Commercial real estate is swimming in data, thanks chiefly to the decade-long rise of public REITs and the growth of the commercial mortgage-backed securities (CMBS) markets. As a result, legions of analysts and data gatherers now provide a steady flow of information about occupancies, asking rents, sales per square foot, and so on — for all markets and classes of commercial real estate.

The idea is simple: reliable data and research lures capital since it gives money managers and others a complete picture of what they're buying. The word for this is transparency.

But if this is transparency, it is of a highly murky vintage. Industry executives and investors say that the great abundance of information doesn't necessarily render better insights. Indeed, they cite the conflicts and variance in data from different sources as proof that investors are getting a confused and/or skewed picture. One big question for these critics is whether the brokerages that supply much of the basic data can be trusted to report objectively on market conditions when they are simultaneously using the data to make deals (or withholding information that gives them a competitive advantage).

“There are some critically important issues at stake here, since people use market data to make their investment decisions,” says Rick Gold, director of research at global real estate investment firm Grosvenor Americas Inc. “What they [investors] don't know is often more valuable than what they do know.” That includes undisclosed conflicts and — more importantly — proprietary information that brokerages withhold from the public to stay competitive.

The most obvious problem is conflicting data. Property researchers often can't agree on the size of a market or, for that matter, the dimensions of a single office building. Take something as seemingly basic as reporting the gross leasable area (GLA) of 375 Park Avenue, the internationally renowned Seagram Building. A search conducted by NREI in mid-May yielded four separate figures with as much as 120,000 sq. ft. between the highest and lowest tally.

Cushman & Wakefield's internal database listed 375 Park Avenue as having a GLA of 640,000 sq. ft. CoStar Group, meanwhile, pegged the building's GLA at 693,688 sq. ft. A third search on a lesser-known property database, known as, returned 630,320 sq. ft. A call to the building's owner, RFR Realty, pegged the building's GLA at 750,000 sq. ft. With a square foot of space in the Seagram Building renting for roughly $95, a 120,000 sq. ft. difference equals $11.4 million of annual rent.

Why should anybody but the buyer of the Seagram Building care? Because a series of 120,000 sq. ft. deviations spread out across an entire central business district (CBD) can grossly distort the picture. Errors in fundamental facts such as GLA ripple through the system, fouling up all sorts of metrics that investors rely on: vacancy rates, prevailing asking rents per sq. ft., and so on.

A review of five separate quarterly reports on the Dallas-Fort Worth office market illustrates how much real estate data varies (see table below). There is as much as a 6.8% spread between the highest and lowest estimated vacancy rates — and sharply divergent absorption totals.

What do 700 basis points of vacancy translate into within an office market with more than 150 million sq. ft.? More than 10 million sq. ft. of vacant space that might be empty, partially or fully leased. Indeed, the five absorption totals (or amount of space leased during the quarter) are so uneven as to suggest that each researcher was measuring a different market; the reports tell several different stories at once and investors have to do their best to determine which story seems most reliable.

Data due diligence

Investors and others who consume real estate data can and should push their suppliers to justify their numbers, says Doug Poutasse, chief investment strategist at Boston-based real estate investment advisor AEW Capital Management, which manages roughly $27.5 billion in real estate investments for some of the nation's largest pension funds. Fifteen years ago, he says, “you could get the vacancy rate, but the brokerage couldn't explain to you how it arrived at that number.”

Now, Poutasse demands that his data providers — Property & Portfolio Research (PPR), Torto-Wheaton Research (a subsidiary of CB Richard Ellis), Real Capital Analytics (RCA) and Reis — explain and defend their methods. In particular, he wants to make sure he knows how their geographic market is defined, as well as how they gather their data.

“A lot of the data that's out there is reliable, but you really have to examine how they arrived at these numbers,” says Poutasse.

Even so, Poutasse only uses their research as a starting point. He relies on monthly reports from Real Capital Analytics, for example, to gauge what investors are buying and selling in each market. With that wealth of data, Poutasse can draw his own conclusions about where the market is heading. He then draws on broader economic data to round out the picture for those markets.

And what does he think of brokerage-driven research? Brokers do have a very strong connection to the marketplace and are well positioned to find out what's going on at ground level, he says. “But I don't necessarily disagree with others that there can be conflicts,” says Poutasse. Just 10 years ago, he notes, it was common to read a brokerage report about a property and, simply by strolling into the building, learn that the vacancy information was unreliable.

