October 20 - 2021
The concept of comparables is by no means new. When you buy apples, you might check the price at a variety of markets to make sure you’re paying the fair market value. Not only are you going to compare apples to apples, but you’ll also consider size, color, quality, and price.
When it comes to commercial real estate, the principles are the same, but the data is infinitely more complex. That’s why CRE brokers and appraisers typically rely on one or more commercial real estate comps databases to value property and advise clients about the market.
How do you know which comp database gives you a real competitive advantage? Let’s find out.
This review article will fully explain key questions to ask when evaluating a commercial real estate comps database, such as:
There are a number of different types of CRE comps databases. Each one of these has its own strengths and weaknesses. The most commonly used sources of data are:
We can break down the commercial real estate comps database evaluation into seven key categories:
1. Sales Comps
2. Lease Comps
3. Data Accuracy
4. Data Science
5. Data breadth vs. cost
6. Competitive Set
7. Data Analytics
A head-to-head, feature-by-feature comparison isn’t always the best way to evaluate databases. Instead, the goal is to identify critical differentiating aspects of comp databases that truly impact CRE business performance.
When it comes to CRE sales comps, most professionals are searching for data such as general property information, sold date, sale price, names of buyers/sellers, cap rate, and zoning. However, not all comps databases provide the full range of information.
For example, consider the property capitalization rate (also known as cap rate). The cap rate is the rate of return expected to be generated on a real estate investment property. As you might imagine, the cap rate adds insight to gain access to the data.
Public records, for instance, will not have the cap rate information. Internal databases may provide cap rates while publications and online platforms may or may not publish this data. However, the cap rate can make a big difference for CRE pros looking to negotiate deals or generate an accurate appraisal.
Another aspect to consider with sales comps data is non-disclosure (ND) vs. disclosure states. In a ND state, the public record will not show information like the property sales price. CRE professionals in a non-disclosure state may have internal databases containing sales transactions. For instance, appraisers may have data from past reports, and brokerages compile data from past deals they closed. But they will not be able to grow their internal databases using public data, as non-disclosure states do not publish such information. However, more advanced online platforms will show data for both ND and disclosure states.
When it comes to comps data, lease comps are much harder to find than sales comps. Firstly, lease comps are rarely included in the public record. Also, internal lease comps database will mostly include the transactions your company completed. A broker involved in investment sales, for example, might have sales comps for their own deals, but not lease comps, and most likely, no sales comps for deals completed by other firms.
It takes a keen eye to find true lease comps. Some online platforms may claim they have lease comp information, but the data is actually derived from listings on closed deals.
One way to evaluate lease comp database quality is to closely examine certain details. For example, does the lease comp data provide true starting rent? This can be dramatically different from the asking rent in the listing. How about the length of the lease? The more complete data sources will also show landlord concessions, such as tenant improvement allowances or a number of rent free months granted.
The more granular the data, the more valuable it is for CREs looking to close deals. For instance, if you know about concessions, this enables you to back up your negotiations with more confidence. The rent alone tells only part of the story.
If the comps data isn’t accurate, it’s not useful. So when evaluating a CRE comps database, you should take a close look at where the data comes from and how it’s verified.
Public record data should be accurate, but it might not provide the whole picture. For instance, the recorded buyer and/or seller might be a company or LLC created specifically to buy or sell a property. The actual identity of buyers and sellers might only be revealed by more in-depth comps databases.
Internal databases should be accurate as they keep track of internal deals, such as a brokerage tracking its own deals. Appraisal companies also record comps from previous appraisals.
With other databases, such as online platforms, you should ask where the data comes from and can you trust it? High-quality comps databases, such as CompStak, only allow verified commercial real estate professionals working in a brokerage or appraisal (the professionals involved in the deals) to submit comps data.
This brings us to a critical aspect in comps database evaluation: the data should ideally be cross-referenced across several different sources to verify accuracy. The best platforms will even show users how many different sources the data was derived from.
CompStak also incorporates data analysts into the data review process. If the comps data looks suspicious or inaccurate, the comp is corrected or the data removed. Additionally, users (“power of the crowd”) are incentivized to update and correct comp data in exchange for credit.
