaboration tools that integrate discussion into the platform. Rather than relying on email, in-platform communications simplify tracking all comments and questions on a particular property or document. It improves transparency and keeps decision-makers informed at all life cycle stages.
- On-demand access. Stakeholders need to see the most recent data now. REPMs remove gatekeepers, reduce import/export lag time, and speed up analysis. Stakeholders receive the most recent view of what is happening whenever they log in.
- Easy-to-use interface. The ideal REPM systems must be designed to be intuitive to the user. This prevents adoption lag time and encourages platform use.
Monitors meaningful CRE performance metrics
As we saw in the scenario with Gretchen, consolidating information from various sources and spreadsheets is a frustrating, inefficient practice. Real estate teams need an instant, uncluttered view of key metrics in a readily accessible manner. Supporting features for real-time metric monitoring include:
- Cloud-based data and analytics so that information can be updated more frequently and accessed from anywhere.
- Customizable dashboards for viewing key metrics such as expenses, revenues, and NOI
- Standardized reports for portfolio-wide analysis, automatically generated on schedule.
- Again, integrations with many disparate systems and charts of accounts.
Connects strategic planning and execution
REPMs act as a single hub for portfolio and property management. After setting objectives during the forecasting and budgeting phase, team members easily see how well the portfolio meets those projections. The gathered data on actuals helps strategic planning for the next cycle. Defining features for strategic planning:
- Strategic planning tools. REPM solutions may either provide native planning toolsets or integrate with standalone systems to pull in key data from property pro formas, forecasts, annual budgets, variance explanations, and expense reports.
- Collaboration tools. Features such as in-app messaging and task assignment help ensure that issues and opportunities found through analysis of data are acted upon promptly.
- Deeper analysis. Depending on strategic focus, REPM buyers may want to look for features that incorporate project management tools for CapEx projects, workforce management tools, or scenario analysis.
Automates key real estate performance workflows
Commercial real estate management contains tasks that are done the same way every time. The latest REPM software can take over these repetitive tasks. REPMs can automatically generate portfolio-wide performance reports like variance analysis and revenue performance. This frees team members from hours consolidating disparate data and spreadsheets. Typical workflows a REPM system speeds up with automation include:
- Variance reporting
- Property benchmarking
- Due diligence for acquisitions
- Leasing and lease renewals
- Capital underwriting
When examining a REPM solution, check for these automation supporting features:
- Review process. A built-in review process streamlines the close of each financial period with rules-based workflows.
- Reporting automation. Integration with data platforms and data standardization make building and analyzing reports a snap, whether standard reports are demanded regularly, or ad hoc reports pulled as needed.
- Presentation-ready exporting. Once reports are built, the platform should be able to export reports in a format that needs no additional tweaking to make it ready for presentation.
Manages the drivers of NOI
Optimized property performance management requires us to identify opportunities to create value. REPMs help asset managers and analysts discover these opportunities. Now that their time is opened through the REPM’s automation, they can focus their priorities on improving NOI and driving portfolio value. Make this discovery process simple by finding a REPM that:
- Offers enhanced analytics. One user said, “Right now we don’t have a great way to look at and compare things on a portfolio level. I want to go on a property by property level and how does each compare to another property in our portfolio.” One key feature is the ability for users to access metric analytics across regions and to “zoom in” on a single property. Analytics should easily adjust to compare categories or zoom out on the whole portfolio.
- Market benchmarking. Comparing similar properties in similar markets is invaluable for understanding which properties are outperforming or underperforming. The REPM’s analytics must enable benchmarking for useful property performance comparisons.
Additional feature considerations
- Data quality. The analysis is only as good as its data. Decision-makers must trust their information is more accurate and complete because the REPM solution reduces the human error risk of manually consolidating and updating reports. The systems should remove redundancies that impact data analysis.
- Changing organizational needs. As organizations flex and grow, or strategic objectives change, the REPM solution must adapt. Acquisition of a new property with a different chart of accounts system should not disrupt the monthly report expectations.
