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A high-tech headache

Two years ago, companies looking for comprehensive technology tailored for the real estate industry found themselves on the outside of the tech world looking in.

But no more. Within the past 18 months, major accounting and management software suppliers — including J.D. Edwards & Co. of Denver and Management Reports International (MRI) of Cleveland — have introduced real estate management modules for their products, expanding the industry's options.

“Most of these systems are built for real estate accounting and billing operations first,” says Wayne Pryor, chief information officer of AMB Property Corp. in San Francisco. The company, which budgets annual technology spending, operates more than 1,000 facilities in 26 U.S. markets. “Over time, software suppliers have added capabilities that are considered to be ERP [Enterprise Resource Planning] systems within the real estate sector.”

ERP systems refer to comprehensive software packages that handle the full range of business functions, including back-office accounting, human resources and marketing responsibilities.

Theoretically, true ERP systems can automate virtually all of a company's administrative and management analysis tasks.

However, buying an ERP system is just the first step toward technological efficiency. Mark Rose, chief financial officer for the Americas with Chicago-based property manager Jones Lang LaSalle, describes technology as an admission ticket to an arena. Once inside the arena, companies must allocate sufficient funds to their technological undertakings in a strategy known as “change management.” Rose estimates change management costs about two to three times the software itself.

Why is change management important? Buying a $1 million ERP system, for example, does not guarantee that people in an organization will use it efficiently. If they use it poorly or don't use it at all, the company will receive no value for money spent.

Change management covers a broad spectrum of technology-related activities. It requires adding a new capital budget category for hardware and software, as well as the inevitable periodic upgrades.

Technology introduces new ways of working with outside companies through collaborative alliances that may create new forms of customer service. All in all, the new era of technology requires a company-wide commitment to train employees on the new technology.

Budget battles

While some real estate companies may put technology plans on hold due to uncertainty stemming from the dot-com crash, others have embraced bits and bytes and their accompanying costs and benefits.

For example, Jones Lang LaSalle spends 10% of its revenues — or $100 million per year — to improve the company's technology platform and to teach skills required to use it.

While most executives won't discuss technology budgets in detail, all agree that tech allocations are a growing capital-spending item. “We are spending more on technology in 2001, 2002 and 2003 than we spent during the 1990s,” confirms Rich Greninger, managing director of operations at Washington, D.C.-based CarrAmerica, which owns and operates approximately 280 office buildings around the country.

Other firms are doing the same. United Dominion Realty Trust Inc., a middle-market multifamily company based in Richmond, Va., that owns nearly 76,000 apartments, invested about $4.4 million in technology and technical support in 2001 — up by $1.4 million from 2000.

And Tim Harvie, chief technology officer with industrial REIT ProLogis Trust in Aurora, Colo., budgeted more than $1 million to buy and manage the change to an ERP system that includes a property management module. The firm's international holdings include 1,700 facilities worldwide.

Evolution produces new mindset

Capital spending on technology has matured from the days of buying simple desktop computers and some software. Today, technology initiatives require careful planning to ensure performance is matched to a company's business goals.

For example, using technology for infrastructure needs is the top priority at AMB. “Infrastructure is as important as the buildings themselves, because it allows us to communicate and collaborate with our customers, business partners and our internal folks,” says Pryor.

AMB's focus on communications infrastructure stems from its business model. Unlike vertically integrated real estate companies, AMB outsources the majority of its operational work, including development, leasing and property management. According to Pryor, the company's in-house strength lies in portfolio and asset management.

As a result, AMB remains relatively small in terms of staff. Only 175 people work directly for the company, which has offices in San Francisco and Boston. This staff manages a portfolio that includes 92 million sq. ft. of space valued at approximately $4.5 billion.

To facilitate the work of this small staff and manage business processes, AMB has installed a Web-based infrastructure that includes systems built by AMB and application service providers (ASPs). For example, to forecast operating expenses and income, AMB evaluates data from its third-party leasing agents and property managers across the country. “We've created a Web-based front end,” Pryor says. “This allows us to send prior-year financials, current year financials and columns for forecasts to our property managers, who supply their operating and capital expense assumptions for the coming year.”

ASPs offer distinct cost advantages to companies in search of expensive technologies. Software makers charge up to $500,000 for their products. Implementing such systems can cost three times that initial expense.

