March 6, 2016
Interviewed by: Zoe Hughes
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The Data You’re Missing in Due Diligence

Will Silverman of Hodges Ward Elliott argues brokers, investors and managers are failing to use vast swathes of open data that could fuel smarter investment decisions about the buildings—and users and tenants— they’re targeting.

Will Silverman of Hodges Ward Elliott argues brokers, investors and managers are failing to use vast swathes of open data that could fuel smarter investment decisions about the buildings—and users and tenants— they’re targeting.

The Data You’re Missing in Due Diligence
With Will Silverman of Hodges Ward Elliott

Zoe Hughes, PrivcapRE: I’m joined here today by Will Silverman, managing director of the brokerage Hodges Ward Elliott. Thank you so much for joining me today.

Will Silverman, Hodges Ward Elliott: Thank you for having me.

Hughes: We’re in a world of change when it comes to technology, data and the way data is actually transforming the society around us. Yet you look at commercial real estate investments, particularly on the acquisitions side, and it feels as though we’re still doing business the way we were 20 years ago. You’re a broker—you’re out there, trying to persuade people to spend hundreds of millions of dollars on deals. Are we getting better at using new data to quantify our transactions?

Silverman: I think it’s funny you said we’re still using methods from 20 years ago. The worst part is that, 20 years ago, we were using the methods from 20 years before then. I think that here is the issue with real estate and why it’s so hard to adapt technological change: the swings in value are so violent—to the positive and the negative—that they have a tendency to both wash away some very good work and to cover up a lot of sense. The actual incremental money isn’t always made on the margins here and it’s on the margins where the technology and the better information is going to matter more. So, we sort of paper over a lot of the rational for it, but I think we’re getting better at it. What we’re on the front end of trying to do—something we’re trying to do at Hodges Ward Elliott—is to help people quantify the qualitative.

For example, the city of New York makes available the latitude, longitude, and time of every single taxi ride that occurs in New York City…going back six years. You say, “What can we possibly do with that information?”

One example would be a portfolio we were looking at in South and East Williamsburg. [These] are interesting neighborhoods because they’ve been recipients of a sort of re-gentrification as the people who started in Williamsburg stared to push further out. The question investors have when they look at a neighborhood like South or East Williamsburg is, “What’s the credit quality of that tenancy? Is it a bunch of 22-year-old kids subsidized by their parents or do they have real jobs and are they paying real rent?” We were able to show that, over the last five years, the average drop-off time on Saturday nights in front of the buildings we’re looking at moved from 3 AM to 1 AM. So, what is that telling us?

I can’t pinpoint the correlation, but I’m comfortable suggesting that the person who goes out and comes home at 1 AM on Saturday night is probably a little bit older, probably further along in their career than the person who goes out until 3 AM. The good news is, is they’re still going out. They’re making money. They have money to spend.

But we can quantify what was previously a qualitative argument about the maturing tenancy and improving credit quality in the neighborhood, in way people haven’t seen before. Then, when someone presents that deal in a committee and they say we should be looking at South and East Williamsburg because the tenancy there is changing and someone says, “What’s your evidence of that?”, instead of relying on [something like] “I saw some cool-looking people on the street, and they were slightly older then the cool-looking people I saw there three years ago,” we can actually prove it.

Hughes: What other data sets are there?

Silverman: We were actually presenting on a building in Brooklyn. It’s a building that’s a bit remote from…traditional transportation, but there is a Citi Bike station in front of it. What we discovered was the places that people took Citi Bikes to from that building were all of the places that everybody would love to invest in. But they probably didn’t realize that the kind of people who hang out in or work in those neighborhoods live in this location. What it enables us to do is change the pitch from, “Do you want to buy a building at ‘X’ location?” to “Do you want to buy a building in which the tenants’ favorite destinations are Williamsburg, Dumbo, the Navy Yard, Downtown Brooklyn and Fort Greene?”

When you layer that in with the taxi data and look at where those people come home from at night and where they work, you’re then telling a very different story. You’re telling a story that isn’t just about the people paying rent, the rent you’re getting and the NOI. You’re telling a story about the other markets to which you’re getting exposure by making this specific bet.

