Commercial Real Estate News / Technology / The Urgent Need for Data Transparency in Commercial Real Estate

The Urgent Need for Data Transparency in Commercial Real Estate

Published: 09-12-23 Category: Technology

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

a finger pointing at the observer through a legal

Following the 1929 stock market crash, Wall Street was laden with a slew of regulations aimed at ensuring such an economic catastrophe never happened again.

The Securities Act, the Securities Exchange Act, the Glass Steagall Act, and the Investment Company Act emerged as only the opening rounds of the government's response.

While these laws brought about data transparency and accountability, they also posed onerous, cumbersome, and costly compliance burdens on securities dealers and exchanges. They were dragged, kicking and screaming, into greater regulation.

Today, the commercial real estate (CRE) industry finds itself in a similar quagmire of opacity, and without proactive measures, might be exposed to analogous regulatory aftermath.

Commercial Real Estate Data Opacity

It is startling that, in the modern era of information, a significant sector like commercial real estate is riddled with such a dearth of data transparency.

Unlike the stock market, where every trade is visible and accessible, the commercial real estate market shrouds even basic information, like a property's last sale price.

This gap has given rise to niche data specialists which gather, curate, and often withhold valuable property data, effectively holding it for ransom from the broader market.

Such conditions breed potential for misinformation and misreads by the market, and, with the lack of a central repository for even basic data points such as property liens, beneficial owners, and their last purchase prices, the risk for a contagion event looms especially large.

The Dangers of Information Asymmetry

When there is a lack of transparent information flow, especially in massive markets like commercial real estate, consequences can be catastrophic. It is worth noting that the primary objective of many securities laws is the promotion of data transparency.

Additionally, due to the benign US formation experience times the absolute mass and throughput of the US economy, anytime catastrophe reaches out and touches Americans on anything other than their own terms, they overreact, and in doing so remake the world.

Following the 1906 San Francisco earthquake, the insurance industry had to be brought under a standard set of regulations.

As a result, we got the NAIC, reserve and net capital requirements for insurers, prohibition of interlocking directorates between insurers and banks, reinsurance regulations, and the Federal Reserve Act. World War II and 9/11 serve as additional examples of this phenomenon.

In the stock market, traders and investors as a result have a plethora of data at their fingertips: every trade, every movement. Public companies have an obligation to inform their shareholders about their financial health. Dealers have detailed reporting obligations they must adhere to.

Contrast this with the CRE industry, where vast amounts of money change hands based on fragmentary, curated information, and no one has any reporting obligations thereon.

A large credit event could easily be on the horizon with no one able to glean its true magnitude or prepare adequately, therefore.

Proactive Measures for CRE Data Transparency

It is in the best interest of everyone involved in commercial real estate to advocate for the industry's future success. However, this requires proactive action. If we don't proactively self-regulate, it could be imposed on us.

Here are some approaches to enhancing data transparency:

Central Repository for CRE Data: Establish a public platform accessible to investors, detailing property listings, transaction prices, rent rolls, and occupancy rates, facilitating easier trend tracking and informed real-time decision-making.
Enhanced Broker Disclosure: Mandate commercial real estate brokers to provide detailed information on property conditions, seller motivations, and potential risks, enabling investors to make better-informed buy or sell decisions with less work.
Technological Solutions: Leverage blockchain technology to create a secure and immutable record of property transactions, drastically reducing the potential for fraudulent activities.
Self-Regulatory Body for CRE: Establish an authoritative body of members responsible for standardizing and enforcing data transparency standards, ensuring uniformity across the market.
Anti-Money-Laundering Provisions: Commercial real estate currently has no AML requirements or provisions requiring efforts to keep ill-gotten funds out of its ecosystem, representing an attractive target for illicit funds. This will be imposed if not remedied.

The commercial real estate sector must self-organize and self-regulate if it wants to avoid having onerous regulations foisted upon it. History has shown that post-crisis regulations can be stringent and potentially restrictive.

To avoid being blindsided by external impositions, the CRE community should champion data transparency now.

Find & Connect With Commercial Agents & Brokers Near You for Free on MyEListing.com

MyEListing.com maintains one of the largest national databases of commercial agents and brokers in the country. Use it for free to find an agent or broker near you.