"GIS: Meeting the Information Demand"
The following text is Gil Castle's final draft of the real estate column appearing in Valuation Insights and Perspectives, Fourth Quarter 1998
Copyright © 1998 The
A sea change in the real estate industry is undermining traditional appraiser revenue sources. This article discusses several salient characteristics of that sea change, the ramifications for appraisers and other real estate professionals, and the increasing importance of Geographic Information Systems (GIS). The article concludes with a brief review of a new Appraisal Institute book entitled "GIS in Real Estate."
For those not familiar with the technology, GIS is essentially a marriage between computerized mapping and data base management systems. Anything that can be recorded on a map can be replicated in a computer—using longitude-latitude or other coordinate system—and then interrelated to everything else that can be mapped. Since approximately 85% of all computerized data bases have some type of geographic reference (e.g., a street address, zip code zone number), GIS technology can integrate more information than relational, hierarchical, network, or other data base managers. Moreover, people like pictures—"worth a thousand words"—and a GIS definitely draws compelling pictures/maps. A GIS thus uses "location, location, location" to compile and display all the information needed for sound real estate decision making.
What Is Happening?
Particularly noteworthy are these four trends in the real estate industry:
(1) Internet Broker Listings. A large and ever growing percentage of both commercial and residential properties are being listed on literally thousands of brokerage Web sites. Of even greater significance are the efforts of several major players to become the predominate, national Multiple Listing Service (MLS):
Several of these organizations are already trying to gain a substantial competitive edge by using GIS to display the locations of properties satisfying their customers' selection criteria, as well as other important types of data. On the residential side, for example, potential home buyers want to see not only the locations of available houses but also the locations of schools, parks, shopping centers, etc. "Exhibits 1 and 2" show the results of a typical Internet home search in the Bay Area on www.cyberhomes.com.
(2) REITs et al. Real Estate Investment Trusts (REITs), Commercial Mortgage Backed Securities (CMBSs), and other publicly traded real estate securities are becoming major forces within commercial real estate. For example:
Publicly traded real estate securities should continue to gain in importance as:
The number of properties encompassed by the largest 135 REITs is approximately 14,000. Sooner or later REIT investors, Wall Street analysts, and other industry professionals will be demanding current GIS displays of the locations of properties owned by any given REIT, not only to just keep track of REIT holdings but also to better understand and predict the financial performance of the REIT. Additionally, as with home purchasers, REIT industry players will want to see GIS displays of other variables, such as submarket-level variables affecting the demand-side for a REIT's properties. "Figure 22" is an MAI appraiser's analysis of the changes in employment opportunities in the vicinity of an apartment property.
3) Computerized Analyses Generally. Real estate is essentially a game of information arbitrage. The likely winner of the game is whoever has the most comprehensive, timely and accurate information. Serious competitive maneuvering is underway by various members of the Real Estate Information Providers Association (REIPA, at www.reipa.com) and other data providers to meet the ever more pressing informational demands of the real estate industry. Since data is to software as fuel is to an engine, the number and sophistication of computerized analysis tools is keeping pace.
Information arbitrage directly affects individual appraisers, brokers, and other industry professionals. When authorizing a five-figure commercial appraisal, for example, a bank officer is likely to be most impressed by the MAI with demonstrated access to the greatest amount of pertinent information—and GIS is an attention-getting way of showing what you know. "Figure 24" is a further analysis of "Figure 22's" apartment property; this time the appraiser is showing the precise locations of the current and potential employers of the property's tenants. Why should the bank officer hire the MAI who lacks access to this level of information?
Given the ever greater size, complexity, and especially cost of data bases, the environment of choice is shifting from stand-alone desktop computers to local area networks—and to the Internet. Given the choice of:
who among us would continually choose the former option over the latter?
For example, a retail site selection analyst can purchase 200+ demographic variables for every census block group in the nation and load that information into a desktop GIS for approximately $10,000 to $20,000 per year; alternatively, the analyst can have unlimited access to those variables in map form for $595 per year from Market Statistics (www.sbponline.com). Similarly, real estate professionals in Dallas-Fort Worth can access numerous demand-side, supply-side, and environmental data bases for the entire Metroplex in GIS form on a subscription basis from Bruton Information, Inc. (www.brutoninfo.com).
(4) Automated Property Appraisal Specifically. Innumerable individuals and institutions have experimented with automated appraisal systems using statistical formulas, artificial intelligence methods (e.g., neural nets), and other pattern recognition techniques. The research has focused primarily but not exclusively on residential properties. Some banks, such as Seafirst and Norwest, have largely supplanted appraisers with automated appraisal systems. The industry is still waiting for a standard, most likely to come from the research that both Fannie Mae and Freddie Mac have been focusing on such systems. Initial estimates are that approximately 85% of residential appraisals will ultimately be conducted by automated appraisal systems.