Lawrence Fiedler, a real estate investor and professor at New York University's Real Estate Institute, is more critical: “The brokerages are the lubricants of the market. They therefore use their data as a selling tool to puff up the market,” he says. “This data is created for one reason: to market these firms. It makes them appear to be experts; people often believe they are.”

So where does Fiedler go for market research? He relies on independent researchers for property data. Manhattan-based property research firm Reis Inc. is reliable, Fiedler says, primarily because “there is no conflict.” Reis, for example, is independently owned. Most savvy real estate investors follow a similar pattern, he believes. Reis Inc. was founded in 1980, making it one of the oldest independent national property research firms.

Still, investors continue to rely on brokerage-generated reports. For one thing, they tend to be comprehensive. Cushman & Wakefield, for example, can tap 11,000 brokers in 48 countries to gather data. Maria Sicola, Cushman & Wakefield's managing director of national research, runs a 150-person shop that cranks out reports on 45 major markets. And, she says, clients are too smart to put up with sloppy research. “Anyone who's doing this research with smoke and mirrors has a real problem,” she says, adding that, contrary to perception, her researchers do more than canvass brokers for data.

“It's not a trivial exercise to provide this research to clients, and our research doesn't always agree with what our brokers are seeing in the market,” she says.

Sicola adds that the notion that independent research is more reliable is false, because — like the rest of the industry — those researchers rely on the brokers on the streets for basic information. “They can call themselves objective, but they are still getting much of their data from the brokerages,” she says.

Andrew Florance, president of Bethesda, Md.-based CoStar Group, a top independent data firm, acknowledges that as much as 25% of his company's data is indeed derived from broker input. But, he says, CoStar researchers also make roughly two million phone calls a year to obtain property information. “Other sources are public filings, government agencies, tenants, owners, and field research partnerships with other information services,” says Florance.

One testament to the reliability of broker research, says Sicola, is the fact that clients are willing to pay for it. As of mid-May, 13 institutional clients were regular buyers of Cushman & Wakefield research, she says. That client list includes some of the biggest equity REITs in the business such as Trizec Properties, Mack-Cali and ProLogis. Cushman & Wakefield declined to disclose how much it spends annually to create research, but the firm claims that its research budget increased by 25% between 2000 and 2005. On the buy side, Leonard Sahling, ProLogis' head of research, also declined to say how much his firm pays for the Cushman & Wakefield reports, though he did say, “it's not cheap.”

The other major brokerages, including CB Richard Ellis and Jones Lang LaSalle, are also big spenders on research. Los Angeles-based CBRE, for example, releases “Market Snapshots” of the top U.S. markets every month. These reports detail vacancy rates, absorption levels, large sales or leases and other pertinent details.

Chicago-based Jones Lang LaSalle also publishes monthly and quarterly market reports from the largest metro markets. Jones Lang LaSalle also includes detailed charts in their reports about projected completions and vacancy rates as far as three years into the future.

Jones Lang LaSalle doesn't sell research directly to clients, though CBRE does sell research chiefly through its Boston-based subsidiary, Torto-Wheaton Research.

The growing presence of independents in the market — in late May, CoStar announced the purchase of mall data provider National Research Bureau (NRB) — is encouraging to lenders, who may be deploying hundreds of millions of dollars. Charles Krawitz, national director of small balance originations at Chicago-based LaSalle Bank, a subsidiary of Netherlands-based bank ABN AMRO, says he welcomes the new sources of information.

“This is a good thing, and I think we'd be doing ourselves a great disservice if we all relied on one central depository for real estate data,” he says. “As a lender you have to dig a lot to get the best data, and access to that data has improved dramatically over the past decade.”

Testing the data

But Krawitz emphasizes the need to do original work, rather than relying too heavily on research, no matter what the source. Michael Pollack, a Phoenix-based investor, is another ardent believer in gathering first-hand research. “I'm certain there are some firms out there producing research that's trash,” says Pollack, president of Pollack Investments, which controls 4 million sq. ft. of commercial space.

Pollack even sprung for an in-house real estate analyst, who assesses the research and crunches the numbers on potential deals. But, says Pollack, a 30-year industry veteran, none of that can replace first-hand reporting. “There's no real short cut, and investors have to go kick the tires on these deals first,” he says. He still tours properties, even visiting neighboring ones to get a sense of the market. He spends a lot of time with owners, tenants and brokers with knowledge of a particular building or neighborhood.

George Emmons, executive vice president with KeyBank Real Estate Capital, says that it's also important for prospective buyers to ask bankers about the lending climate in a particular submarket. “You've got to talk with local experts in the market. A lot of people don't do that today,” says Emmons. KeyBank ranked No. 3 on NREI's 2005 Top Lender survey with nearly $19 billion financed in 2004.

