September 15, 2009
The following is the fifth in a series of newsletters designed to foster a healthy dialog. I hope you enjoy it and encourage your feedback and discussion.
Take a look on http://www.caswell.org for prior articles, access to resources and information on what I can do for you. If you know someone who would benefit from this piece, feel free to forward it.
Please let me know your thoughts on this piece and other subjects you would like explored.
Ward S Caswell
Making Sense of Messy Data
Are you an expert in commercial real estate? Malcolm Gladwell's Blink, the Power of Thinking Without Thinking suggests we are all experts in myriad subjects and simply lack the nomenclature to communicate with others. By way of example he describes our ability to recognize faces instantly and accurately. It's something we can all do very well, but few of us are able to describe a face sufficiently for another person to recognize an individual. Forensic artists are able to communicate within their field using terms defined by fellow practitioners, allowing them to precisely describe a face. In a similar way, most of us can recognize a high
quality, well located office tower in comparison to a lower quality, more poorly placed property. Along those lines, we are able to differentiate the value of two properties from our own knowledge of the basic forces influencing pricing. But to accurately and precisely define the value of a property, you
need market data. The difficulty arises when you review the data available for commercial real estate (CRE) and discover inconsistencies between sources. How do you know which sources are accurate? In this article I will review the sources, issues, and solutions for data. As CRE defaults mount, threatening the larger economy with a double dip recession, a better understanding of the data will help you gauge the opportunities and make more informed decisions.
Commercial real estate is not a transparent market place. There are no benchmarks for rental rates, income, demand, or even supply. Different indices exist, but each has flaws in methodology and without the ability for the end user to recreate the data, they are indices, not a benchmarks, and therefore not open to the level of scrutiny necessary to improve reliability. To get started in creating your own set of data, take a close look at what is available. The brokerage houses produce some excellent quarterly and annual reports as well as white papers and opinion pieces. Pulling together reports for a few markets provides a wealth of detailed data in just a few minutes. The trouble begins when you compare the reports. While the general trends are usually similar, the specific values for things like vacancy rates, net absorption, and rents differ widely. Each firm has its own set of properties included in their surveys and use different methods to calculate variables. Most firms have gone away from including extensive descriptions of their methodologies, making it impossible for the reader to clarify the differences.
The methodology page is the least read but most important section.
A well placed call to the firm's research departments will usually provide more detailed data, clarifications of the methodologies, and sometimes even a handy sheet describing the differences between sources within a market.
Many people attempt to create cross market comparisons using data from individual market reports. This can seriously misrepresent the situation when levels are used across differing methodologies. For example, comparing vacancy rates from two markets may be misleading if one market's report includes single tenant, owner occupied properties, while the other does not. The first market's vacancy may appear to be lower as it includes properties that are generally not as well surveyed and also tend to have a lower natural vacancy rate. Even using the same