So instead of purchasing a system, AMB subscribes to the CTI Real Estate System (owned by New York-based solutions provider the REALM) in ASP form. The subscription fee allows AMB employees and their business partners to log into CTI at a Web site hosted by that company. The relatively low subscription fee, compared with the high purchase price, enables AMB to focus funds and effort on implementation, training and change management. “In addition, we don't have the technical expertise to run this system,” Pryor says. “We felt CTI could run the data center and bear the cost across a number of users more easily than we could.”

Back home, AMB moves data supplied by property managers and leasing brokers using the ASP site into the financial accounting system ARGUS, a product owned by the REALM. The ARGUS system turns out 1-, 3-, 5- and 10-year cash flow forecasts. AMB's technical staff constructed an interface that allows data to flow from the ASP system into ARGUS.

AMB's third-party property managers constantly update the data flowing through the CTI application service provider into ARGUS. At the same time, AMB managers and other third-party partners enter a variety of data into systems that manage maintenance, leasing and other operations. “At the end of the day, I want to bring all those disparate sources of information together,” Pryor says. “I may want to call up a picture of a property along with past financial performance and next year's forecast. To do this, we're creating a repository called a data warehouse.”

When the warehouse is completed, a management reporting system will be added to sort through warehouse data and produce reports on issues related to individual properties at the touch of a computer key.

High-tech service strategies

Technology brings new customer service opportunities to firms throughout the commercial real estate industry. For example, ProLogis' Harvie implemented a new set of services for both tenants and investors in 2001. “We now offer our customers Web sites that allow them to request information about additional properties and look up information about their existing properties,” Harvie says. “We also provide this Web service to investment partners participating in our funds.”

Harvie also views bandwidth as an important customer service. In that area, ProLogis has installed broadband T-1 connections in “a significant subset of our properties in markets around the country.” According to Harvie, these connections have contributed to several successful leasing initiatives with tenants that want to move inventory into and out of distribution facilities.

ProLogis also has launched a major wireless technology initiative that will push tenants' work orders from Web sites to wireless handheld devices carried by maintenance staff. The devices will enable employees to acknowledge the receipt of maintenance requests and to report on their progress in accomplishing the work.

According to Harvie, ProLogis pre-engineers facilities with wireless infrastructure to enable customers to get distribution processes up and running quickly. “Companies can run forklifts that talk to warehouse management systems in a wireless mode as soon as they move in,” he says.

Likewise, CarrAmerica is introducing an in-building wireless pilot program. The program features a neutral host in-building system and will allow anyone in the property — from the two full levels of below-grade parking to the atrium food court and all office levels — this service, including guests and tenants.

Rick Gehringer, chief information officer at Los Angeles-based Westfield America, owner of 39 major regional shopping centers, looks at wireless technology as an emerging revenue opportunity called “farming the rooftop.”

“Companies have been leasing space on their roofs for years,” Gehringer says. “But today, segments of the real estate industry are studying the value that rooftops might offer to companies interested in space for rooftop antenna systems and dishes.”

Building alliances

In building a technology platform the strategy of aligning with a technology partner is becoming more popular. CarrAmerica has forged a number of alliances in recent years. “We were one of the first companies to enter into national contracts with broadband providers,” says Greninger of CarrAmerica. “We have high-speed Internet and telecom capability in 86% of our properties.”

Greninger plans alliances prudently, however. For example, he contracted with more than two dozen broadband providers, including the well-known Broadband Office. “Broadband was one of our preferred vendors, and we planned to use their services in a majority of our buildings,” Greninger says. So when Broadband Office fell victim to the dot-com crash, CarrAmerica didn't miss a beat because of its investments with other companies.

CarrAmerica also invested in an alliance partner, a company called Agilquest of Richmond, Va. Agilquest provides Web-based hotelling services for office tenants. Hotelling is a corporate setup in which mobile workers are not assigned offices, but must instead reserve an office for those times when they will not be on the road.

Consulting firms, for example, find that many of their offices remain vacant for long periods of time while their employees are out on the road working with clients. A hotelling service enables such a firm to make more efficient use of its office space by eliminating permanent office assignments. Consultants who travel frequently only need a home office periodically. Hotelling software enables them to reserve properly equipped offices when their schedules bring them home for a few weeks.

