Top three data hurdles we keep seeing during the real estate valuations process

Commercial real estate valuations are only as good as the data they are built on

“Garbage in, garbage out,” is a popular phrase that is unfortunately germane to the data that drives the results of commercial real estate valuations. But bad data in real estate valuation does not always boil down to a single issue like an inaccurate appraisal.

In this article, we will reveal the three key data hurdles keeping commercial real estate fund managers, portfolio managers and asset managers from the valuation information they need to make great investment decisions and share options on how to overcome those hurdles.

Overcome your data hurdles

In hundreds of client projects and thousands of client conversations, we have helped some of the largest open-end and closed-end commercial real estate funds overcome the following three common obstacles, surface their best view into the value of their portfolios, and equip them with the good data they need to make informed investment decisions.

Hurdle 1: Establishing methodical confidence in your own commercial real estate data

The quality of data used to make a decision can strongly impact the business outcome, this is a widely accepted correlation. Unfortunately, acknowledging this correlation and being able to comprehensively address it are on two entirely different levels of difficulty.

Let us dive into a “good data” checklist to better understand the challenges and how we help funds to produce good data they can consistently depend on:

Ensuring data is up to date

Market conditions have been more volatile over the last two years meaning what was true a quarter ago or even a month ago for the value of a property, may not be true today. This leaves fund managers and their teams with an outdated view of their assets and portfolios.

Consequently, many commercial real estate funds have started to increase the frequency of their property appraisals to maintain an up-to-date perspective on their investments, however, this can introduce organizational and resource-based complications with sourcing an increased volume of appraisals.

We are focused on removing the resource burden and complexity out of managing appraisals through:

• Our nationwide network of appraisers

• Serving as a management layer to a fund's own selection of appraisers

• Centralizing and organizing the flow of data and information that moves back and forth between the fund and the appraiser throughout the valuation process via our valuation management software platform

Whether we are engaged across all three options or just one, commercial real estate funds benefit from our decades of appraisal experience which successfully delivers more than 10,000 appraisals per quarter.

Unbiased data

Truth in data is fundamental to making an informed investment decision, or instilling confidence in all parties in a deal, regardless of whether the numbers end up higher or lower than what is wanted.

As a leader in valuation management services with more than 200 funds and 24 out of the 26 ODCE funds, we have built a reputation of trust in the market where funds and auditors alike know that we are intent on delivering an elevated level of satisfaction when it comes to the commercial real estate valuations we manage.

Standardized data format

How many ways can square footage of an office building be represented? Fund management teams know what kind of headache variances between appraisals and across appraisers can create for accurate valuations.

This is why we have developed the expertise and technology solutions to ingest all the appraisals we manage and enforce consistency of the data so clients can depend on an “apples-to-apples” comparison.

Having accurate and transparent data

Data transparency is increasingly important to commercial real estate funds, especially to keep limited partners informed on the health of a shared investment, or both sides of a transaction confident in the veracity of a deal. Therefore, we maintain comprehensive automated audit logs of every commercial real estate valuations we work on.

Fund managers know they can rewind to any moment during the building of a valuation to know what data was changed, when it occurred, and who was involved. In respect to accuracy, we actively monitor for data exceptions that could lead to inaccuracy by leveraging the same technologies we built to track and audit every stage of the valuation process – that’s peace of mind.

Hurdle 2: Understanding how your portfolio of commercial real estate assets compares to the market

Investment decisions for commercial real estate assets, portfolios and funds should never be made in a vacuum.

To make good strategic investment decisions, funds need quantifiable market insights to tell a contextual fact-based story of why their properties perform the way they do on an individual and overall basis, and how their portfolios stack up against the wider market.

Here are a few examples of how market knowledge can better inform decisions across the real estate investment lifecycle:

• Acquisition: Proper benchmarking results in increased confidence in your market assumptions and how well an asset will fit into the rest of your portfolio.

• Operation: Leveraging key benchmark metrics year over year in annual business planning drives better decision-making.

• Dispose or reposition: Market comparisons provide useful triggers to assess whether an asset has peaked in its performance and is in a prime position to be sold.

To address the use cases above and many other market intelligence-based requirements for decision-making, you need a lot of reliable, consistent, and timely data about the market to derive statistically relevant benchmarks and analyses.

This is an extremely demanding enterprise for an individual investment firm and is why we focus many resources on supporting performance attribution needs of the funds we serve. Supporting the valuation management of thousands of institutional properties across more than 200 real estate investment funds; we:

1. Produce anonymized valuation data points from a subset of these properties

2. Vet and standardize the data to reveal underlying drivers of market performance

3. Illustrate how capital markets and cash flow fundamentals influence real estate returns.

Marrying the wealth of market data, we maintain with the combined knowledge of more than 170 real estate advisory professionals embedded in major metropolitan markets across the world, we monitor investment, leasing transaction and macro-economic factors to understand regional trends.

This information is delivered quarterly to the funds we serve through collaborative sessions to explain their portfolio’s overall performance qualitatively and quantitatively as it relates to the market.

Hurdle 3: Surfacing meaningful insights from the data collected to drive investment decisions

As a commercial real estate fund, successfully reaching the third data hurdle means you have:

1. Established a scalable way to consistently collect high-quality valuation data

2. Overlaid your valuation data with similarly high-quality market data

3. Organized your data into easy-to-consume information.

To navigate the final hurdle, an organization must begin the work of running analyses and turning information into actionable insights that will enable good decision-making. This may sound like a typical progression, but truly making the move to becoming an insights-driven investment fund means you will need the right technology and people in place to make the most of your information treasure trove.

Many commercial real estate funds do not have the necessary internal resources and tools to achieve this. Altus addresses this gap by combining our unique strengths as a leader in real estate data, software, and expert advisory services.

Delivering the tools

Commercial real estate funds directly use our valuation management software platform to help manage the entire lifecycle of the valuation process and collaborate across the different parties involved.

Not only does this platform centralize their data and organize their valuations, but it also provides key operational and performance indicators through an in-application business intelligence dashboard with options for generating reports on valuation assumptions, historical trends, and many other essential metrics for diving deeper into an asset or fund.

Delivering the data

Much of the market data we generate (as mentioned in Hurdle 2) is brought into our valuation management software platform so fund managers can directly understand the performance of their investments compared to their peers.

Additionally, fund managers can gain further visibility into fund or individual partner performance by comparing against a robust benchmark index we have developed in collaboration with NCREIF, the official benchmark for ODCE funds.

Delivering the expertise

The funds we serve can depend on us to deliver critical market intelligence and expert advice to make insight-driven decisions based on accurate and timely asset values. Whether it is to augment a fund manager's existing team or take on a new project, we can cover the spectrum to meet ongoing fund, portfolio, and asset management needs:

• Mitigate acquisitions risk with financial due diligence

• Ensure profit is realized on a development

• Maintain in-depth visibility into your asset performance

• Analyze the legitimacy of assumptions for important sales or repositioning decisions

Conclusion

Addressing any one of these data hurdles can make a considerable difference to improving the quality of your commercial real estate valuations. If your organization is looking to overcome the outlined challenges, know that leveraging our tools and expertise is one of the best ways to tell that story.

Through accessible valuation audit logs, standardized models, robust performance attribution, system-based collaborative processes throughout the valuation lifecycle and expert resources; we can deliver the comprehensive data, market intelligence, and insights when you need it.