Realty Rates

[PL1957]

Ultimately, the Gold Standard for capitalization rates is extraction from the market, so you can compare apples to apples. If you're consistent in application the value conclusion will always be correct.

One of the things that many fail to understand is that you can have multiple "correct" cap rates for the same transaction. That's why taking OARs from any source without knowing their composition is inappropriate.

 

[leasedfee]

One of the things that many fail to understand is that you can have multiple "correct" cap rates for the same transaction. That's why taking OARs from any source without knowing their composition is inappropriate.

Bingo.

Ted Whitmer MAI's Comprehensive Appraisal Workshop prep course has a great little section where he shows 1200 or some huge number of cap rates ranging from something like 5% to 16% on the same subject depending on how you model/extract the cap rate. So it's pretty pointless information of a broker, investor, or banker to say The Cap Rate Was X%.

RERC had a useless survey they sent to the boss. He was too busy so I'd fill it out. They'd ask "What is a Suburban Office rate?" And I'd just plug in a number. These types of surveys were only useful during my first year as an analyst and I was trying to get my feet on the ground. Now they're a waste of money and report filler, unless you need to extract some change rate or to extract a spread to develop a specialized rate or yield, of the land or building components. Or should I add, if you're in a very thinly traded market and some data is better than no data.

 

[DanBuck]

I don't know about the surveys you subscribe to, but the larger ones like PwC, RERC, etc. are pretty clear regarding their methodology. Survey participants certainly aren't random and the surveys themselves are pretty detailed and often include follow up questions. There's usually a section of the report (or on the website) that describes the methodology and names participants.

Well,my associate used to do that survey for them from the office. Ive heard many phone calls in person done that way...

 

[leasedfee]

Korpacz PwC is a fine report. If you look at the spread in the survey rates it is very very wide -- though most people only report and look at the average/median. (There was a great recent study in The Appraisal Journal looking at two decades of their data.) The PwC is a nice tool and good start but very lacking. There is too much of a wham bam thank you mam aspect of the research market data. We don't really know how each investor develops their NOI pro-forma. One guy may use $0.03/sf for reserves and another $0.70/sf. Sadly, appraisal data remains in the age of medieval astrology. There would be nothing greater, if the market could support it, of a vendor providing quality research market data.

 

[PL1957]

There would be nothing greater, if the market could support it, of a vendor providing quality research market data.

Just out of curiosity, how would you define "quality" market research? Interview the buyer? The seller? The broker? The lender? The appraiser?

Where would you get your market estimates for parameters such as IRR, growth rates, etc. which represent expectations vs. "facts"?

 

[leasedfee]

Just out of curiosity, how would you define "quality" market research? . . .

Great question. I don't want opinions or off-the-cuff quotes. I want to see numbers approaching facts.

So a survey may say "The average cap rate for suburban office is 7.2% for such 'n such area" like everyone else.

But then you could drill into a table of all of the 15 sales from which they were extracted. Then you could look at a particular sale #11 and see the pro-forma/actual numbers from which the cap rate was derived. The data would have to be presented in a standard way -- and most likely you'd have maybe 3 or 4 pro-formas on each sale. When you want to see the average cap rate, you'd have to click on a report saying what you wanted: "Prior Year Rents"; "Broker's Pro-forma Rents"; "With Appraiser Estimated Reserves"; "With Broker's Reserves"; "Without Reserves"; "Broker's Pro-Forma Vacancy"; "Market Area Vacancy"; etc. You could look at each expense category of the comparables be it "Broker's", "Last year actual", "3 Year Average"; "Appraiser's Stabilized & Restated". As such,you could then have something like a IREM/BOMA expense reports BUT could filter the data to get the age and size or whatever more inline with your needs. You'd want a system flexible enough to represent all of information, yet rigid enough to standardize it. You could run some great reports of variance in cap rates and cash on cash rates both on the deal's actuals or on current lending parameter's. Etc.

PL1957, you and I do this all of the time when we extract three or so good capitalization rates on our own and summarize them in our reports. We know exactly what is going on with the number development. We review the broker/owner's data, and and correct it when it is silly. Like we add in management expense or a correct vacancy rate to 5% or 7% instead of 0% or 3% on an apartment building.

There's other ideas on creating accurate data in every area of real estate research, especially in the income approach. If I thought I could make money doing this I'd hire a team of analysts. Alas, this is just a silly dream because it'd be very labor extensive. Any idea how much $ or subscribers that Korpacz (still call them that as I think Accounting when I hear PwC) pulls in?

 

[leasedfee]

Not directing this rant at anyone; it's just venting.

Appraisers are funny. We're cheap and we won't pay for data unless they absolutely have to have it and can't share it, yet we spend countless hours refining data. Many don't trust assistants to analyze the data correctly, yet we'll gladly accept a whimsically wham bam thank you mam survey. I just grabbed a Korpacz 2013 Q3. National Suburban Office Market cap rates range from 5.00% to 11.00% with an average of 7.51% down 4 BP from prior quarter. So $100,000 NOI building ranges in value from $900,000 to 2 million. Um, okay. What makes the average any more reliable? We don't rely on averages in the sales comparison approach. Down 4 BPs, is meaningless information as the random error factor of the survey is maybe 100 to 200 basis points. Rant is over, sorry for the culture jamming.

 

[PL1957]

There's other ideas on creating accurate data in every area of real estate research, especially in the income approach. If I thought I could make money doing this I'd hire a team of analysts. Alas, this is just a silly dream because it'd be very labor extensive. Any idea how much $ or subscribers that Korpacz (still call them that as I think Accounting when I hear PwC) pulls in?

There's been a tremendous amount of effort toward the standardization of real estate data, especially on the institution side. If you look at rates included in the various NCREIF indexes, you will see a great deal of standardization.

As real estate moves toward the public markets, it has to comply with the market's demands for transparency. Various organizations are working together (or separately) to develop international standards. Most local market participants are totally unaware of these efforts because they really don't apply to local practice. Even something as simple as using a chart of accounts for expenses which is consistent with BOMA or IREM is the exception instead of the rule.

 

[leasedfee]

There's been a tremendous amount of effort toward the standardization of real estate data, especially on the institution side.

Excellent.

Most local market participants are totally unaware of these efforts because they really don't apply to local practice.

Once in awhile local brokers don't subtract property tax expenses in their brochures to see if slides through. . . . . Once appraised a property where the broker used the owner's actual expenses loaded with everything under the sun for tax purposes. The savvy buyer did a double-closing and pocketed a cool $100,000 and owned the property during his lunch. The first scenario occurs pretty frequently; the last was a once in a lifetime mistake.

 

[GregoryK]

You both make the perfect argument for personally verifying your data. In doing so you find what expenses are included, whether reserves were included, actual vs projected vs pro-forma. As long as the subject and all are treated the same, we are comparing apples and apples. Published data provides a range or benchmark in which we can compare our findings.