When evaluating a commercial real estate comps database, dig into the data verification process. Ask questions. It can be very revealing since the number of levels of review makes a big difference.
Internal databases might not be much more than an Excel spreadsheet which may contain several versions of the same comparables (duplicates.) However, these databases, low on tech, have no sophisticated tools to compare and merge different versions of the same comp. How would you know which of the comp versions is accurate? Only advanced comps data platforms provide proprietary algorithms that can identify, with a high degree of accuracy, different versions of the same comp, consolidate them, and arrive at an accurate result.
Furthermore, advanced databases like CompStak use Machine learning to compare each comp to other transactions in the same market, submarket, or even the same building. This occurs very quickly and thousands of transactions can be processed every day.
Commercial real estate professionals require a lot of data to present an accurate picture of the market to their clients. When you only use your internal database, chances are that most transactions there are the one affiliated with your our your firm’s own transactions. In contrast, a comp database that sources its data from a large network of many different market participants can offer more deals and more data that a CRE business can leverage.
Most CRE professionals will prefer a nationwide database. This applies even if most of the CRE professional’s work is regional since comparisons to other areas can be useful for establishing values, trends, and terms.
The majority of online comp platforms that offer a large network and nationwide data require high fees. CompStak is one of the few platforms that provides in-depth, highly accurate national data for free (for those working in brokerage and valuation.)
Information provided by a comps database can be leveraged in a variety of ways to unlock new business opportunities - for instance, identifying competing or similar properties.
Computing algorithms can match competing or similar properties (“competitive set”) against your subject property in terms of average rent, location, building class, building size, and other parameters. Public record and internal databases can’t do this, and neither can most online services.
Similar to Netflix or YouTube recommending videos based on other videos you’ve watched, this technology will highlight properties that are similar to your subject property - ones that you may have not considered. Also, the competitive set can be edited and customized to suit your preferences. This is a powerful way to streamline and accelerate the search process, and only the most advanced online platforms provide this kind of service.
For enterprise level clients, data analytics is another way to leverage a comps database. For instance, you may want to track rent trends over time for markets, submarkets, or even a group of buildings. Also, you might be interested in tracking starting rents which could then be compared to effective rent trends.
The effective rent is the net rent paid per square foot. Since landlords may want the rent to appear higher on the books, they may charge high rent and then offer some of it back to the tenant in the form of tenant improvement (TI) allowance or even several months of free rent. If your data is limited, it may seem like the average rent in an area is rising over time when in fact the effective rent is flat or even declining. Robust analytics gives you and your clients this added insight.
Of course, the quality of analytics completely depends on the data it’s built upon. The underlying data needs to be plentiful, accurate, and be reviewed frequently. When the fundamentals are solid, it powers the analytics to provide a truly competitive edge.
Now that we’ve looked at the main attributes that identify a superior comps database, let’s explore how a database can directly impact the CRE business performance.
1. Valuation accuracy - Database helps forecast income, estimate fair market value, and monitor trends across properties, submarkets, and buildings. Crowdsourced and analyst-reviewed comps will provide greater accuracy for starting and effective rent, sales price, cap rate, NOI, and more.
2. Prospecting - Comps database allows you to scout for tenants or properties similar to your high-value clients. Also, you can discover undervalued assets for your clients.
3. Client presentations - Superior data will showcase your expertise and ability to drill deep into property fundamentals. Show clients a full picture of the market dynamics and help them make favorable deals.
4. Market analysis - A high-quality comps database provides a comprehensive understanding of CRE market dynamics based on current, analyst-reviewed, data science powered, lease and sales comps. Many levels of review provide increased accuracy.
5. Deal negotiation - Establish a position of strength with accurate data on starting rents, landlord concessions, tenant names, and sales histories. Compare accurately to get the best deal.
Taken as a whole, the CRE comps database characteristics we described here set the bar exceptionally high. It stands to reason that only a platform specifically designed to be a comps database would satisfy all the criteria.
CompStak was built to provide the most in-depth and accurate comps data in the commercial real estate industry. It works due to the high quality, accurate, crowdsourced data verification which is all powered by data science. This powerful combination has not been duplicated by any other platform. CompStak offers a national database, free to those working in brokerage and valuation.
Want to take a look at an advanced, accurate, CRE comps database? Get Started.