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A Technology Lull, You Say?

A weak economic recovery, war with Iraq and fears of another economic downturn have crushed capital spending. Purchases of new equipment, computers and other production tools fell 15% last year and will drop another 10% this year, according to a survey of 51 industries by Goldman Sachs & Co. Computer and telecom equipment makers, from Sun Microsystems to Cisco, have issued dire warnings about lack of demand that will depress their results through 2003.

But guess who's spending money on tech now — despite the worst market conditions in a decade? The commercial real estate business.

Real estate investment trusts (REITs) were one of the few business sectors to show an increase in capital spending in 2002, according to the report issued in February, titled “A Bottom-Up View of Capital Spending.” In aggregate, the companies surveyed boosted capital expenditures by 23% last year and plan to increase them by another 5% in 2003. Only health care facilities showed a more dramatic rise with a 27% increase in capital spending in 2002.

REITs aren't traditionally big tech buyers. Those surveyed by Goldman logged capital expenditures of $1.4 billion in 2002, up from $1.1 billion the year before. According to economists, companies usually earmark between 30% and 40% of capital expenditures for technology. But industry observers note that REITs have been spending more on technology since the late 1990s, when their business strategies shifted from growth through acquisitions to growth through efficient internal operations and customer service. Technology serves both of these priorities.

In addition, the late 1990s saw huge REIT investments in accounting systems, according to Scott Morey, chief information officer with Equity Office Properties Trust. “The financial markets demand that public entities provide financial reports in standard formats,” he explains.

Online Orders

In 1999, for example, Equity Office automated its engineering, work order and tenant request systems and integrated those systems with its accounting technology. Today, an Equity Office Web site enables office managers to submit maintenance requests and track their status.

In some Equity Office buildings, wireless technology supports the process. Internally, the company has integrated work-order requests with its accounting systems for billable maintenance projects. “Nationally, about 60% of our customers are entering work orders online,” Morey says. “That has made life easier for us and for our customers.”

Many REITs will not discuss their technology investments, citing competitive concerns. Equity Office, for example, refuses to disclose financial figures. Indianapolis-based Duke Realty Corp., however, will talk about both technology and money. The giant industrial REIT spends about 1% of its annual revenues on technology, not including labor costs, according to Paul Quinn, Duke's chief information officer. The REIT spent 1%, or $875,000, of its total 2002 revenues on technology.

Most REITs spend a similar percentage on technology, Quinn believes, but notes that Duke's technology budget goes beyond capital investment. “We do a lot of in-house development,” he says. “Last year, we probably spent about $300,000 on labor related to technology development. This year, we'll spend about the same, but we don't capitalize these labor costs.”

For example, Duke recently developed and installed a customer relationship management system (CRM) after Quinn concluded that the market did not offer the tools Duke needed. “The packages we looked at are two-legged stools capable of tracking customer companies and people,” he explains. “But they don't enable a real estate company to model the property dimension. We created our CRM application in-house and added the property relationships.”

Controlling Costs

Although the CRM system is a revenue enhancer for Duke, the company also has created technology projects aimed specifically at controlling costs. One such initiative reduces costs by automating work requests from Duke tenants that previously were entered manually. “We also are seeing less leakage,” Quinn says. “A higher percentage of billable work orders in fact gets billed. So there is a little pick-up in revenue here as well.”

In addition, Duke is installing a document management system, a new management reporting system, electronic invoicing and an automated interface with the company's banks — all with the goal of boosting efficiency.

REITs aren't the only commercial real estate companies putting money into new technology. Ed Reading, vice president of finance for Phoenix-based shopping center owner Vestar Development Co., estimates that his company spends $100,000 annually on technology. Two years ago, Vestar quintupled its technology budget and purchased a $480,000 system to integrate the company's voice and data systems and assemble a company intranet. Reading says that the new system has increased efficiency while cutting the company's long distance telephone bills by 70%.

In Pursuit of A Payoff

The dot-com crash led many companies to shift their tech investments away from the B2B or business-to-consumer companies and into their internal systems. Nevertheless the real estate industry has not given up on dot-com style investing.

Constellation Real Technology Partners, a consortium of 14 real estate companies and investment firms, has invested $30.5 million in four technology companies. About $5.45 million of that sum went into three investments in 2002 after the dot-com crash. Constellation's goal is to invest in companies that are developing technology, such as Web-based property tax software, contract or project management or e-procurement services, that will help real estate owners cut costs and enhance revenues.

“Constellation exists because its members believe that technology plays a role in making real estate firms more successful,” says Glenn Barnard, Constellation's CEO. The consortium's partners include REITs such as AMB Property Corp., Archstone-Smith and Simon Property Group Inc.

Another consortium of real estate companies, Octane, supports companies building cost-saving technology for real estate service providers, such as SiteStuff, an e-procurement company, and Workplace IQ, a transaction management company. Members of the consortium include service providers such as CB Richard Ellis and Jones Lang LaSalle.

Individual members of the Octane consortium also spend large sums on technology for internal operations. Jones Lang LaSalle, for example, has spent 10% of its annual revenues ($840 million in 2002) on technology for the past five years, according to Mark Rose, the company's CFO. “We are making investments not for dot-coms, not for return on capital,” explains Rose. “We are making investments in technology to be better service providers.”

Rose estimates that in 2003, Jones Lang LaSalle will spend $90 million on technology, which includes hardware, upgrades of the lease administration system, transaction tracking software and client extranets.

Likewise, United Systems Integrators (USI) of Stamford, Conn., a corporate real estate service provider, has increased spending on technology by 500% over the past four years, says Rick Bertasi, the company's president and chief technology officer. While Bertasi won't talk about actual technology budgets, he will say that annual spending has reached seven figures.

Late Bloomer

With all this spending, why do so many observers believe that the commercial real estate industry is lagging others in adopting technology? “The reason is that real estate embraced technology later than other industries,” says Morey of Equity Office.

Traditionally closed-mouthed, the real estate industry has found it difficult to open up its internal processes to third parties, a step which is vital to successful automation. As a result, many real estate technology initiatives have floundered.

Nevertheless, since the late 1990s, REITs have been showing the larger real estate industry how to build technology systems that provide service for tenants, streamline internal operations and boost revenues. “As an industry, I think we're still playing catch-up,” Morey says. “But we are beginning to move faster.”

Michael Fickes is a Baltimore-based writer.

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