One of my favorite podcasts is ‘Invest Like the Best’ hosted by Patrick O’Shaughnessy. He has a mix if incredible guests from all ends of the finance world (venture capital, authors, researchers, portfolio managers), and recently did an episode on quantitative investors. Institutional investing is becoming increasing quant-driven and firms are utilizing all sorts of tools and data-sets to produce alpha. To a layman, the sophistication of these shops is almost unimaginable (you quickly realize it’s impossible for a retail investor to compete!).
Investors are utilizing a wide-range of data-sets to get an edge; crowdsourced earnings estimates, credit card data, satellite images, insurance company information etc. are all utilized to make better investment decisions. The skill, however, is synthesizing the data in a way that enables you to form non-consensus opinions that end up being right.
I’m constantly reminded of the framework popularized by Howard Marks. Investments can be described in a simple two-by-two matrix. On one dimension you can either be right or wrong. On the other you can be consensus or non-consensus. You don’t make money if you are wrong, but most people don’t realize you don’t make money if you are right and consensus because the opportunity is too obvious and all the returns get arbitraged away. The only way to generate outsized returns is to be right and non-consensus.
However, real estate has lagged in its use of sophisticated data. The edge in real estate is still typically driven by relationships and access to capital. While this ‘edge’ isn’t being arbitraged away any time soon, there are tools available that can provide real estate investment firms with an informational and analytical edge.
Using multifamily as a proxy, in this post I share a few of the tools investors can utilize to gain an edge on the competition.
Rent Roll and Financials Analysis Tools
Most real estate professionals analyze rent rolls and historical financials by hand, comparing rents and expenses to the competitive set and other deals within their portfolio. Through this process, they’re able to identify expense variances and determine the severity of the mismanagement and potential upside.
However, this rudimentary approach is exactly what their competition is doing. Equipped with the same information and identical analytical process, the investor that wins the deal is often the one who overpays. There are several advanced tools which enable investors to synthesize the data in a more sophisticated way.
Rentlytics is the premier tool for analyzing and visualizing the performance of multifamily assets. The custom charts enable owners to visualize the occupancy, rents, expenses, loss-to-lease, capex etc. over time and identify potential upside.
RedIQ is another tool which enables owner’s to slice & dice the rent roll and financials to get a deeper understanding of the performance of an asset.
These tools enable multifamily investment professionals to get a true understanding of the property-level performance and determine potential upside.
The real estate community as a whole is not making data-driven decisions. Typically, investors are presented with a particular opportunity, then utilize market-level data sources to determine the attractiveness of the submarket. Very few firms are identifying the attractive submarkets first, then looking for the opportunity.
Whether you take a top-down of bottom-up approach, there are several tools which can be used to analyze submarkets.
Esri maps demographic information including current-year estimates and 5-year projections for population, households, income, housing, daytime population etc. When exploring an investment opportunity, demographic information is often the first source of data we look at. CityData.org provides similar information for free.
Moody’s offers market-level data such as demographic information, housing data, and economic, demographic, and financial forecasts.
Using these tools, investors can quickly understand the submarket demographics today and where it’s headed over the next 5 years.
Property-Level and Transactional Data
There are several data companies which provide information to the multifamily industry. Each provide something slightly different including property-level, transactional, and market-level data. Below are a few of the most popular sources used in the multifamily industry.
REIS provides submarket reports, property-level operating data, as well as forecasts for occupancy and rent growth. However, they lack transactional data.
Axiometrics, owned by RealPage, is dedicated specifically to the apartment sector. They provide granular data on every property, every floor plan, every month to provide submarket and market insights on rent, rent growth, occupancy performance etc.
Costar remains the largest player in the commercial real estate data world. They track property-level, market-level, and transactional data.
Real Capital Analytics is the premier firm for transactional data. In addition to the sales price, their data includes owner and debt information (which is tough to come by).
Reonomy, which started out as exclusively NYC-focused, has launched its national platform providing market-level and property-level data and empowering real estate owners to make more informed decisions. Their sorting functionality allows you to view assets by location, property type, year built, sales prices, year renovated, and year sold etc. It’s a great tool for sourcing off-market deals. It’s also extremely affordable and price on a month-to-month basis.
While all data providers offer something different, they provide invaluable insights into the market occupancy and rents, who’s buying and selling, and forecasts for the next ~5 years. Having access to accurate real-time data is important, but what’s more critical is how one synthesizes that data to make informed decisions.
Other Tools / Resources
There are several other tools which are important to get the complete view of a submarket.
Niche.com provides insights and ratings of local school districts.
Marshall & Swift is helpful for estimating the hard cost aspect of replacement cost.
There are many tools available to real estate investors which can provide an information and analytical edge over the competition, however real estate in general has been slow to adopt and data-driven investment process. That will change. It’s just a matter of time. If you need evidence, just look at the sophistication of the investment world.
What are some of the tools you utilize to get an informational and analytic edge?