GIS is especially relevant here, because GIS:
In short, GIS-based automated appraisal systems—on desktop computers and over the Internet—will inevitably and profoundly change the appraisal industry. Stated differently, if roughly 85% of residential appraisals are conducted by GIS-based and other automated appraisal systems, then (as discussed more fully below) roughly 85% of appraisers will have to modify their careers.
What Does It Mean?
What, then, are the implications of the above observations vis-a-vis the real estate industry, real estate professionals, and GIS?
Real Estate Industry Overall. Commercial real estate will increasingly be bought and sold in a manner similar to stocks and bonds. Real estate assets will be controlled by ever fewer and ever larger players, operating from the nation's (if not the world's) capital centers. In parallel, the percentage of securitized commercial properties will continue to grow beyond the current 10% level. For both commercial and residential real estate, computerized data bases and analysis tools will increase in number, size, and sophistication—emulating information systems utilized by investors for evaluating stocks and bonds. The Internet will be the predominate information distribution method. As discussed below, GIS is the logical technology to facilitate the real estate industry's information revolution.
Real Estate Professionals. For both commercial and residential real estate, fewer traditional real estate professionals will be needed, especially brokers and appraisers. The survivors of the shake out—especially the 85% of current appraisers who will likely have to change their business practices—will gravitate toward two principal types:
A useful model of real estate brokerage and appraisal firms of the future may well be the Wall Street brokerage firms of today (Morgan Stanley Dean Witter, Merrill Lynch, and so on). Like stock brokers, real estate brokers/appraisers would provide both research and transactional services, helping clients to assemble and revamp portfolios of real estate equity and debt investments.
Role of GIS. No other data base management system uses "location, location, location" to organize and portray information. Accordingly, in the ever more data-intensive and software-intensive world of real estate, GIS is the logical technology to become the industry's informational May Pole. This will be true both on personal computers and the Internet.
Even today, for example, one can:
To date the most frequent use and cost justification of GIS has been in data presentation—primarily because relative few professionals have invested the time and effort needed to completely understand and benefit from the full spectrum of GIS capabilities; see "Side Bar One." History will ultimately show, however, that GIS' greatest value-adding capabilities are in data integration and analysis.
GIS will not supplant all other data base managers (e.g., Access, Oracle, RBase), much less spreadsheets, wordprocessing, drawing programs, etc. The reasons lie in the innumerable differences in what these various types of software are designed to do, and in the preferences of individuals and organizations to stick with what they've already installed as long as possible. However, GIS is and will remain a fundamentally complementary technology for assisting real estate professionals in performing their jobs cheap-faster-better.
"GIS in Real Estate" (The Book)
"GIS in Real Estate: Integrating, Analyzing and Presenting Locational Data" is the seminal book on the application of GIS technology to both commercial and residential real estate. The 200+ page book is being published by the Appraisal Institute in November 1998.
After a Forward and a Preface, "GIS in Real Estate" devotes two chapters to an overview of GIS, the technology's relevance to real estate, and the benefits enjoyed by practitioners. The next two chapters explore a broad spectrum of GIS case studies in commercial and residential real estate—including brokerage, mortgage underwriting, institutional investment, corporate real estate, and so on. Chapters 5 through 7 focus exclusively on GIS in appraisal, both in traditional appraisal assignments and in new areas such as automated appraisal systems. The next chapter covers the basics of implementing and maintaining a GIS, including software, hardware, data bases, personnel, etc. The last chapter predicts the future of GIS in the real estate industry. Finally, for further information, the Appendix provides the Web sites of leading GIS software vendors, data sources, service providers, glossaries, periodicals, conferences, etc. "Side Bar Two" provides some of those sources. Finally, note that this article's GIS graphics all come from the book "GIS in Real Estate."
In addition to serving as overall editor, I wrote the Preface and the chapter on GIS applications in commercial real estate. The other authors of the book are:
* * * * *
The Bottom Line issue is not whether you should re-invent yourself, but how—especially with the benefit of GIS technology.
"SIDE BAR ONE"
ILLUSTRATIVE GIS FUNCTIONS, FROM SIMPLE TO COMPLEX
"SIDE BAR TWO"
ADDITIONAL GIS RESOURCES
PUBLISHERS OF GIS BOOKS & PERIODICALS
GIS World, Inc.
Geo Info Systems
DIGITAL DATA VENDORS
American Digital Cartography Inc.
Environmental Risk Information & Imaging Services
Geographic Data Technology Inc. (GDT)
On Target Mapping
Thomas Brothers Maps
ATTRIBUTE (TABULAR) DATA VENDORS
CACI Marketing Systems
Easy Analytic Software Inc.
National Decision Systems
VISTA Information Solutions