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A Changing Landscape

Dot.com insiders discuss the challenge of bringing new technology to the shopping center industry.

The new wave of online platforms promises to make a lasting impact on retail real estate. At Shopping Center World's invitation, a group of executives from leading real estate-focused technology firms gathered in Boston to discuss how the Internet will change leasing, lending, marketing and other segments of the business. SCW publisher Jon Tuck and assistant editor Joel Groover moderated the discussion. Michael H. Greco, COO of MortgageRamp.com, participated in the roundtable via e-mail.

SCW: Maybe we could start by introducing ourselves.

DAN WOODS: CapitalThinking is a real estate technology company. We're focused on providing systems to brokers and lenders on an application service provider (ASP) basis to help them make the commercial real estate finance process more efficient. We also operate a direct brokerage business that uses the same technology.

JAMES MATTHEWS: NAI, one of the largest real estate companies in the world, has developed a number of software programs. REALTrac is one of them. It allows people to track and manage transactions, from initially deciding to dispose of some property or sell some property right down to final closing and due diligence.

BRIAN McGOWAN: TenantMix is an online prospecting tool for brokers and developers to identify tenants for their properties. We're the other half of Storetrax.

ANDREW NADLER: Storetrax provides landlords the ability to market and showcase their properties to the retail community. We're a retail-only site that provides retail leasing solutions. Landlords can showcase their properties and retailers and retail brokers can search our site for properties that match their particular criteria.

NICK JAVARAS: Location-net basically is a product that profiles customers for retailers and properties using demographics and lifestyle segmentation. It allows a retailer and a property owner to match a site to a retailer and a retailer to a site based on this profiling.

JUDY BATSON: CyberXpo.com is an Internet kiosk company that provides free Internet access to people in shopping malls. We have about 50 locations right now in 19 states and are growing quickly.

JEFF GAULT: CapitalEngine is a full-service online financial advisory firm that does loan and equity origination and provides a broker/dealer service. We're going to be trading loans, warehousing loans and then originating and syndicating equities. I've been on the job for about two weeks. I come from an old-fashioned developer background, and I would say we're a hands-on high-tech company.

BRIAN HAYASHI: Mallfinder Network had its first online shopping center in 1997. We're basically an e-commerce ASP for shopping centers. We're in partnership with large property developers who want to get their entire portfolios online. We help them, and by extension their tenants, get on the Internet and start communicating with shoppers directly.

GARY MANSFIELD: MyShoppingCenter.com brings business-to-consumer solutions to the merchants at shopping centers. We help them make the conversion to bricks-and-clicks. We also bring broadband into shopping centers, which helps the tenants drive traffic and revenue to their stores. By providing solutions under an ASP model for those same tenants, we help drive down operating expenses.

SCW: Let's talk first about the attitudes toward technology you're all experiencing in the field.

HAYASHI: The shopping center industry has always been one of the least likely to invest in information technology. There's always been nine million other things on the plate. But we've seen a big sea change. Now, people are saying, `We can use technology and the Internet to enhance all of our relationships.'

MATTHEWS: I can see that a lot of the reluctance on the developer side would be that everybody's looking for a return on investment. And the Internet is a lot like advertising. It's a way to get the information out and to increase visibility. But advertising doesn't have that return on investment that the accountants can measure.

Retailers, on the other hand, understand better the return on advertising and the need to be visible. And brokers want to do deals. They will get out in front of technology because we've all told them they'd better or they're going to get buried by it. So, I still see some reluctance by the developers to get involved, but the brokers and retailers are embracing technology. Our job is to make technology easy and accessible for everyone.

GAULT: What I've found is that the developers that I've been talking to, the bread-and-butter guys around America, they're always struggling with finance issues. Whether they're small developers, medium-sized or big, it's always a struggle to get returns on equity, to get the right kind of loan. And what these guys are starting to see is that the Internet can provide a vehicle to get better information and, taken to the limit, these platforms that are emerging can serve as finance home pages. These pages won't be used as advertising but as vehicles basically to get cash, because cash is what feeds the engine.

My view is that these platforms will improve the quality and the breadth of information. CapitalEngine, for example, provides access to a wider range of capital sources than the broker calling up his favorite two lenders. But these sites will not, and I've heard this without exception from every developer I've talked to, replace human beings on the ground.

MANSFIELD: What's driving interest in solutions that we provide is the investment banking community. The publicly traded REITs are all striving for additional revenue streams, and equity research is showing owners and developers that, through methods of aggregation, they can drive much more revenue out of their existing properties.

At MyShoppingCenter.com, we see a lot of interest in solutions that we bring that drive revenue to tenants. These solutions save tenants money and thereby increase the overall value of the property.

WOODS: It seems to me that the profit orientation of the real estate industry makes it hype-proof, because all the people around this table and all the real estate companies actually have a customer and a business model. They aren't just let's throw-it-up-on-the-wall-and-see-if-it-sticks sort of businesses. From my perspective at CapitalThinking, we all have a high bar to jump over in making technology actually provide value to the commercial mortgage finance process. In real estate, you often get business cards that have no e-mail address on them, which to somebody who comes from the Internet/technology space is quite a shocker. But on the other hand, you never get people who don't understand how they're making money. The first thing they want to know is how you're going to help them make more.

