From the humble garden style property, to the trophy high rise, to the logistics fulfillment and distribution center, the inspection is a fixture of owning and operating commercial real estate.
Inspections form the basis for prioritizing maintenance work and capital investments.
Without knowing the current state of things, owners would be flying blind. It would be impossible to follow an investment thesis without understanding the capital and operating requirements of your assets.
And yet, with all that rides on inspections, many portfolios still perform this function on clipboards.
In addition to being unnecessarily time consuming, every inspection is (or should be) valuable data collection. When done on pen and paper, that data cannot be aggregated or analyzed effectively, ultimately wasting time and money.
This is likely a primary reason that owners miss their capital budgets by $12B annually.
The Inspection
There has never been an inspection performed that found nothing that could be improved.
There are always cases where “band-aid” solutions are technically working, but shouldn’t continue to be relied on.
There are always cases of aging infrastructure, where there’s a small change of a very large problem occurring.
There are always cases of clogged filters, degrading facades, and potential safety hazards.
Inspections are so tricky because doing a good (meaning thorough) job almost necessarily means that most of the report will be skipped.
Moreover, many issues identified are not isolated. If you want to replace part of the facade, you’ll have to repaint the entire thing. If you want to upgrade the HVAC, you’ll need to upgrade the electrical infrastructure. If you want to replace old pipes, you’ll disrupt tenants, etc.
Fortunately, the challenges inherent in inspections lend themselves to the digitization and automation available through technology.
Let’s dig into three real-world examples.
Asset Management in Global Investment Portfolio
This portfolio has 250 buildings, across a number of different property types, spread across North America.
The Director of Operations needs to coordinate a range of property management companies to arm asset managers with information for budgeting purposes.
They want it to be standardized, so they’ve come up with an inspection checklist.
Every year, they send it as an editable PDF to each property, which can be filled electronically and submitted through their property management system.
In practice, these PDFs are often printed, filled in by hand while performing the inspection, then scanned and uploaded.
Asset managers then go through each line manually, comparing flagged items with what they see in their five year capital planning spreadsheet.
On the road to putting together a finalized budget, there are invariably questions for the property management team, often performed via email and directly in meetings.
This past year, in order to keep up with ESG reporting requirements, the investment firm added technical waste, water and energy audits.
The process fell apart almost immediately, as IT struggled to integrate the new data sets. Their process simply was not designed to be flexible.
Now, this portfolio has digitized their annual inspection. It is performed annually on a mobile app by property management teams and the data flows directly into their capital planning software.
Property Management in Industrial Portfolio
This portfolio had recently gone through a training on best practices for inspections during tenant move outs.
This is critical because, even though tenants operate the building under their triple net lease, property management must calculate the cost of getting the space in condition for leasing.
The training was helpful to know what to look for, but the VP of Property Management recognized that the process itself was broken.
After an inspection, property managers would go back to their office and put together an itemized list in a Word document for the outgoing tenant to review.
But tenants are simply not focused on this. They’re focused on their business continuity. They’re focused on getting set up in their new space. They often ignore the document and months are spent chasing them down.
Now, inspections are again performed on an app. The report of items to tenants is automatically generated, along with photo evidence and time stamps. These reports are digital, with automatic reminders.
More important, the portfolio integrated best practices from the training session, namely performing inspections on a quarterly basis.
Because there was no administrative work on the backend, property managers increased their inspection frequency. This gave tenants a long lead time to plan for move-out expenses, and saved property managers months on the backend chasing tenants down.
Example 3: Engineers in High Rise
Walking into this high rise tower, you could tell it was well maintained. Everything was clean and there were no outward signs of issues.
On the backend, the engineers themselves were sophisticated. They used real-time data to run the building efficiently, while balancing tenant comfort.
They were also on top of their inspection schedules, rarely missing a scheduled inspection.
However, they had a sizable team and wasted their latest inspection to be accessible directly at the equipment, not back in the office.
And so, they recorded inspection results on sticky notes and scrap paper taped to equipment.
The fate of a $300,000 chiller was resting on a sticky note that could fall off at any moment.
Now, they perform their inspections on a mobile app.
If they need to pull up the results of a previous inspection, they can simply scan a QR code placed on the equipment. This not only gives them the previous results, but the full history of the equipment.
Conclusion
Despite the progress made to digitize real estate (leasing, construction, metering, real-time monitoring, etc.), inspections remain woefully paper based.
There are real costs to operating like this. Costs that some portfolios have eliminated.
Every minute property managers spend on administrative tasks is time they could be serving tenants.
Every time budgeting decisions are made with inadequate data, there’s a risk of unnecessarily spending money, or deferring a truly necessary replacement.
Whenever engineers come up with a hack to pass on information, they are decreasing the property’s resilience to change.
As the cost of capital continues to rise, those who can reduce variance and budget smarter will be rewarded.
Likewise, better stewardship of assets means higher likelihood of getting funding for what matters, whether big upgrades to keep the spaces competitive or a decarbonization plan for the property.
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