Driven by the desire to improve internal operations and advance tenant services, real estate companies are seizing upon engineering marvels to advance in the new age. Inspired by the successes of Silicon Valley, these REITs and other publicly traded real estate companies are developing proprietary technologies to improve their bottom line while creating the tech firms of the future.

The Need for Speed
"I think being proactive about investments in technologies that impact real estate is necessary," said Chris Hartung, analyst NationsBank Montgomery Securities, San Francisco, CA. "But, if a company decides they want to [invest] it becomes incumbent upon them to appropriately analyze the risks of these new ventures and clearly communicate that risk to their investor base."

In March 2000, BRE Properties Inc. introduced Project Velocity, an Internet-based system, at its MultiTech 2000 Conference where investors were given a first-hand look at this new technology born of a need to better run its multi-family business, according to Frank McDowell, president and CEO of the San Francisco, CA, REIT.

It was about two years ago when BRE executives were looking for ways to become more efficient and improve customer satisfaction. After considering options, executives realized that the same high-speed Internet access they were using to transact company business might be appealing to its apartment residents, too.

"We then asked ourselves how can we give that same convenience and a real value proposition to our residents as well," said McDowell. "The deeper we dove into it, the more we found we could integrate high speed web access into things that were valuable to us as owners and to our residents."

Besides providing tenants with high-speed Internet access, Velocity provides them with an Internet Portal where they can communicate with the apartment management and the community.

"We think it makes us a much better operator of real estate," said McDowell. "We think it's absolutely critical in things like how our residents make a maintenance request and track it, or pay their rent online."

Steven Bloom of Morgan Stanley Dean Witter, New York, NY, was one of 150 analysts who attended the MultiTech 2000 event. "I think it's very user friendly," he said of Velocity. "It's a matter of turning it on and connecting to the Internet. You can use some of the menu's they provide to connect with e-commerce they provide you. Simply click on an icon and you're there."

"Velocity was very forward thinking on the management team part," said Hartung. "It is a very innovative approach to deepen your relationship with your residents."

A spin-off is in the works. The REIT filed a registration statement with the Securities and Exchange Commission on May 3, 2000, according to a report issued by Credit Suisse First Boston. Under the terms of the offering, BRE shareholders will receive one share of Velocity for every five shares of BRE at a yet to be determined record date.

"Nobody understands apartment residents the way we do, certainly no technology company does," explained McDowell. "And, we want our shareholders to be able to take advantage of that. I think they are going to be very happy."

Supplying the Need
Frustrated with his search for a technology firm that understood property management, Duane Lund, CEO, Stonehaven Realty Trust, Minneapolis, MN, eventually collaborated with ReSoft, Inc. (formerly NetLink) to develop property management technology tools that allowed its management, tenants, and vendors to communicate through an Internet browser. Its product, SPACElinkSM, is available to other property owners. In February 2000, Stonehaven purchased ReSoft in a package valued at $7.5 million.

"We truly believe real estate technology has a home in the real estate profession," said Lund. "If you look at real estate technology there are only two players; those who need it and those who supply it. We were a 'need it' company before we acquired ReSoft. Now, with ReSoft on board, we are a supplier. We believe that the 'supply it' companies are going to capture a great deal of wealth, not only in the private, but in the public markets. [Brokerage firm] Robertson Stephens predicted that the online services sector will be larger than the REIT sector in 12 months. We believe that."

SPACElinkSM provides real time reporting to property owners/landlords, enhances tenant relations and leasing functions, provides a vendor bidding/auction service and increases employee productivity.

Right now, ReSoft remains a wholly-owned subsidiary of Stonehaven, but that could change over time. "We didn't want to wait for [January 2001], so we bought it out as a REIT subsidiary. We're still a real estate company, with two divisions: online real estate service division, and our offline real estate division. If you buy our stock in the open market you're buying into both divisions today," said Lund.

Like other REITs, Stonehaven wasn't looking to own and operate a technology company, but internal operations forced them to look outside the typical real estate realm. "We were a company that was having a problem that needed a solution and we couldn't find it."

They have found their solution in ReSoft and hope that others do, too. "I've been pleasantly surprised with the response, not only from the Wall Street community, but also the Main Street community," he said. As far as a future spin-off, Lund added, "If this opportunity explodes we'll make a decision at that time. We'll do what we feel is in the best interest of the shareholders at that point in time."

Partnership Produces Results
When United Dominion Realty Trust, Richmond, VA, began searching for software to run their business they learned that the folks at AvalonBay Communities Inc., Alexandria, VA, after searching in vain, had begun to set the groundwork to develop their own product.

"We talked to them and said, 'why don't we partner?'" said Pat Gregory, IS Director, United Dominion. By partnering, the REITs were able to combine their existing staff to fulfill their need for technology administrators instead of hiring more staff. Then they partnered with Arthur Andersen Consulting to develop the robust, scalable platform they wanted.

Trillium Data Systems, a software system for apartment owners and managers that processes leases, checks applicant's credit, compiles rent and occupancy statistics and more, is the product of that successful partnership. It is being developed as a separate entity and will be managed as a software related company and other firms are showing an interest in the product. A spin-off may be in the future.