JAVARAS: I was on the transaction side of the business for 30 years. And when I called a retailer and explained that I had a site on Union Square, it was amazing how fast I'd get through. But now, when I call and say, `I've got a technology I want to talk to you about,' it's amazing how many voicemails I get. So there's a couple of issues here. On the transaction side, the number one goal is transactions. If you can show people that you're going to aid them in transactions, they'll listen.

The other issue is how comfortable people are online, and how often they're online. The more they understand the use of technology, the easier the job is for everybody in this room.

NADLER: My experience at Storetrax has been that, depending on who you're talking to, the mom-and-pops and some of the independent owners just don't have the technology right now. But some of the larger REITs, the Simons, the General Growths and others, are creating their own technologies. They've got their own IT departments. They want to expedite their entire leasing process. They know where they want to go, and we're helping some of them get there. Some companies even want to take this a step further throughout the entire occupancy process.

BATSON: CyberXpo has been in business for a couple of years, and when I first started calling developers they were like, `Oh, the Internet. This is weird. We don't want to do it.' They were all waiting to see what the big guys were doing, what Simon and GGP were doing. There was a sense of, `We don't want to be the first because we don't want to be the ones that make the mistake.' But now, they all have made this transition. They're saying, `We've got to go now. How fast can we get in on this whole Internet thing?'

JAVARAS: Welcome to the real estate business!

NADLER: When you pre-lease a shopping center, it's all the domino effect. People ask, `Who else is involved? If they're on board, then clearly we're going to probably have to get on board too.'

SCW: Let's say that this hurtle is crossed in two years or five years and the industry fully embraces technology. Do you have an ideal model for how shopping center companies will use these platforms?

GAULT: Whether you provide service, capital, or access to communicate to both the consumer and the retailer, you're part of what I would call the Internet real estate platform industry. And the challenge for this industry is, `How do you get the average Joe Blow developer around America - the guy who's building a $10 million grocery/drug center, a single-tenant deal, or a couple of office buildings - to take advantage of these technologies?'

How do you show them that these tools are going to help them? `Help' in my point of view is simple - making money by doing this. If they're not going to make money, they're not going to use us.

WOODS: The reason the commercial mortgage finance process is such a pain is because you have to re-enter the same basic financial information two or three times, sometimes even more. Huge piles of documents are shipped around the country and only a small portion of that is actually relevant or gratifying. There's no reason for that to happen. There are always inefficiencies, and it's going to take awhile for us to understand what those are and to provide solutions that actually make them go away.

HAYASHI: My sense is that with the REIT Modernization Act passing into law and the introduction of taxable REIT subsidiaries, landlords, instead of being providers of spaces, will become providers of services.

Owners and developers know that most of the smart technology people in the world don't work for them, so they'll look to purchase services from third parties that can then be resold to tenants. I think it's very straightforward. Every month, the tenants purchase services from you, and you buy in volume. There's a certain wisdom to this.

NADLER: Look at Jones Lang LaSalle, CB Richard Ellis and Trammel Crow forming their alliance. Here are three competitive companies that have joined forces, which I think is a milestone in our industry.

MANSFIELD: Aggregated purchasing in the retail shopping center - where retailers all purchase the same types of products, goods and services - creates incredible purchasing power. This can truly drive down operating expenses. And once you accomplish that task, you take all the inhabitants, be they owners, tenants or consumers, and you offer additional solutions. You drive more revenues, more profits, out of that structure.

MATTHEWS: Every new office building has the infrastructure for hard wiring and everything else already built in. But nobody's building shopping centers that way. Why can't a developer offer the service out to the individual mom-and-pops who take up 80% of the space in the shopping center? The developer could say, `Yeah, we'll get you any kind of report you want. We'll track the sales off of your cash register.' They could match that to the promotions that they're doing in the mall.

Those kinds of services are being offered now. And I think if the developers really embrace this they will eventually see a greater return and have much smarter shopping centers. They'll have the kinds of smart centers where, because of the services that are being provided, tenants prefer to be.

SCW: How about the challenge of assuring people that your information has integrity?

JAVARAS: These platforms are going to save the commercial real estate industry a lot of money. It's going to be huge. But the industry must first get comfortable with the credibility and the reliability of this whole process.

McGOWAN: With tenant profiles, for example, that's one of the questions I'm asked pretty often. My answer is to say, `Will all the information always be 100% accurate? No, it's impossible.' Any database of any size, no matter how frequently you're trying to get updates, will contain some percentage of dated information. I'm not saying it's going to all be dated. But spaces are filled daily. Real estate reps change daily. Criteria change. So I think that nobody will ever be able to assert, at least not from the database side, that there's 100% accuracy in every single thing you're going to find.

