Data "Analysis" has always been one of the commercial real estate phrases that rub me the wrong way. I put quotes on "Analysis" for a reason... the bulk of what is done in real estate investment analysis is NOT actual data analysis.Here's the current method for data analysis:
A typical multifamily analyst, after gathering all of the data to begin their analysis in Excel, will average the rents for each unit type (Studio, 1BR & 2BR) from each of the properties in the Excel sheet. Then, they will insert those average rents into a financial model, again typically in Excel. If they're a good analyst, they'll try to predict the rent growth rate for the market depending on what historical data they can find from their various subscriptions to data providers.
If not, they'll just use 3% rent growth. It's the industry standard after all.
This process will repeat itself for sales comps by averaging the price per unit and price per net rentable square foot to determine a potential purchase price. At this point, the analyst has gross potential income, and now they can make a stab at valuing the property. These income numbers will, of course, go into their pro forma, and after plugging in rules of thumb for operating expenses, as well as the debt terms available to the firm, the analyst can calculate a going-in cap rate from this information.
On a simple buy and hold multifamily investment, this would be enough.
However remember, this is a value-add opportunity, so the analyst must repeat the entire data collection and analysis processes for renovated properties in the same market. The data collection and analysis actually has to be done twice, once for the pre-renovation property, and again for the hypothetical post-renovation property. After running both scenarios, the analyst is better suited to estimate the upside potential for the value-add investment.
This is a lot of work!
And when I say that this work is not data analysis, I mean it - there are literally no statistical analysis techniques used in this entire process. What happens if a major employer leaves the market? What happens if competing properties engage in similar value-add projects in the same market at the same time? What about new developments? These questions are tough to answer, but there's a much simpler question that is even more important to the success of the investment and is even more difficult to tackle:
"What should the scope be for a value-add investment?"
Should you install quartz countertops? A rooftop deck? A dog run? Or a fitness center? Will you get the ROI you need from those improvements? Should you offer package receiving services? Online rent payment? Concierge service? What should you ACTUALLY do in this value-add opportunity, and what will the ROI be on those scope items?
Unless you're a skilled data scientist with access to the volumes of data necessary to perform in-depth statistical analyses, you simply do not have a way to determine, item by item, what your scope should be. So, in summary, you spend a ton of time, manually gathering and "analyzing" a lot of data, and at the end of the day, you still have to guess at the best investment strategy.
This is the part where I shamelessly plug Enodo, the alternative to the mind-numbing, inefficient and inaccurate processes analysts typically employ. Our platform simultaneously aggregates data from nearly all publicly available properties, analyzes it with our predictive algorithms, and instantly predicts for you:
Optimal Rent Calculation - We calculate the optimal rent to maximize revenue for each unit in your building based on your specific unit types, sizes and amenities
Amenity Rent Premiums - We calculate the incremental value of every single amenity in the property you are analyzing, showing the exact rent premiums you can generate based on everything taking place in your market. Needless to say, this is a bit more accurate and a heck of a lot faster than doing full pre and post-rehab analyses
Instant Comps - The statistically most comparable properties in your market, so you can easily compare and contrast performance.
And just because we know how much real estate people love excel, we make it all easily exportable in an excel template for you to take to your manager or investment committee.