Perhaps, because of the idiosyncratic nature of the real estate business — two adjacent properties with identical profiles can perform differently — real estate may never be as transparent as other investment assets. Most likely, there will always be multiple data sources and a huge number of private players, who have little interest in spreading too much information around. “There won't be a Bloomberg machine covering the entire commercial real estate industry for a long, long time,” says AEW's Doug Poutasse.

“The commercial real estate business just isn't as transparent as many within the industry claim it to be,” adds John Falco, president of Atlanta-based real estate consulting firm Kingsley Associates, which advises REITs and other large property investors. “But the investors have to have faith in something, and that goes for the institutions, too.”

Even data that is extremely reliable has limitations, explains William Lindsay, a partner with Pacific Coast Capital Partners. Lindsay cites the case of a West Coast office market in which three buildings sold for $250 per sq. ft. An investor bought a fourth building in that market for $245 per sq. ft., thinking that he had gotten the deal of the century. “We wondered why someone would ever want the building because it was functionally obsolete. Data drove the investor to a decision that the real estate drove us away from.”

Demographers project that the population of California will grow by 12.5 million by the year 2020. “That doesn't mean it's a great time to be investing in California,” insists Lindsay. “What you need to look for is the right kind of opportunity in the right place with the right local aspects to it. The data can't give you that.”

Editor Matt Valley contributed to this story


The first quarter reports on the Dallas-Fort Worth office sector demonstrate the variance in data reports between companies.

Cushman & Wakefield CBRE JLL CoStar Reis
Q1 2005 Vacancy 26.5% 22% 25.75% 19.7% 24.5%
*Rental rates Q 1 2005 ($) $20.69 $20.07 $20.87 $20.14 $17.58
Leasing absorption Q 1 2005 (sq. ft.) -85,332 434,824 263,393 8,734 1,015,000
*Average Class-A asking rents per square foot annually
Source: The Companies


The new research firms that have emerged over the past two decades now serve more than 54,000 clients.

Founded Clients
Reis Inc. 1980 400+
CoStar Group 1987 50,000
Smith Travel Research 1988 450+
Property & Portfolio Research 1994 150+
Lodging Econometrics 1997 500
Real Capital Analytics 2000 350
Source: The companies

He Wrote The Book

Long Before CoStar and Reis, Robert Ballard pioneered commercial real estate data

In 1978, Cushman & Wakefield leasing broker Robert Ballard compiled a book that painstakingly catalogued all major office buildings in Manhattan. His 228-page Directory of Manhattan Office Buildings, published by McGraw Hill, included everything from floor plans to the routing of elaborate duct systems of 500 large office buildings. It listed assessed valuations of every property. Amazingly, it was the first time that this information was made freely available.

The impetus for the book underscores how vital reliable information is to the real estate industry. Ballard undertook his fact-finding mission to break a deadlock between Manhattan office landlords and their tenants. In the mid-1970s, when inflation was rampant and landlords were trying to pass on rising costs in the form of big rent increases, the largest tenants balked. They argued that they were getting socked disproportionately — paying higher rent increases per square foot of occupied space than other tenants.

The problem was that neither the landlords nor the tenants could prove who was right, because nobody agreed on the actual size of the buildings. “The people who owned these buildings didn't even know everything about them,” recalls the 71-year-old Ballard, an executive vice president at Cushman & Wakefield.

The concept hardly sounds groundbreaking today, with detailed data on thousands of properties available at the touch of a keystroke through firms like CoStar Group and Reis. But in 1978, no such technology existed — and Ballard's tome was the only place where this information was collected between two covers.

How did he do it? He hired an appraiser to go out and measure the buildings. It took an estimated 3,000 hours to catalog about 500 buildings, and most of the work was done at night. One problem, Ballard recalls, was that most leasing brokers refused to cooperate. “So, we did walkthroughs wherever we could,” he says.

Ballard's tome was the precursor to Cushman & Wakefield's property database, which is now overseen by a 14-person department in Manhattan. Maria Sicola, senior managing director of research at Cushman & Wakefield, gives Ballard full credit for spearheading the grassroots efforts that evolved into a dedicated department in 1981. “He really spent the time and energy to get it started at a time when nobody had ever thought of doing it,” says Sicola.

Ballard remains committed to research. He still clips newspaper and magazine articles about Manhattan office buildings. “These file cabinets are always being filled with new material,” he says from his paper-strewn office above Sixth Avenue in Midtown.
Parke Chapman

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