Real estate asset performance management benefits
Adopting a real estate performance management solution delivers measurable benefits for organizations. Forrester Group conducted a study commissioned by Tagetik that showed implementing its corporate performance management (CPM) software delivered an adjusted ROI of around 299% over five years with a payback period of just 24 months. Since REPM implementation is strategic and relatively low cost to begin, clients can find benefits like the ones listed below in the months following deployment.
- Improve productivity
REPMs reduce the potential for human error from consolidating diverse and non-standardized workflows. As a result, stakeholders have greater accountability for financial results. Property managers receive better communication on their property’s performance as it stacks up against similar benchmarked holdings.
- See the whole picture
Asset managers, investors, and owners gain a deeper understanding of performance across the whole portfolio. REPMs remove unnecessary gatekeepers of information. Now vital data is accessed at any time.
- Better strategic alignment
Data drives portfolio management decisions. REPMs present the most recent data. Stakeholders synchronize their efforts towards reaching the portfolio or property’s strategic and operational goals.
- Grow and adapt
Expand, shrink, or alter course swiftly based on changing market conditions. Handling these complex operational decisions is easier with a REPM. An integrated, cloud-based system can scale up to handle asset acquisitions.
- Identify and prioritize opportunities
Real estate professionals conduct performance analysis not just to measure revenue streams and expenses against market norms. Over time, REPMs build more accurate models of market conditions and performance that inform decision-makers. The in-depth analysis pinpoints opportunities for change or expansion other competitors might miss.
- Get better results
Real estate management is really risk management. REPMs reveal properties that potentially burden a portfolio with undue risk. Asset managers prioritize their actions to rehabilitate the property or make other well-informed decisions towards optimizing operational performance.
Costs of not adopting performance management
Let’s say your team decides not to adopt a real estate performance management solution at this time. Your team is left with two scenarios.
Continue operating with existing workflows. The customized spreadsheet inhibits complex analysis within the accounting system. Additionally, the team has a higher risk of errors based on manual processes. Vital information may be missing from analysis or duplicated, both which impact decision-making. Employees waste time on repetitive tasks like populating spreadsheets and verifying data. Running operational reports takes additional time waiting on different parties that have critical access to the required information.
The team purchases a EPM that, while having good reviews, is not purpose-built for the real estate industry’s needs. Integrating with industry-specific systems becomes a challenge. The EPM requires more implementation time as users develop custom configurations for typical commercial real estate reports and dashboards, slowing the adoption. Their customer service representatives aren’t sure how to answer some of the programming queries, as they are not familiar with the CRE industry’s needs. Changing the programming when strategic objectives change is almost like starting over again.
In both scenarios, teams spend more time making systems work rather than on what drives net operating income: analysis and better decision-making. Users are missing key opportunities like reducing high operational expenses, or modifying decisions based on shifting market dynamics.
Who needs a REPM?
Medium to large asset portfolios with various teams who “own” different segments of data would benefit from an REPM solution. The REPM would bring together the diverse systems into a single hub to simplify analytics and reporting. The REPM works with privately-held and publicly-held portfolios.
Different organizations will likely have different priorities for their required capabilities when selecting a REPM solution. It’s important organizations have a clear handle on the most important features they need when assessing a REPM software. For example:
- Vertically integrated asset manager
Ideally needs an easy-to-use and customizable interface. Data must be simplified to help make real-time strategic decisions. The REPM needs internal KPI tracking capabilities and comparisons between regions or regional managers.
- Asset manager with multiple 3rd party property managers
Asset managers need to understand management performance across the portfolio. Roll up features will be a priority when assessing REPM software. They will need to control user permissions and integrate with 3rd-party property managers.
- Limited partner asset manager
These organizations likely have multiple operating partners. Data aggregation and standardization will be critical. They will want to ensure data integrity when selecting a provider.
REPMs add value to any type of commercial real estate organization wanting to:
- Streamline reporting on property operations
- Add clarity to their decision-making
- Integrate disparate systems into a single hub of information
- Improve their operational performance portfolio-wide and at the individual asset level
Selecting the right features is important when buying into an REPM. Make a decision based on your organization’s structure and goals. Software should be scalable, intuitive, and easily adapt to future needs.