August 17, 2023
The current investment challenges in CRE have caused focus to shift to asset classes that hold a greater promise of ROI. Find out how Prophia's AI is adjusting to better support one such asset class: Retail.
Image Source: John Voorhees, "Apple's Flagship Chicago Store", 2017. Accessed via https://www.macstories.net/news/a-photo-tour-of-apples-new-flagship-chicago-store/
When CRE investment strategies shift focus from one asset class to another, it’s important for strategic partners, like Prophia, to make tech improvements as a response to those conditions.
That’s why, in one of our most recent platform-wide improvements, Prophia data scientists and product engineers placed particular focus on the machine learning model’s ability to recognize CRE terms that relate specifically to retail leases.
Find out more about the strategic move to include more retail-specific lease terms into our AI to better serve the nuances of this category as investment dollars continue to pour into the once ill-fated asset class.
The Current Market Conditions in CRE
There are a number of stressors making today’s CRE market volatile and inspiring firms to take a more thoughtful approach with their investment strategies. One such stressor is dwindling interest in office assets and looming termination dates on some of the most premium office spaces around the country. With vacancy rates continuing to increase from our initial office report earlier this year, office leasing continues to make investors nervous while also causing property owner’s eyes to wander to asset classes that hold greater ROI potential.
While office real estate makes a slower comeback than many anticipated, life science assets are picking up the pace, holding the majority of new construction projects in the United States. Many experts anticipate that life science space will increase by 20% over the next two to three years. This prediction is only supported by the fact that life science employment is booming as well.
Another sector continuing to impress in the volatile market is retail. While perhaps not following the same growth path as life science, brick-and-mortar retail is actively learning to evolve along the changing needs of customers, pivoting to product distribution and elevating brand loyalty with premium in-store experiences.
The Demand for Better Retail Lease Coverage Increases
As retailers adjust their strategies to meet these new customer demands and influence market growth, landlords, and the firms that represent them, will also need to pivot the way they manage retail contracts to keep their retail tenants and attract new ones. This changing negotiation landscape, as a result, is driving up the need for ownership groups to have much greater visibility and data accuracy around retail contractual obligations and opportunities.
Heeding this call, and trends in the CRE market, Prophia developers and AI engineers have placed focus on training and developing the LLM’s familiarity with more retail-specific lease terms. This increased coverage of retail assets allows us to support our growing roster of retail clients who, in turn, are building stronger investment strategies to avoid vacancies and baked-in incentives to attract financially viable retail tenants.
Prophia’s Recent Retail Enhancements
Training and maturing an AI model is a steady process—one we began nearly five years ago in 2019 when we first started building Prophia’s AI. This head start, assembling CRE’s most comprehensive collection of private contract data, has helped make Prophia one of the most formidable vertical AI solutions on the market. But our continued improvement of our AI and unbiased training practices continues that winning streak. And that is no better demonstrated than the recent modifications we made to expand our AI’s understanding of retail terms.
To effectively cover the management needs of our retail clients, Prophia product designers sought out three additional key terms to include in the retail enhancement:
Tenant Radius Restriction: A provision prohibiting tenants from opening like-businesses within a particular radius of the leased premises for a specific period of time.
No Build Area: This clause prevents the landlord from further developing a part of the lands and site upon which the shopping plaza, mall or other commercial building is located and that the tenant occupies.
Prohibited Use: This type of clause prohibits tenants from using a commercial space in a certain way. Among other things, a use clause outlines what a retailer is and isn't allowed to sell as well as how they can or cannot conduct business.
Teaching our AI to flag these terms will allow clients with retail tenants to lead stronger negotiations, effectively advocate for property owners and drive higher tenant satisfaction.
Clients Putting Retail Enhancements to Use
When the retail enhancements rolled out in spring, there were a handful of Prophia clients and users that immediately adopted the improvements into critical business functions. For one regular Prophia user, Klein Enterprises, Associate Director of Acquisitions & Development, Matt Hutton, describes how the additional coverage on retail assets improved his team’s ability to conduct due diligence throughout a recent acquisition:
“A large part of our Due Diligence is extracting information from numerous lease documents. What was a time consuming task has been revolutionized into an efficient process leveraging Prophia's innovative technology and exceptional customer service.”
Matt Hutton, Associate Director Acquisitions & Development, Klein
This is just one testament to the unique way Prophia blends the human and AI element to make CRE professionals stronger negotiators with a bigger impact on their portfolio’s ROI. With advanced lease abstraction and portfolio insights, Prophia empowers commercial real estate professionals—in the retail sector and beyond—to make informed decisions, mitigate risks, and identify valuable business opportunities.
In addition to the retail term focus, Klein also noted that the platform greatly enhanced their ability to collaborate with all stakeholders involved in transactions, confirming important deal points and effortlessly understanding any tenant encumbrances, landlord restrictions, and critical dates that could impair their ability to execute their business plan after closing.
"Prophia's revolutionary technology and exceptional customer service have transformed our Due Diligence process, giving back time in spades—time being the most valuable asset during this critical period. Moreover, the delivered insights refined our underwriting process, all while saving nearly half the time and cost compared to traditional approaches we used in previous deals of similar size."
Matt Hutton, Associate Director Acquisitions & Development, Klein
Klein and other leading firms who use Prophia have significantly raised the competitive stakes for CRE. With Prophia assisting in due diligence and running discrepancy checks against retail-specific terms, CRE firms who learn to leverage technology will come to the table equipped with greater data accuracy and stronger negotiation power.
If you're ready to take retail lease management to the next level, . Get started by exploring Prophia’s AI solution in under a minute, or reach out to a member of our team to schedule a personalized demo.