I remember the dot-com internet bubble in the late ’90s. Stock prices were going through the roof – the Nasdaq increased 800% from 1995 to March 2000, before falling 78% from the peak through October 2002, giving back most of the gains. I thought my portfolio of internet stocks would allow me to retire before age 30; it did not happen.

There were promises that the new internet technology would change the way we live – like autos in the ‘20s, TV in the ‘40s and PC’s in the ‘80s. There were losers – Pets.com, eToys.com and Webvan are no more – and winners (this was when Amazon started to take off). Internet technology did not change our lives overnight, but there is no disputing that today we can order something online in the morning from Amazon and receive it that evening (or the next day), which is a life changer.

Artificial intelligence or AI, per Wikipedia, is the “intelligence exhibited by machines, particularly computer systems, as opposed to the natural intelligence of living beings”. We see AI in our daily lives with internet searches, GPS systems, digital voice assistants, smart home devices and Netflix recommendations, to name a few. What has made the biggest splash recently is generative AI, which uses AI to create new content, such as text, images, audio and videos.  Generative AI really demonstrates the power of AI and the future of the technology. (Full disclosure: I used the generative AI tool Chat GPT as a starting point for this article!)

AI feels eerily like the ‘90s internet craze – a revolutionary technology that shows promise to change the way we live, followed by stock market euphoria around companies with AI technology. NVIDIA Corp., a Silicon Valley-based technology company that is the dominant supplier of AI hardware and software, has seen its stock rise over 70% in just the past 12 months, becoming a $2.4 trillion company by market capitalization and helping to fuel overall gains in the broader stock market. AI technology may not feel like a game changer today, but it will be, maybe sooner than we think.

The real estate industry is notoriously inefficient and slow to embrace technological change. I can remember starting as a young real estate analyst in the brokerage industry in the mid-1990s. I was armed with a business school education along with fancy financial Excel models, prepared to determine real estate transaction values using the discounted cash flow approach. I will never forget a lecture by a successful real estate veteran that “we are selling bricks and mortar, not IRR’s (Internal Rates of Return)!”

Oh, how things have changed as our industry has matured. While investors are buying bricks and mortar, as our industry has become more institutionalized, it has become apparent that sophisticated investors are buying an income stream – good real estate produces a dependable stream of cash flows. I saw that broker go from a market leader to a follower because he did not embrace technology and the new way of doing things. I believe that AI is similar in that the early adopters of the new technology will be the likely winners.

How will AI affect apartment investing? Where can we become more efficient, get a leg up on our peers, streamline our operations and processes, become smarter at how we do things? This is probably just the beginning, but I believe there are three key areas where AI will have an impact on apartment operations and investing in the near term: market research, asset and property management and marketing and tenant selection.

Market Research

The adage that you make money on the buy in real estate is often true. Market rent growth, and resulting apartment values, are most dramatically impacted by population growth, household formation and employment and wage growth. If we can invest in an area that is flourishing in these areas, demand for apartments should increase and our target residents will have the income to pay higher rents. AI gives real estate investors the ability to analyze vast amounts of data to determine market trends, analyze key economic indicators and gain improved understanding of demographic data to better predict property performance and rental demand. This helps with initial asset selection, but also mitigates risk – data can show where not to invest or when to dispose of a property because the market fundamentals are deteriorating, or growth is slowing. Being able to analyze more data faster makes us smarter, helping to make better decisions on acquisition, pricing and optimizing a portfolio. Better analysis – aided by AI – makes for better investment decisions and performance.

Asset and Property Management

Asset and property management are the blocking and tackling of apartment investing. Managing better enables you to turn a good investment into a great investment.

I’ve looked at many operating statements for potential acquisitions, and many times there is low hanging fruit – delinquency that is double what we average in our portfolio, bloated operating expenses, other revenue sources that aren’t being tapped. If we take one of our core competencies and make it even better – bingo, increased value for our properties and our investors.

AI has great promise to make property management more efficient. Computers can handle routine, repetitive tasks that take up time for property managers, such as rent collection, maintenance scheduling and lease administration. This allows people to focus on more important activities, such as tenant screening, building relationships with tenants and lease renewals.

We recently implemented AI collections software at some of our properties. Calling non-payers is not only time consuming, but also creates friction between onsite staff and residents. The AI collections software is expected to reduce delinquency by 20%, free up onsite employees’ time and make employees’ interactions with residents more pleasant.

There are also some tasks that computers just do better. In our portfolio, we have gone from roving security guards to a live monitoring security system that is powered by AI. Not only does the live monitoring security system do a better job (how often does a security guard catch a problem during the three or four times they drive by a property for a few minutes at night?), but it is also saving us real money, which falls straight to the bottom line.

Marketing and Tenant Selection

During my career, I have seen annual advertising and marketing budgets increase from $150/unit to $500+/unit, and that is just to stay competitive. AI promises to make marketing campaigns more focused, identifying target demographics and tailoring campaigns to more desirable prospective tenants. This is expected to result in more personalized communications with prospective residents, and a higher leasing success rate.  Leasing “bots” on property websites are one form of AI; while impersonal, they do offer an important option – they can respond to questions in real time and at the preferred schedules of potential residents, which is often outside of regular office hours.

There are also AI applications that assist with resident screening, helping us flag potential problem tenants prior to signing a lease. Through AI, we should be able to better predict a tenant’s ability – and willingness – to pay rent, and avoid costly bad debt, attorney’s fees, eviction costs and downtime between leases.

Challenges Implementing AI into Apartment Operations

There are pitfalls and challenges that need to be considered in the implementation of AI into our business. Ever go to a website and get frustrated that you are dealing with a bot as opposed to a person? AI can negatively impact a customer’s experience if it is not used properly. AI can also go awry when it uses historical data to predict the future if it lacks a key ingredient – human intuition and judgment. Data validation is a potential red flag – garbage in results in garbage out.  AI will require human interaction in the form of ongoing monitoring to maintain accuracy and effectiveness – my job won’t be totally replaced by a computer, but AI could make me more efficient and effective!

Looking ahead, AI promises to transform real estate investing, offering investors extraordinary opportunities to improve property selection and operational performance. Embracing AI to help source, analyze, acquire, manage and dispose of real estate assets should allow investors to take advantage of the technology to enhance investment returns.

R2D2 and I are looking forward to what the future will bring!

Scot Eisendrath is Managing Director of Pathfinder Partners. He oversees the firm’s financial analysis and underwriting and has spent more than 25 years in the commercial real estate industry with leading firms. He can be reached at seisendrath@pathfinderfunds.com.