How Data Can Improve Commercial Real Estate Investment Opportunities
“In God we trust; all others must bring data.”
— W. Edwards Deming, statistician and author of
The New Economics for Industry, Government, Education
As the Internet economy becomes yesterday’s news, it’s clear that millennials are bringing a generational change to markets. The impact of the shared economy and discussions about the “Internet of Things” aren’t limited to dynamic business models such as Uber and AirBnB. The commercial real estate market—one of the world’s oldest investment vehicles—is undergoing dramatic changes on a similar scale. With the data and analytics tools available today, investors can analyze these trends and make necessary adjustments more easily. Instead of resorting to “gut feeling” and the rudimentary methods of past decades, investors can now work with fresh insights powered by data and analytics.
The recent upheaval in the commercial mortgage-backed securities (CMBS) market is a prime example of the need for data. It was nearly impossible to predict the large CMBS market reduction in the first-quarter 2016 year-over-year volume just by going with a gut feeling… The situation was a warning that the mortgage industry needs to heed in the immediate future: nearly $200 billion in what’s come to be known as the Great Wall of Maturities of CMBS may potentially come to fruition in the next year or two. How is that wall going to be addressed in light of the CMBS market slowdown and the tightening of commercial real estate investment? More data and analytics tools are likely going to be necessary.
Levels of data
In general, the mortgage industry frequently views data and analytics on two major levels: macro data and address-level data. Macro data can help identify new market opportunities and could forecast a CMBS market decline. Address-level data provides insight on how to place capital within a given market.
Yet there are several things about data that need to be understood. Data often needs to be analyzed for veracity, volume, and velocity before investors can move forward with any confidence.
- Veracity: Poor-quality data results in bad outcomes. It’s important to have the right verification of the data.
- Volume: If data is statistically insufficient for an analysis, the analyst may make too many assumptions, which can often lead to bad outcomes.
- Velocity: The pace of specific data available over time and the changes in data values constitute velocity. If the required data isn’t available at sufficient speed or the analyst can’t see any changes over time, then it’s static input. Dynamic changes in data often provide greater insight.
A key first step is to know what insight to look for. Without this, time may be wasted searching various data resources without understanding the information outcomes. Macro data can help an analyst assess where secondary or the next primary markets are heading—and that’s when investments can pay off substantially. In addition to typical unemployment, median income, and other census indicators, it’s important to include regional indicators such as:
- socioeconomic resilience of a given region
- infrastructure fragility
- consumer potential
- capital potential
- market access and adaptive capacity
Trends in those indicators can provide insights into which regions offer potential for investors. Making this information available at the time of the transaction can help create more transparency, potentially increasing valuation and interest. For example, when Superstorm Sandy hit New Jersey, the business center of Jersey City bounced back in less than a week—not the months, or even years, of outlying municipalities. That’s because the area had infrastructure solid enough to withstand the effects of the storm, and the socioeconomic resilience and adaptive capacity of the region were strong.
Tailoring risk with indices
Other indicators also provide insight into how well a given region can cope with man-made disasters such as acts of terror. Companies use many of those indicators extensively in various markets, and certain indices present a clear opportunity to help improve returns on investment by being selective for geographic areas. In fact, there are more than 200 indices for over 198 countries, which means that information is available globally. By using the right indices, an investor can tailor risk appetite, making the deal more transparent and potentially more attractive. Such information could help the buyer better understand the pricing, and that insight can move an opportunity faster.
Another important variable is the global effect that the movement of investment funds has on available capital and interest in commercial real estate. Investors need to look beyond the Immigrant Investor Program (or EB-5, as it’s commonly called) when entering U.S. markets and examine how investment capital moves to other markets, opens new markets, or makes changes within a market. Some strong examples of catalysts include reopening United States/Cuba relations, lifting sanctions on Iran, and China’s changing economy. Commercial real estate markets have largely proven to provide returns over time. But the time horizon for this investment capital can shorten as uncertainties grow and investors begin looking for quick returns and safe capital.
Remember to check the address
While macro data provides insight into geographic regions from a market perspective, it’s important to look at address-level data too. That information can help an investor better understand why Property A surpasses Property B, even though both properties are located on the same block and appear similar. Address-level data provides additional insight beyond amenities and delves into the quality of tenants—a key component in assessing rental income. If Property B has several private companies with floundering businesses falling behind on their rents, this seriously affects a property’s value.
Fortunately, data analytics can determine a privately held company’s ability to pay rent. With more than 26 million companies in the United States, more than 99 percent of them are private entities with opaque financials—and yet there are tools available to find data on virtually all of them. Similarly, significant catastrophic risk and crime data is available at the address level that can provide insight into why two similar properties with the same area of rental space, amenities, and block location can have different valuations.
With the emergence of crowdsourcing platforms that provide opportunities for even small investors to participate in funding the commercial real estate market, the need for transparency has never been greater. It’s vital for the small investor that’s being asked to invest in a property sight unseen to have more data and analytics to help determine if an investment makes sense. Smaller investors can leverage data and analytics when investing in stocks across the globe, and the commercial real estate marketplace should be no different for them.
As we know in commercial real estate, “it’s all about location, location, location.” While this is an old saying, data and analytics have become available to help develop an asymmetric advantage by examining the most robust markets and specific addresses. This emerging paradigm offers increased transparency, with data and analytics accelerating the pace and leading to more transactions. That can be beneficial for everyone participating in the commercial real estate market.
In the end, it’s all about using the appropriate data to derive insights tailored for better outcomes. With available data resources, low technology costs, and the speed of computation, the opportunity for lower-risk investing is here and ready for motivated investors to seize.
Narendra Srivatsa, Ph.D., is assistant vice president of product development, Verisk Commercial Real Estate, a Verisk Analytics (Nasdaq:VRSK) business. He has an extensive background in operations, business development, product development, workflow management, and marketing at Fortune 500 and midsized companies in a variety of industries. For more information about Verisk Commercial Real Estate, visit www.verisk.com/cre or e-mail us at email@example.com.
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