Hughes: Obviously, you’ve using this to give you a competitive edge. Talk to me in regard to why the industry needs to do this.

Silverman: The problem with historical information is that it is, in its nature, historical. What’s nice about this information is that it enables you to see—I wish there were a metaphor that was the positive version of a canary in a coalmine, because it’s signaling you to trends that haven’t yet manifested themselves in the comps. My friend David Kramer at Hudson Companies has this great line—he says, “By the time there are comps, you’re too late.” The people who have really made money are the ones who have been right about those types of issues. Now, there are some tried and pretty true methods of doing this, but there is no reason that it can’t be done better and more efficiently. And that, again, you can change the nature of capital you can raise for these endeavors, cheapen the cost of the capital and, therefore, drive higher prices by making it a more quantitative exercise as opposed to a pure gut exercise.

Hughes: Fundamentally, doesn’t it all come down to vintage, though, when you buy and when you sell? How much of a difference does this new data really make?

Silverman: My job is to get the highest price for the asset and I do that by being in front of the right investors and giving them the best information available to arm them to make arguments for their deals internally and whatever their committees are. Yes, you are right. There is no bigger predictive indicator of whether a deal will be successful or not than its vintage. However, making the right investment decisions is very, very important.

Sometimes it isn’t just about whether you make money, because yes, vintage can crush you no matter how good your analysis is. But, if you made smarter choices than your peers based on better information than your peers, then when the next opportunity presents itself, you’ll be better positioned to raise capital.

Hughes: One of the things that is often cited to me, especially when corporations are looking to move their headquarters, is that they want to move to areas that are not just great efficient buildings, perhaps class-A offices, but also where they can retain and attract talent. Are you seeing that when it comes to corporations looking to move their offices and the deals that are actually happening?

Silverman: I think that’s a massively important point and this is the analogy I would use: on high street-retail deals, a lot of people always talk about how there is an advertising component to those deals by being on Fifth Avenue. I would argue that there is an analogous phenomenon happening in the office world, which is that some of the rent should be allocated to the recruitment and HR budgets, because so much recruiting these days is based on using your space and having a space.

We’ve even seen it. To be perfectly candid, we have a 2,500 square-foot outdoor space at our office that’s absolutely beautiful. We interviewed our analysts outside at night when they came to interview for jobs and, not coincidentally, they accepted pretty readily after we made them offers.

Hughes: But, I would actually argue this is not just about millennials. This is about how we all want to work.

Silverman: This is exactly the point. It’s that the preferences of millennials just happen to be things that everyone else now realizes they wanted. It’s funny—I moved last year from Brooklyn to Greenwich and my wife and I were walking down Greenwich Avenue and we saw a retail store we used to love in Brooklyn. We said, “Hmm, funny to see this in Greenwich.” My wife said, “Maybe it’s not so much that everyone is going to move to Brooklyn. Maybe it’s that every place else will become a little bit more Brooklyn.” Who doesn’t want a brighter space? The only one that I think they might have misfired on is the open plan.

Hughes: I think in terms of open plan, there are some research reports that show productivity of open-plan offices is actually not as productive. The thing is, people say, “Yes, you’re compressing the amount of space per workers.” However, what you’re also doing is providing more communal space, more conferencing space and more private phone-call space.

Silverman: So, yes, there is a counterbalance to the densification, but you still end up with greater densities. The other, more subtle issue that a lot of people don’t focus on and nobody really wants to talk about is that there are many buildings that are woefully underprepared for this in terms of infrastructure, particularly elevators and bathrooms. The line we use is, “There is a problem when tenants want to leave or have to go.” If you are selling buildings in Midtown South, in particular—I’ve never given a tour of a Midtown South building between noon and 2:00, because when they’re in these high densities, you see people queuing up at the elevators at those hours. So, the buildings that are going to outperform—and this is another subtle point for investors—are going to be the ones that have the capacity to process that number of people. That’s not going to happen yet, because what has to happen is the first generation of those tenants have to have their leases roll and they have to tell their leasing brokers, “We love the aesthetics and we love the neighborhood. We’re just tired of not having enough bathrooms and elevators. Please move us into a building that replicates the experience we like but has better infrastructure.” The buildings that have that infrastructure are going to dramatically outperform the rest of the market.

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