JAVARAS: I don't necessarily think you have to be 100% accurate. Once the industry grabs on and participates, people are going to realize that, `Here's this instant access to information that is mostly correct.' One of our obligations is to correct it. And if your customers and your client feel there's value here, they will participate with you in improving that data.

SCW: Are there technologies that you guys are excited about that are on the horizon? Any thoughts on how changing technology will affect the industry?

MATTHEWS: One thing that we have to recognize is that we're all traveling. We're all mobile. I mean, we can't live without our cell phones. Therefore technology platforms must have systems set up so that users can have wireless access. If a broker is walking the site with a prospect and the prospect says, `Well, what are the taxes going to be on my site?' The broker could sit down and try to figure it out in his head. Or he could hit a couple of buttons on this little portable thing and tell that prospect right down to the penny.

One of the problems we have in the United States is that there are eight separate protocols for wireless Internet access. In the rest of the world there are only three. And so each one of our home pages must be translated into those eight different systems. Hopefully, there will be some consolidation. The other problem is that it is very expensive for us to access wireless.

GAULT: A decade ago, people didn't worry about building smart buildings, and then people started to build them and that added to construction costs substantially. Technology is like this giant snowball that just keeps changing. If the time comes when we have totally wireless technologies, then the industry will face a huge challenge all over again. There will have been a huge capital investment in the infrastructure, the bricks and mortar, and that infrastructure could end up becoming prehistoric.

MANSFIELD: I think we're all here because we're providing access to information to one constituency or another. And be it in a fixed world, a fixed wireless or solely wireless world, a broadband connection to that information will be a requirement to provide more and better solutions. So, even if some of the infrastructure cost today will be amortized sooner than planned, we certainly have to build the infrastructure to deliver that information.

SCW: This question is for the online finance and lending sites. Could you talk about who your customers are? Are they the smaller firms? What kind of deals are you doing?

WOODS: We've closed two deals so far, and we have 35 more in the pipeline. Most of them reflect the market at large. The market is 70% intermediated, so we have a lot of deals coming in from brokers. We work with brokers and with borrowers. The borrowers reflect the real estate industry as a whole. I don't think there's any theme yet. We opened March 1st and the volume isn't such that the patterns are clear yet. It is clear that there are, more than we expected, borrowers out there looking to do business online.

GAULT: Our book of business is a little more than $340 million. It's both debt and equity, and eventually we think it will diversify more as we take on broker-dealer functions for distribution and syndication of both equity and for pieces of debt.

The customer base is the mid-size developer, the mid-size deal: $5 million to $30 million. Let's just use $10 million for arithmetic's sake. That means it's a debt instrument in the seven to eight range, and an equity investment in the two to three range. On the book we have right now, 10% is retail. The retail deals are roughly in that same range.

However, I believe that our industry could potentially grow at compounded rates of return. Historically, the average developer has gone to either a local bank or their local mortgage broker, who is their cousin. And their cousin has one or two favorite lenders that he or she has had success with. Now, when you go to that developer and you say, `CapitalEngine has 70 lenders online that update their profiles on a periodic basis, it's relatively accurate. And we've got 40 investors, and you have access to that,' their eyes go wide open.

GRECO (e-mail): MortgageRamp targets several different types of customers with what is basically an all-inclusive financial services approach. Our ASP model targets medium and larger institutional clients who believe in the concept of outsourcing loan production to a web-enabled service provider to achieve greater efficiency. We also have a private labeling effort that targets smaller institutions that want to participate in e-commerce but don't have a varied enough product menu or technology base to go it alone.

We can provide instant access, training and technology support for these institutions at a minimal cost. Other customers who are attracted to the our technology include individual borrowers, who can get instant access to our underwriting and technology staff, as well as brokers, who get significant back-office assistance from our screen and scrub department. Mortgage bankers are also attracted to our products, from fixed and floating rate debt, to equity, mezzanine and bridge financing, to construction loans. We even have an area where users can request customized financing products.

We believe that to be ultimately successful in this space you must be able to provide a full array of supported products and services. You've got to deliver them on a fully interactive platform, and you have to be able to provide them to all participants in the industry.

SCW: On the leasing front, do you guys have any thoughts on how technology might eventually shape the way leasing is done.

JAVARAS: At LocationNet, we create a customer profile of a trade area and then match that to the criteria of the retailers. We recently had a very sophisticated entrepreneur talk to us and he said, `I look at 32 shopping centers a year to redevelop and re-merchandise. With your site, I can basically put all of those properties online. Then I can look at the retailers I want to attract. If there's a match, I can e-mail those retailers about it.'

I mean, that's new. From our point of view, it will be pretty dramatic if people will really start using an electronic method to bring these fabulous resources together to make decision-making easier.

GAULT: Well, it's inevitable the retailers are going to do it because you just can't keep track of all of this information manually.

NADLER: The retailers have to meet their quotas. The landlords have to meet their leasing objectives. And there's no question about it, they're using this technology already. At Storetrax, we've already got more than 3,000 listings. This technology clearly is creating more efficiency in the whole process. And eventually it will become a best practice in the industry.

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