When apartment operators are evaluating the performance of their communities, data about the surrounding submarket is absolutely critical. But not all submarket data is created equally.
Although metro market reports produced by research organizations have an undeniable value in the assessment of a market’s performance, it would be a mistake for operators to rely on the submarket information presented in these reports to compare against their own property (we will get to why in just a moment).
Ultimately, the best way to understand what’s going on in your submarkets is to understand what’s going on with your comps. And to understand what’s going on with your comps, you need to do market surveys (comp benchmarking).
The Pitfalls of Regression Analysis
Metro reports from third-party organizations can provide a great sense of the overall economic and rental trends in a metro area, such as Phoenix. This is extremely valuable information for an operator to have when evaluating the current performance of the market and when making projections about the future. This is valuable information when making strategic market-wide decisions, such as do we want to acquire/build in this market or is disposition and exit a better option. Recall how some of the public REITs years ago decided to exit all other markets and focus solely on East and West coasts. However, the most relevant data for most operators is submarket data. And, unfortunately, the submarket stats in these reports can be flawed.
Here’s why: the surveys used to produce these reports are conducted at the broad market level. Generally, only a sample of properties are contacted directly, which makes sense because calling every property in say Phoenix takes a lot of resources, time, and effort. Using that market-level sample set, regression analysis (starting from the top and working backward to establish relationships between data sets and data points) then is conducted to determine a metro area’s various submarkets’ data performance. For instance, if a Class A property grew rents by 4% this quarter, then the researcher assumes all Class A properties within say 2-mile radius must have increased rents by an equal amount.
This practice can produce misleading submarket data. It becomes significantly more difficult to drill down to a property’s specific submarket with this regression model. To use an analogy, digital photos from the mid-90s lacked enough pixels so as you zoomed in the picture got blurrier. The same happens when data is selected from the top as a sample. The more you drill in the less accurate it gets. In addition, when you layer in the delayed aspect of regression data, it simply cannot provide trustworthy and actionable insights into what is going on in a property’s all-important comp set.
Enter Market Surveys
In the end, getting information about rental and occupancy rates directly from competing properties is by far the most effective method for gaining insight into submarket dynamics and for understanding how a community compares to others in the area.
However, another problem stems from how these market surveys are traditionally conducted. Onsite associates who already are stretched too thin have to spend enormous time calling comps in often-vain attempts to collect information about asking rents, concessions, vacancy rates, etc. Often associates aren’t properly trained to get accurate data from competitors. Finally, when – or if – they are able to collect this data, they place it into Excel spreadsheets, which causes its own set of problems and usually prevents meaningful analysis.
Forward-thinking operators are implementing third-party, cloud-based market survey database platforms and processes that automate the collection of asking rents and related information from comps, allowing associates to concentrate on the many other tasks they must tend to. These solutions also can provide users with real analysis, clear reporting and true apples-to-apples comparisons between properties.
One of the many real values of these surveys is that they provide direct insight into what is going on with your competitors and, by extension, the surrounding submarket. When you want to know what’s going on in your neighborhood, don’t rely on regression analysis – rely on what your comps are telling you.
To read the original article written by our CEO Blerim Zeqiri, click this link:
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