By using this system, tenants with variable office space requirements can cut their square footage and leasing costs to more efficient levels. CarrAmerica wants to provide this service for its tenants, but doesn't want to administer it. Agilquest's technology serves this end.

CarrAmerica also has formed a partnership with Seattle-based Essention to use its InfoCentre product. “This is a Web-based system that manages work orders and provides our building operations staffs with the ability to link to customers 24 hours a day, seven days a week,” Greninger says.

The InfoCentre proved its value to CarrAmerica executives after the Sept. 11 terrorist attack on the Pentagon in Washington, D.C. Following the attack, telephone lines throughout the city could not keep up with traffic. In addition, the federal government shut down cell phone use in the region. “We were able to communicate with tenants in all of our Washington region buildings,” Greninger says. “We posted information about security issues on InfoCentre. We could post this information and modify it anytime. Without this technology, communications would have been virtually impossible.”

CarrAmerica also is allied with DukeSolutions in Charlotte, N.C. A division of Duke Energy, DukeSolutions provides a Web-based energy-information management system that enables CarrAmerica to monitor energy use across its portfolio 24 hours a day. According to Greninger, the system spots energy-use spikes as they happen, enabling the company to pinpoint the problem immediately.

Creating a tech ally

Sometimes a company can search far and wide for a technology or a technology partner to no avail. Three years ago, AvalonBay Communities Inc., a Washington, D.C.-based multifamily REIT with 140 high-end apartment communities, went looking for an ERP system and a property management system tailored to the needs of apartment owners.

The company settled quickly on PeopleSoft Inc. of Pleasanton, Calif., as its ERP provider. But PeopleSoft lacked multifamily real estate management capability.

At the time, AvalonBay was using an older stand-alone, DOS-based property management application. Andrew Kilbourne, vice president of strategic technology initiatives, wanted a program that would provide a central database of residents, a system that would facilitate communications with all residents, and the capability of integrating with PeopleSoft and other software.

While some vendors with multifamily management packages voiced interest in creating such a system, no one had a product. So AvalonBay decided to build its own.

To ensure their product would offer broad utility in the multifamily market, AvalonBay executives invited United Dominion Realty Trust and Post Properties of Atlanta to join the project.

But executives from the three apartment REITs realized their development work could lead to a technology that would quickly grow obsolete. The partners discussed the possibility of forming a separate company, which would have the ability to handle long-term product evolution, Kilbourne says.

Company executives took the idea to the investment community and received enough support to spin off a private Washington, D.C.-based company called Realeum. Foundation, the product Realeum is developing, will centralize the firms' resident database and allow it to communicate with residents in all of their apartment communities, according to Tom Toomey, president and CEO of United Dominion Realty.

“This will give us a number of capabilities, such as providing residents who are relocating with options that may lead them to stay with us,” Toomey says. “It will also enable us to respond better to maintenance work orders and generally enhance our relationships with residents.”

Making a commitment

Pryor at AMB surmises that any new technology will likely fail without a strong company-wide commitment to adopting the system. “This is our single biggest challenge,” he says. “It is becoming easier to build, buy or rent technology. To some extent, it's easier to integrate disparate technologies. The trick is getting people to use what you've implemented.”

To that end, Pryor budgets time before and after buying and installing technology to make sure that company personnel buy into the new system. In fact, AMB policy requires that no new technological initiative can begin without an executive sponsor and a program manager recruited from the company's operational ranks.

The executive sponsor and program manager take responsibility for the project. It's theirs to buy and implement, with the support of Pryor's department. In other words, if the project fails, the executive sponsor and program manager will have to answer for it.

Pryor estimates that any new technological initiative will require 30% of his departmental resources to guarantee success. “Technology projects succeed or fail in direct relation to the time we spend training and supporting employees,” he says. “Change management takes time and effort. You have to train people. You have to engage in a certain amount of evangelism to get people excited about what is coming. And after you implement a new system, you must provide a high level of support.”

Pryor says that at least 30% of time should be spent on training and support to ensure a successful project. But in the end, it takes both technology and effective change management to automate a real estate company and change business as usual into a successful business of the 21st century.

Mike Fickes is a Baltimore-based writer.

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