AI is the Hot Topic...but What is Real and What is Not?
AI is the hottest buzzword in most industries...commercial real estate is no different. The rapidly evolving landscape offers tantalizing opportunities in marketing, data analysis, productivity and more. However, for institutions, adoption is not as simple as "let's do it." Our team dives into what the real deal is with AI and how to assess solutions as an ownership group. Let's start with the why...opportunity for better asset and organizational growth of course!
Tools Available
Everybody loves to talk ChatGPT and Anthropic but open-source models like Llama (Meta) and others are allowing for local and secure/contained testing of large language models internally. ChatGPT is a cool tool, but frankly not an enterprise level solution for most REIT's. It makes too many mistakes, when managing investor funds and large organizations they have to be able to rely on the accuracy of responses. These models just are not there, broadly.
However, custom models, trained internally by an organization are seeing more success. These require significant investment into development and data-training but are leaps and bounds more effective than generally available LLM's that do not have the experience necessary (or the data) to consistently output effective answers.
SAP, Salesforce Yardi and others offer some off the shelf AI tools that integrate with customer's existing data resources and are more useful. However, the best solutions are custom-built and vendors who specialize in both AI and commercial real estate are leading the charge by ensuring the challenges of security, data training and reliability are top of list. Otso has built a custom, multi-agentic framework to significantly increase both efficiency and reliability of our customer's lease decisioning frameworks. Our AI handles massive amounts of disparate financial documentation and helps parse, analyze and combine/organize the data so that our experts can provide the best assessments possible in an exponentially faster time-frame.
Humans are necessary for these solutions to succeed. In our business every report we generate goes through 20+ AI agents we have developed but ends with a human being to verify and cross-check. Don't expect any AI to 100% replace your team, it's not there yet and accuracy is too important in our business to not put systems in place to verify the work being produced.
So what are the usecases driving AI interest in commercial real estate...
Enhanced Data Analysis and Insights
AI and machine learning algorithms can process vast amounts of data from various sources, offering deeper insights into real estate markets. By analyzing patterns in historical data, AI can predict market trends, tenant behaviors, and property performance. This predictive capability allows REITs to make informed decisions about acquisitions, dispositions, and property management.
For instance, AI tools can analyze foot traffic data, leasing trends, and demographic information to identify high-potential investment areas. These insights help REITs optimize their portfolios by targeting properties that promise higher returns and minimizing exposure to underperforming assets.
Tenant Behavior and Utilization Analysis
Understanding tenant behavior is crucial for REITs managing commercial properties. AI-driven analytics can track and analyze how tenants use space within buildings. This includes monitoring foot traffic, space utilization, and even energy consumption patterns. Such data allows property managers to optimize space usage, improve tenant satisfaction, and reduce operational costs.
For example, AI can identify underutilized spaces in office buildings and suggest ways to repurpose them for better efficiency. It can also provide insights into peak usage times, helping managers to schedule maintenance and cleaning services more effectively.
Predictive Maintenance and Operational Efficiency
AI-powered predictive maintenance systems use data from sensors and IoT devices installed in buildings to predict when equipment is likely to fail. By anticipating maintenance needs, REITs can reduce downtime, extend the lifespan of equipment, and avoid costly emergency repairs.
In addition to maintenance, AI can optimize energy use in buildings. Smart systems can adjust lighting, heating, and cooling based on real-time occupancy data, leading to significant energy savings and reduced operational costs.
Investment and Portfolio Management
AI helps REITs manage their portfolios more strategically by providing real-time analysis and forecasting. Machine learning models can evaluate numerous variables, including market conditions, economic indicators, and property-specific data, to recommend optimal investment strategies.
For example, AI can assist in identifying undervalued properties or those with high growth potential. It can also simulate various economic scenarios to assess how different investments might perform under changing market conditions. This capability allows REITs to balance risk and reward more effectively in their investment decisions.
Valuation is also a core area of interest. By combining data on tenant rent, credit and term institutions can more readily assess current values of their properties. This leads to more successful discussions and outcomes with lenders, sellers and investors across the spectrum. We're seeing highly valuable gains in property value prediction leveraging these custom-built ai tools. The concept here is simple, let's stop relying on outdated status quo like previous appraisal, estoppels and as-is rent roll and leverage comprehensive credit analysis with rent roll data to fundamentally alter the way properties are valued...in real-time.
Risk Management
AI enhances risk management by providing detailed analysis and early warning systems for potential issues. For instance, AI can analyze market volatility, tenant credit risk, and environmental factors to predict and mitigate risks. By identifying potential threats early, REITs can take proactive measures to safeguard their investments.
Customer and Tenant Engagement
AI-driven chatbots and virtual assistants improve tenant engagement by providing quick and accurate responses to queries. These tools can handle routine tasks such as scheduling maintenance, answering FAQs, and processing lease applications, freeing up property managers to focus on more complex issues.
