New International Property Measurement Standards (IPMS) will be unveiled next month that are aimed at bringing greater consistency and transparency to the global commercial real estate investment market.
Measuring a property sounds like a simple task. Yet properties are often measured used different methods —and with different results—in various regions and countries from San Francisco to Shanghai. Recent research shows that the methods used to measure properties can deviate by as much as 24 percent depending on the methodology used, according to the Royal Institute of Chartered Surveyors (RICS).
“That inconsistency creates difficulty in doing like-to-like comparisons for investors, occupiers and advisors,” says Neil Shah, managing director of the Americas for RICS in New York City. RICS is a global association that promotes and enforces professional qualifications and standards in the development and management of land, real estate, construction and infrastructure. RICS also has been a key group behind the push to create the new standards, which are now supported by more than 50 organizations around the globe.
Building size is a critical component in numerous calculations ranging from yields and rents to net operating income and common area maintenance charges. Incorrect square footage also can skew results in other cost calculations such as energy efficiency, operating costs the construction costs per square foot. “It affects everything. It affects the lifecycle of an asset,” says Shah. “So, having it done consistently is imperative to make sure that you are optimizing what an investor sees.”
The goal of IPMS is to address inconsistencies in the way property is measured from one market to the next by introducing internationally standards for measuring different property types including office, retail, industrial and residential. “The ultimate goal is to provide some consistency for how properties are measured,” says Bill Garber, director of government and external relations at the Appraisal Institute in Chicago. The Appraisal Institute is one of the sponsoring organizations of the IPMS.
Current measurement practices do vary by market. Some of the common discrepancies include which side of the wall to use—outside or inside? And are mechanical spaces such as elevator shafts included or excluded as part of the gross leasable area? Different regions can have their own unique practices. For example, some countries include the parking space in the total size of a building. Investors looking to buy a home in Spain need to be aware that measurements may include a pool as part of the overall property size. In the Middle East, size may be calculated on the hypothetical versus the physical based on what the foundation can sustain, notes Shah.
In the United States, the Building Owners and Managers Association International (BOMA) method is the predominant standard for measuring commercial properties and it will likely remain that way. International investors are likely to see the biggest benefit from the new standards. “For appraisers that are valuing portfolios globally, the IPMS is helpfully in normalizing that data so that you are making better apples-to-apples comparison,” says Garber.
The IPMS Coalition represented members from more than 140 different countries. The group worked together to create some common definitions and standards on what floor space should represent. For example, measurements will site IPMS 1 if they use the outside wall; IPMS 2 uses the inside wall; and IPMS 3 takes out all of the things that are non-rentable or non-usable from a tenant or user’s perspective. “So, when things are quoted, they are quoted with a certain spec that is universally understood whether you are in Sao Paulo or San Diego,” says Shah.
Although IPMS are expected to be effective by the end of the year, it will take time for companies to start using those standards as best practices. To that end, RICS plans to provide some guidance and training for its members that promote the use of IPMS in the industry. RICS also has some 70 organization partners that have said they will be partners in promoting and adopting the new standards.