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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2018

The Quest for a Common Digital Language

True data standardization is the holy grail of commercial real estate

Much of the appeal of investing in commercial real estate is that it is a tangible asset. For many lenders, buyers and commercial mortgage brokers assessing multifamily properties, however, what is even more important than the bricks and mortar (or glass and steel) is the underlying data about these properties.

This data — primarily rent rolls and operating statements — tells the story of a building’s financial health and investment potential. Unfortunately, for those looking to “read” this story quickly and accurately, manageable operating data is not always easily accessible. Often, it gets passed around in a dizzying array of formats, the result of the disparate methods used by many commercial real estate professionals to record and store valuable property information.

Decades ago, the data was captured on paper. Today, information is frequently exchanged between deal parties in the electronic equivalent of paper. In order to reliably analyze the fundamentals of a multifamily property, for example, and compare it to other investment opportunities, deal participants have to manually extract the data from those files and convert it into their own Excel templates to be analyzed.

Because of the wide range of formats in which this data is compiled, an analyst looking to assist with the underwriting of four multifamily properties may have to sort through rent rolls from multiple distinct systems. As a result of this burden, at least in part, there is notably less institutional ownership in the multifamily space than in other real estate asset classes, such as the office sector, despite the significant value of many apartment properties.

Grunt work

How do lenders, mortgage brokers and other analysts achieve this consistency of data in a single cohesive format to make informed underwriting decisions? It’s accomplished through hours and hours of manual data entry, or grunt work. It’s a chokepoint on the number of properties a given lender can evaluate.

Seeking a workaround, lenders, brokers and acquisition teams frequently outsource manual data transcription to companies that specialize in this line of work. These companies, some based overseas, have finite capacity themselves, however.

Turnaround times often stretch into days, depending on your place in line, as these businesses operate on a first-come, first-served basis. For an originator trying to create a term sheet for a time-sensitive deal, a 72-hour wait period can have very significant — and costly — consequences.

Standard format

The good news is that there is a way to avert the data chokepoint. Many other industries have successfully adopted standard formats for accessing valuable data, which benefits everyone. People analyzing equity and bond securities, for example, can simply get the data they need from a Bloomberg terminal.

Data — primarily rent rolls and operating statements — tells the story of a building’s financial health and investment potential.

Similarly, consumer lenders can access a prospective borrower’s FICO credit score to get an instant view of their creditworthiness. The universal benefits of this level of industrywide standardization have not escaped the major players in the commercial real estate space. They, too, recognize that they would benefit from a universal standard.

Attempts over the years to create a standardized format for multifamily data have stalled, however. Fifteen years ago, major commercial real estate organizations and investors backed efforts to create solutions for the real estate space’s data woes. These groups attempted to unify the industry around a common XML standard, but the effort lacked unanimous support and ultimately failed to gain enough traction to create a true standard.

Data capture

Automatic data capture tackles the problem from a different angle. Instead of trying to change the data-collection practices of an entire industry, the technology extracts the data from any PDF or Excel property-management report. It then validates the data, processes it and converts it into an instantly usable format. Property owners are free to carry on with their existing data-collection habits, and the technology does the significant legwork of standardizing rent rolls that were compiled in different formats.

The digital nature of the extracted information also makes it easier for lenders, mortgage brokers and analysts to convert it into graphs, charts and other visual representations that make spotting trends and anomalies easier for the human mind than gazing at column after column of numbers. Speed is another benefit of having data in a universally accepted, digitized format. Borrowers often make loan decisions within short time frames. Automated data capture gives lenders time savings measured in days. Lenders that can turn around a term sheet promptly can increase their chances of winning that borrower’s business.

Today, some 40 percent of multifamily loans are being backed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Especially in this extremely commoditized environment for loan origination, it can be challenging for lenders to distinguish themselves. Speed is one way for lenders to stand out.

Data that is standardized also would provide other benefits to originators. Lenders, for example, are able to offer more attractive loan terms on properties that qualify as affordable based on the average median income of where the property is located. A tool that automatically assesses this would be of great benefit to the lending industry.

•  •  •

The biblical story of the Tower of Babel highlights the obstacles faced by market participants when they are unable to communicate with one another. This lesson can be applied equally to the world of real estate investment. The sooner all market participants start speaking the same data language, the better it will be for everyone in the world of multifamily finance. Across-the-board standardization of multifamily data brings efficiency to underwriting and helps all parties make more informed investment decisions.

Advances in data-capture technology already have begun to improve the data-analysis process for many investors, mortgage brokers and lenders. As these technologies are enhanced, we will see the commercial real estate industry finally achieve the holy grail of having a standard that helps to streamline and improve property analysis and decisionmaking. 


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