Data-driven business decision-making is transforming whole industries with unprecedented insight into opportunities and threats. But when it comes to gaining insight into leasing markets, many CRE professionals derive their transaction insights from traditional sources, which are based on asking rents, market-level trends and small samples of relevant deals. These data limitations can cost investors, lenders, and owners millions of dollars in suboptimal decision-making. This three-part report establishes that real estate professionals can significantly improve their bottom lines using accurate, granular deal level data.
Go to Part One
Go to Part Two
Download the full report.
Part Three: The Importance of Critical Mass to Valuation
As an investor, sourcing relevant lease comps from brokers is time consuming and often only yields a handful of data points. Tracking down the brokers and appraisers who have relevant lease comps is time-consuming work that can result in incomplete or questionable information. It is not uncommon for lenders, owners, and investors to rely on a handful of lease comps from a few properties to generate their cash flow assumptions. That, however, can cause them to miss critical details that would significantly impact their decision-making. The following chart illustrates how sample size can affect rent models.
Recently, CompStak looked at a Class B office property in Fairfax County, Virginia. In one scenario, four nearby lease comps were used to generate cash flow assumptions. These lease were included in the offering memo, which means they were selected to support the original NOI forecast. In the second scenario, more than 300 office lease comps within a 1-mile radius were used.
Cash Flow Assumptions Generated with Varying Numbers of Lease Comps
When applied to a cash flow pro forma, significant differences between the scenarios become evident. Most notably, in the ninth year of the pro forma, the anchor tenant’s lease will expire. This causes a large, temporary decline in NOI due to higher concession package value as well as turnover loss.
Net Operating Income Forecast with Varying Numbers of Lease Comps
Ultimately, the differences in the NOI forecast for each year translates into significant differences in the total valuation for the property. Assuming a discount rate of 8.25% and an exit cap rate of 7.5%, the overall valuation of the property is approximately 9% lower when 300+ lease comps are included in the valuation, as compared to the use of only four lease comps. That amounts to a discrepancy of more than $2 million. Insufficient lease data can cost CRE professionals huge sums in imprecise decision-making.
Get Help from CompStak
CompStak’s Enterprise lease analysis platform puts comprehensive lease details at your fingertips, providing:
- Real-time deal data
- Impartial analyst-verified information
- Starting rents, concessions, transaction size, and more
- 200,000 lease comps and growing daily
- Up to 10 years of history
- 15 markets nationwide
- The ability to build competitive sets based on custom geographies, space type, transaction type, transaction size, starting rent, concessions, floor, building class, and more.
- Fully exportable data
To learn more about how CompStak can improve your decision-making, please visit CompStak Enterprise or call 646-926-6707 to request your free demonstration.