Additionally, AI can personalize marketing efforts by analyzing tenant preferences and behaviors. This helps REITs tailor their offerings and communication strategies to attract and retain high-quality tenants
The Challenges are Real Though
Tantalizing as these opportunities may be, retail REITs face several challenges when trying to understand and select the appropriate AI technologies to implement. These challenges span from identifying the right tools to evaluating their long-term benefits and integration feasibility. Here are some key difficulties:
Rapidly Evolving Technology Landscape
Constant Innovation: The field of AI is rapidly evolving, with new tools, platforms, and techniques emerging frequently. Keeping up with the latest advancements and understanding their potential applications can be overwhelming for REITs that are not traditionally tech-focused.
Variety of Solutions: There are numerous AI solutions available, each with different capabilities and applications. For example, AI tools for predictive maintenance, tenant behavior analysis, and property management optimization all serve different purposes and require different implementation strategies
Lack of Expertise
Technical Expertise: Many retail REITs lack in-house technical expertise to evaluate and implement AI solutions effectively. This skill gap can lead to difficulties in understanding the technical specifications and capabilities of various AI technologies.
Vendor Reliance: Without in-house expertise, REITs often rely heavily on vendors for AI solutions. This dependency can be risky if the vendor does not fully understand the specific needs of the REIT or if the REIT cannot adequately evaluate the vendor’s offerings.
Evaluating Long-Term Benefits and ROI
Cost-Benefit Analysis: Determining the ROI of AI technologies can be challenging. Retail REITs need to consider not only the upfront costs but also the long-term benefits, such as improved operational efficiency, enhanced tenant satisfaction, and reduced maintenance costs. These benefits are often difficult to quantify.
Pilot Projects: Many REITs start with pilot projects to evaluate the effectiveness of AI solutions. However, scaling these pilots to full implementation can be complex and resource-intensive, and the initial success of a pilot does not always translate to long-term benefits. In a cost-sensitive environment the resources needed to properly build and deploy these projects can seem daunting.
Integration with Existing Systems
Legacy Systems: Integrating new AI technologies with existing legacy systems is a major challenge. These older systems may not support seamless integration, requiring significant modifications or even complete overhauls to accommodate new technologies which are rapidly evolving.
Data Compatibility: Ensuring that data from various sources is compatible with AI systems is critical. Inconsistent data formats and data quality issues can hinder the effectiveness of AI applications, making integration more complex. A lack of core development resources around these new systems further complicates investment into solutions that are internally-driven and designed.
Regulatory and Compliance Issues
Regulatory Landscape: Navigating the regulatory environment is another hurdle. AI technologies must comply with various local, national, and international regulations regarding data privacy, tenant rights, and real estate transactions. Keeping abreast of these regulations and ensuring compliance adds another layer of complexity.
Ethical Considerations: There are also ethical considerations in deploying AI, such as ensuring that AI decisions do not inadvertently lead to biased outcomes. This requires careful planning and constant monitoring, which can be resource-intensive and expensive.
So What is the Best Path Forward?
Engage experienced vendors who have already built these systems. We've seen this play out before with CRM's, data-warehouses and marketing tools. Companies can spend a fortune trying to build these tools but with the speed of the AI landscape this is a new ball-game. Most organizations will not be nimble enough to keep up, period. They will overspend valuable time and dollars (on internal team members and external consultants) simply evaluating these solutions. Building them yourself? Good luck, it's a new class of software development and literally changes week to week. This technology is as new and impactful as the creation of the internet itself but it is developing and changing at 100X the speed. It's literally a new language, youtube is one of the core resources for documentation on these models...yes, that youtube.
Your best bet as an institutional landlord is leverage vendors who spend every waking moment building and innovating in the space. A trusted vendor will be straight with you and tell what will and won't work for your desired use case because they understand the ecosystem AND your business. Have your AI decision-makers reach out to these smaller, faster and rapidly evolving organizations that have done the legwork to embrace this ecosystem. Don't expect large consultancies to be experts yet (they're not) or your own team. Evaluate in a small, controlled pilot on a very defined usecase...and grow from there. Anyone selling you on an organization AI "replacement" for "all" of your existing processes is selling you snake oil at best...at worst they're putting your critical data and security at risk.
REITS deserve better and can benefit from AI...but don't be overwhelmed or distracted by the newest, shiniest sales pitches. Make no mistake, AI is a revolutionary and frame-work altering set of technologies that your organization WILL benefit from...if you take the time to learn from the people living and breathing in the space. Smaller companies are more nimble and often able to accurately assess what works for them in a fraction of the time it would take a major REIT. Leverage this experience!
If you or your organization is interested to learn how the rapidly evolving AI landscape can bring value to your organization we'd love to chat :)
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