Budget Season is Here.

Summary

- COVID-19 is making this budgeting season even more difficult. But technology is helping some portfolios quickly compile and analyze much more information

- Unfortunately, tech itself causes budgeting challenges. We surveyed 53 assets and found over 42 different software vendors

- This survey helped create a blueprint that can be followed to digitize operations, keep tech costs down and limit number of vendors

Even in the Before Times, annual budgeting was a time consuming, high pressure and (probably unnecessarily) difficult process that often meant a month or two of 60-hour work weeks.

Projecting rent, vacancies, concessions, payroll, utilities, repairs and maintenance, turn costs, taxes, insurance, and capital expenditures out for an entire year is a lot of work.

The pressure to get it right is enormous too, lest the next year is bogged down by endless variance explanations that no one has time for.

And now, due to the upheaval caused by COVID-19 over the past 18 months, it’s even more challenging because there is no reliable baseline to build projections on.

What does the income statement look like next year for a property that was leased but hardly occupied this year? Does the year-over-year variance trigger everything to be reviewed? Is that too much work and nothing gets reviewed? How do you determine whether to renew maintenance contracts, or how much staffing is needed?

Usually cost budgeting is pretty easy with increasing expenses 3% annually before Covid, but now it is a very rough guess at operating expenses for next year.?

The pros and cons of technology

While it’s going to be a difficult budgeting season for everyone, some portfolios have been able to compile and analyze information much more easily because operations have been digitized over the last couple of years.

Maintenance contracts are centralized in the cloud and easily sorted by renewal date and vendor performance, capital expenditure projections are updated on the most recent maintenance data, energy management solutions have analyzed utility costs and occupancy patterns make better predictions about spend over the next week.

The irony is that the technology that is making budgeting season more bearable comes with its own set of budgeting challenges.

Commercial real estate has matured with a set of rules that govern operating and capital budgets. The introduction of technology has added some complexity and forced landlords to make determinations around whether to put software in operating expenses, whether to underwrite the expected savings, or whether and how much to pass on to tenants.

Not only that, but portfolio-level managers are suddenly waking up to the extensive patchwork of technologies that are being used across their portfolio.?

This variance between the software vendors in buildings and the relative costs of technology adds more complexity to an already difficult budgeting process.

TrueBill for Commercial Real Estate

There’s an app for individuals that finds and tracks subscriptions - Netflix, Hulu, Spotify, etc. - called TrueBill. If this kind of thing is hard enough for an individual to track, imagine the same situation across a diverse set of real estate properties full of different interests, stakeholders, budgets, market dynamics.

We thought commercial real estate deserved a TrueBill too. So, that’s what we did.

Recently, we partnered with one of our clients to conduct a survey across 53 assets to try and get a clear picture of the technology landscape in the portfolio.

Similar to new users of TrueBill, the client had a sense that the tech stack was a bit of a mess.?

But there’s a big difference between knowing something intrinsically and seeing the details in front of you.

In these 53 assets, there was an enormous range in how much was being spent on technology, from two cents per square foot for an asset run almost entirely manually, to over two dollars per square foot for an asset that had bloated and redundant contracts.

Moreover, for what we called basic operations, things that have to get done one way or another - property management, accounting, maintenance, energy management, tenant billing, etc. - there were an average of 5 different software vendors per site and an average of 3 routine operational workflows being done manually.

But it’s not like it was the same 5 different vendors. No, there were a total of 42 different vendors across the portfolio. And that’s for “basic operations,” that doesn’t even include more advanced tools for equipment fault detection, BMS analytics, or air quality monitoring.

There was just as much variation within each category. For example, the portfolio had 11 different vendors for energy management, with costs ranging from .3 cents to 2.6 cents per sq ft.??

Making insights actionable

To be honest, there were so many dimensions, it was difficult to analyze the survey.

What’s most important? The satisfaction with current solutions? Standardization across the portfolio? Understanding the difference between property managers? Identifying markets that are most behind?

In times like this, it’s always best to revert back to the initial goals. In this case, it was to reap the known benefits of technology, while keeping the costs of technology as low as possible and with as few vendors as possible.

That meant that the first goal should be to plug gaps, to digitize those manual and paper or spreadsheet-based workflows.?

One of the biggest takeaways was the lack of consistency. It would be easier if we could say that it’s always daily maintenance or always monthly tenant billing that is done on clipboards and spreadsheets across the portfolio.

Unfortunately, it’s much more of a hodgepodge. In this particular survey, there were 157 total instances of manual workflows. These spanned the gamut from ESG reporting to capital planning, to tenant billing.?

The conclusion was a phased strategy, customized building-by-building, but originating at a portfolio-level view.

The first phase focused on plugging gaps, as long as doing so did not add more than one extra platform. The second phase focused on consolidation. This was aided through an analysis of current penetration of solutions, overlap of capabilities across platforms, costs, and satisfaction.

Now, just like having a capital plan developed by Marx Okubo, there is a strategy that can be followed to bring the tech stack from 42 providers to three or four in a few years.?

It’s possible, this budgeting season is a great time to start.

To make it easier, we’d be happy to white label the survey being used by some of the largest portfolios for free for your use.

Click here to get our Free Portfolio Portfolio Survey Template