"There's some economies that can be gained [from a spin-off]," said Gregory. "We think there can be some operational advantages to combining and spinning off some of the assets into a technology arena."

Spin-off or not, Trillium will make life easier for these two REITs. "The main thing is this is a piece of software that enables us to work in the new economy," said Robert Edwards, manager of information technology services, AvalonBay. "It doesn't change AvalonBay if you spin off the company."

Developing New Technology
Executives at Simon Property Group, Indianapolis, IN, are taking advantage of many technologies including the creation of its subsidiary, clixnmortar.com, a Chicago, IL, venture creation firm that incubates, develops and launches retail-related products.

"Real estate companies are recognizing that there are opportunities in technology," said Steve Sterrett, treasurer. "I think it speaks highly of our company that it is embracing technology and using it so that it becomes a net positive for us and our shareholders. I would hope that is what shareholders would expect us to do as managers."

"Companies will not be competitive if they do not integrate technology into the fabric of their business, at all levels."

However, Sterrett noted that having a technology company embedded in a REIT format may not be the best way to maximize the value for shareholders from a technology perspective and that a spin-off may occur.

"So, ultimately you might see clixnmortar.com spun-off to more appropriately recognize its value," he said.

When REITs began exploring technology initiatives there were several waves of excitement, according to Greg Whyte, analyst, Morgan Stanley Dean Witter, New York, NY.

"When we first started to hear about this there was a fair amount of excitement in the beginning. Wow, this is going to mean bottom line revenues," he said. That excitement waned when investors considered it would add few pennies to the bottom line. "The next leap of excitement came when investors began to consider trading in the public environment—like a Cypress or Allied Riser. Then you get to the next point of the debate: If I am a REIT investor do I buy a REIT because it allows me some technology exposure, or do I not buy a REIT because I don't want to own technology stocks. It's multi-faceted. One has to think of technology from the perspective of how it impacts operations, potentially improve revenues, reduce expenses, or is it a pursuit of a business that is somewhat scalable and could be spun-out."

Analysts agree that technology isn't going away and real estate companies need to utilize it to remain competitive.

"It's changing the way business is done," said Hartung. "Companies will not be competitive if they do not integrate technology into the fabric of their business, at all levels. From the way they build the buildings to the way they lease the buildings, manage the buildings, finance the buildings and provide services to the buildings. Technology impacts all that."

"I truly believe that technology and its ability to deepen your relationship with tenants or residents can be used to push real estate into a category of product instead of just being an asset."

Creating Bonds with Tenants
In 1998 Reckson Associates, New York, NY, spun-off to its REIT shareholders FrontLine Capital Group Inc. (formerly Reckson Services), that incubates business-to-business e- commerce companies that service small and medium sized enterprises. A Nasdaq listed company, FrontLine was the sixth best performing stock of 1999, according to Reckson's CEO and president, Scott Rechler and it was created to answer the needs of the Reckson Associates tenants, 75 percent of which employ 50 or fewer workers in their leased space.

"We began to see that customers needing a greater breadth of services," recalled Rechler. "We're working on a series of special programs for Reckson tenants whereby they will be customizable products that will be derived from our sampling of FrontLine's companies."

FrontLine investments include OnSite Access (telecom), Vantas HQ Global workplaces (office suites), EmployeeMatters (human resources), and other business support, advertising, financing and commercial real estate databases. "Our tenants will have access to information that they may not have had otherwise available to them," said Rechler. "We're going to package a suite of services which will create a stronger bond with our tenants."

Others besides Reckson tenants will be using services offered by FrontLine firms. The firm projects two million customers by 2003, something that may not have happened if FrontLine had remained a subsidiary of the REIT.

"A real estate company can mask the potential value on the technology side," he said. Alternatively, he noted, "It's a far stretch to say that because companies are adjusting to technology that they're now real estate technology companies. I don't think that is really happening. That's like saying now that Ford and General Motors have decided to create a marketplace to buy parts that they're now an automotive technology business."

In late June, in a move that indicates the maturation of the Frontline concept, Donald Rechler, chairman and co-CEO of Reckson, resigned as chairman of the board of FrontLine. and Gregg Rechler, executive vice president and co-COO of Reckson, resigned as a director of FrontLine.

"We have just passed the two year anniversary of our spin-off of FrontLine to Reckson's shareholders," sated Donald Rechler. "During this period, FrontLine has gone through a period of tremendous growth and expansion. At this point we feel it is better for the future of both companies that they work toward becoming more autonomous and this is another step in that direction."

Unleashing Value
Overall, if real estate companies take the right approach, delving into industry related technology can be profitable, and even necessary to stay in the game.

Hartung explains: "I truly believe that technology and its ability to deepen your relationship with tenants or residents can be used to push real estate into a category of product instead of just being an asset. It's more than just the asset that creates the competitive positioning. So, depending on how a company uses technology, it can actually develop a product versus developing just an asset. I think this issue of technology accelerating real estate companies to move toward operating companies is great."

The success that REIT pioneers have found in technology will no doubt encourage others to follow. "I think it opened a lot of eyes to see how technology is impacting the business and there's value to be unleashed potentially," said Scott Rechler.