Two Oxford economists published a paper in 2013 where they estimated that 47% of American jobs are at a ‘high risk’ of being automated within the next 20 years. If you think that this will only impact blue collar industries then you should check out how a team of 600 highly educated Sales Traders at Goldman Sachs who earned an average of $500,000 per year were whittled down to a team of just 2 people by the application of digitization, automation, artificial Intelligence and machine learning.
What are these technologies anyway?
Let’s take a look at what these technologies are, how they can be applied to
real estate and what the benefit to real estate investors will be.
- Digitization: This is the storage of data in a
digital form and is a baseline requirement for all of the technologies that
follow. One example would be moving your contacts into a Customer relationship
Management (CRM) tool.
- Automation: Sometimes called Robotic Process
Automation, this is the automation of repetitive and predictable tasks. An
example of Automation would be automating the workflow of receiving an email
from a potential investor, logging their contact details into a CRM and
instructing a automated marketing platform to send them content.
- Artificial Intelligence: Where Automation
technology allows us to automate predictable tasks e.g. if X, then Y, AI
introduces the concept of human like thinking. AI looks for patterns and
selects the most appropriate response. Using AI we could decide which content
is best to send to the investor based on some of their attributes e.g. age,
gender, area of interest. The CEO of Google, Sundar Pichai, recently stated
that AI is “one of the most important things that humanity is working on”
- Machine Learning: Here we introduce a feedback
loop into the AI technology so that the AI receives feedback on the response it
provides and incorporates that into future selections. It’s like a human making
better decisions as a result of being more experienced. Machine learning could,
for example track, the number of opens on the content sent in the example above
and potentially send different content next time to get better results.
OK, so it is interesting to learn a
little about the technologies that will shape our future but so what? Well, I
am all about what outcomes technology can deliver for my business so let’s take
a look at how I am looking for better outcomes by leveraging some of these
I launched Phoenix Equity Group in
2018 to focus on syndicating multifamily apartment buildings in markets that
are best positioned for sustained growth based on economic factors. It is very
important to me that my business is data driven, leverages advanced analytics
and is as operationally efficient as possible. Ultimately, I see delivering the
best risk adjusted returns for investors as the best way to grow my business
and I think I can best achieve this by leveraging digitization, automation, AI
and Machine Learning. Here’s how we will leverage these technologies
Investor Engagement and Capital Raising
Syndicating multifamily real estate
means raising capital from accredited, private investors to fund the equity
portion of a deal. The equity portion is required to cover the 25% that the
bank typically won’t finance, the cost of planned improvements that will
increase the value of the property and also the upfront cash required to
assemble and close the deal. This is typically in the range of 30%-35% of the
total value of the deal. By leveraging a CRM we can ensure that potential
investors data is digitized and by using automation we can ensure that
potential investors are engaged on a regular basis and that the lifecycle of
getting committed capital is as automated as possible
Market selection is a data and
analytics intensive task but luckily many of the data attributes which impact
the potential of a market are programmatically available. One example of this
is US Census bureau on economic indicators like population and jobs growth. By
examining this economic data over time, we can leverage AI and Machine Learning
to identify which specific indicators most impact rental rates and vacancy and
by how much. By understanding this we will be better positioned to very quickly
identify markets positioned for future growth. Market selection does not
guarantee success but it is a strong foundation. We believe that people who
have now selected strong underlying markets will be in trouble when the market
At Phoenix Equity Group we are focused on identifying target
deals whether or not they are listed for sale. We have leveraged automation
software to build a database of properties in our target markets and we focus
specifically on the data that identifies the property as having value add
potential. This makes us more efficient since we don’t need to wait for
properties to be listed by brokers and we can very quickly filter out
properties that don’t meet our criteria. This reduces the number of deals that
we ultimately underwrite.
Underwriting is the process of gathering the data necessary
to come up with an objective valuation range for a property. Two key inputs
into this process are the financial statements and the rent roll which at this
case are more like a best-case scenario but we will get to the actual data in
the due diligence phase. The challenge here is that this data is delivered in
whatever format the seller has it in. It could be PDF’s, excel sheets or word
documents. To do our analysis we need to get this data into the format required
by our financial models. We use elements of automation, AI and ML to automate
this process. We can add further value by starting to identify which elements
of the property will most enable us to add value.
Due diligence is a quantitative and qualitative review of
the tangible and intangible aspects of a property. Like underwriting, we need
to gather multiple pieces of data which may be in a variety of formats. We need
to transform that data into our formats in order to build our own valuation
models. We also run through a repeatable checklist of steps which lends itself
to some degree of automation. The human element provides a tremendous amount of
value at this point due to the qualitative nature of due diligence but
technology can bring efficiency and consistency.
We buy assets that are
underperforming relative to the market, put simply, they have lower occupancy
and lower rents than comparable properties nearby. We create equity by
increasing occupancy and increasing rents. In order to improve occupancy and
increase rents we need to provide additional value to prospective tenants.
There are many ways to provide this value with one example being renovating and
updating the unit. Using data and analytics (AI) can allow us to make better
decisions as to where to spend out improvement $ in order to get the best
return for any given market. With enough data built up over a history of
projects we will be better positioned to automate some of the decisions as to
what our value-add business plan should include.
As you can see, emerging
technologies will provide us with significant opportunities to run more
efficient businesses, achieve scale more quickly and to develop a more
consistent methodology for making decisions. Technology will never replace the
human element but it will free us up to focus more on where we add the most
value and if used correctly to run more profitable, predictable businesses.
Have no fear, the robots are coming to help!