Implications of Technology and Information in Commercial Real Estate Investing : A Case Study in Ann Arbor
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The purpose of this project was to examine the methods and techniques used in commercial real estate investing of properties in Ann Arbor, Michigan. It was found that information and technology make for a more well informed client, reducing the possibility of a risky investment within a market defined by variable, uncertain factors. This project focuses on information and technology, and how they are utilized in the commercial real estate industry. The use of information and technology is crucial in the imperfect market of real estate investing, especially when dealing with clients who are adverse to taking risks. The first section begins with a literature review which concentrates on market research and valuation techniques used by investors. It also explores technology and how it is used as an investigative platform for research and the technological advances that have made for a more informed and efficient industry. Lastly, these topics are utilized in two case studies located in the central business district (CBD) of Ann Arbor, Michigan. The two case studies are: 1) Selling a client's current building in which they are the owner and tenant, 2) assigning the client to a new five-year lease. Information is critical in real estate investing, from the most basic level to a more detailed, complex exploratory level. At the basic level, information is used to understand characteristics of a property and the market in which it is located. At the more complex level, financial information and differentiating property characteristics are used in valuation techniques. This information is used to predict how a property will perform as an investment and its potential return on investment (ROI). I witnessed the power of information during an internship at a commercial real estate investment firm last summer. In addition, I experienced how technology is being used as a tool to reduce the uncertainty involved in investing. The literature review focuses on market research and the use of valuation techniques, specifically including the sales comparison approach and the potential buyers approach. Valuation techniques are utilized by analysts and investors to value properties when there is limited access to detailed information. Some information that is available can be accessed on CoStar, which is a database that contains information about a properties characteristics and financial information. Information from CoStar was used to perform a number of financial analysis in the case studies, such as the properties general assumptions, rent and expenses. In commercial real estate, there are a number of factors that are variable due to the change in market conditions, the complexity of the investment and how risk adverse the client is. The lack of information within the industry and the presence of variable factors contribute to risk when investing. As a result of these uncertainties, the use of due diligence and market research has increased. This project highlights the importance of analyzing information and understanding how an investment could generate a return prior to the actual investment. The properties that will be focused on throughout the case studies are income producing office buildings. The case studies also explain the current value of a property and the future benefits or risks an investor is exposed to when investing. Technology is a variable studied consistently throughout the literature review and case studies. Technology is used as a platform to explore informational databases that have made for a more informed and effective industry. CrediFi, CoStar and LoopNet are three important property informational databases that will be explored and utilized in market research. The commercial real estate industry is trending towards becoming more technologically advanced and developed as seen by the use of augmented realities, which are computer generated three-dimensional environments which resemble a virtual reality. This advancement helps satisfy a less risk adverse clientele with clients being more informed about their future investment. In the application section, case studies show how information and technology are used in varying degrees, by starting with an investment opportunity and ending in a solution that satisfies the client's needs. In the first case study, the client is an owner of a property located in the CBD of Ann Arbor, and is looking to sell the property. In the second case study, the client is looking to assume a five-year lease of a 4,000 - 6,000 square foot building located in Ann Arbors' CBD. Information is crucial to understanding the properties characteristics and in valuing the properties to produce financial calculations. Information and technology are used to help enable clarity and predict how an investment will perform in a market, where there is high risk coupled with a high level of uncertainty.