Using Alternative Data for Property Valuation Models Post-COVID-19

Being in real estate right now is a bit like walking through a blizzard. You may be able to see the ground a few feet ahead of you, but it is impossible to determine your heading. Also, by the time you actually get to where you’re going, the scenery could be completely different. Even for those with the best sense of direction under normal conditions, the familiar and the known can become foreign and uncanny. In the world of real estate, being able to see the horizon is above all being able to understand the market value. But in the blizzard we find ourselves in now, there is very little to do as trades for many building types are few and far between.

The traditional property valuation models that the industry once relied on are full of assumptions. Delayed reopenings of retail businesses, renegotiations of office leases, restrictions on multi-family evictions, all of which have made it nearly impossible to forecast rents with any degree of certainty. All of this is happening at a time when customer preferences are changing about where and how people want to work, live and shop. Common areas and shared amenities, the things that have traditionally made properties more marketable and therefore valuable, are now empty. The prestige of very tall buildings is based on the proximity of vertical transport. If this COVID-19 continues for an extended period of time, we will have to completely rethink how assets are positioned to make them the most valuable to their end user, the tenants.

In the meantime, we must find our way through the storm. To do this, many players in the real estate industry have started looking for new types of data to help them find their way. Pauline Hale is Senior Director of Consulting at Altus Group, a provider of software (including the popular ARGUS assessment program), data and consulting services. She gave me examples of some important alternative data that should be taken into consideration when calculating the value of a property, including public markets. “Although they are not directly correlated due to issues such as investment horizon, liquidity, and the fact that REIT shares represent the value of not only real estate, but also the company of operating and liabilities, public markets provide insight into the direction and relative performance of the sector,” Hale said.

In addition to public markets, Hale also explained that “sales verification” can be a way to take into account alternative data or simply a change in circumstances, which is exactly what happened. “With very few market-rate trades in the market, one method of determining current market cap rates is to double-check sales,” Hale said, and that means “essentially interviewing parties to pre-shock trades and their ask how they would underwrite the same deal under today’s market conditions. Understanding the factors that make a difference in property valuation provides insight into future transactions. Applying different capitalization rates to model possible outcomes or valuation changes can help owners better prepare for the future. It can also help owners understand where best to direct funds for upgrades and improvements to existing properties if the different models indicate such a need.

Hale also suggests looking at some of the hard data from the last few months as well: “Retracted sales, those that were canceled or changed after the ‘Great Lockdown,’ can also be studied to understand why they failed.” Possible reasons for failure could include “funding, liquidity or performance,” Hale said, “and this information can be used to assess the potential impact on similar properties, sectors and markets.” Examining a retracted sale in a particular city could help guide the modeling of comparable properties within the same market. Looking at the most relevant and recent transactions within a specific market has always been a way to provide evaluative data for the sales comparison approach, but it could also become a standard for other valuation methods, now used as a way to provide additional context for a potential deal.

Since the start of COVID-19, the way we collect data and information has also changed. A lack of global transactions and, in many cases, the inability for people to physically examine a property has led to a greater reliance on other data sources. “During the pandemic, webinars, phone interviews, and articles have temporarily replaced traditional data sources,” Hale said. Although polls have always been commonly used to gauge market sentiment, they are now an essential means of understanding market trends.

Altus recently released its Market Thoughts Survey which provides insight into market sentiment and its impact on value. In their May and June 2020 results, approximately 65% ​​of respondents said that after COVID-19 they expect to see “a fundamental shift in demand for central business district (CBD) office space. to suburban markets. Among the major CBD office markets in the United States, 60% of respondents believed that New York City was the most at risk. This type of information indicates that the value added to a property by its location could be very different in the years to come.

Proximity to public transportation has generally been a huge driver of value, but as suburban office markets grow, this factor may not be as important as it once was. According to Richard Green, chair of the department of real estate development at the University of Southern California, data such as household formation and employment could be critical alternative data to consider in a post-pandemic market. “You can run regressions to compare market demand to employment. We can also look at the relationship between jobs and household formation,” Green said. “We could see people moving in together,” Green suggested. He continued: “Looking at household formation, we could see it declining in the event of a downturn.” This type of data can be particularly useful in determining the growth or decline of local markets.

Although it can be difficult to determine where to find local market data sources, this is the only way to ensure validity when modeling results. As Hale explained, “During this pandemic, the effects are hyper-local, so insights need to be market and sector specific and come from local experts.” Since each state’s governor had to decide how to handle COVID-19 and we know little about this disease, its effects have varied widely across the country. “Perhaps most important, in the short term, is the degree of lockdown at the state, city and local level,” Hale said.

Some states like New York and New Jersey are just starting to reopen cautiously and new virus cases have declined, but in parts of the South new cases are on the rise, stalling or stalling the reopening process. reversed. These local market fluctuations create opacity within the markets due to daily changes in reopening statuses and resulting data. Markets where tourism is an important component of the economy are a good example. Places like Orlando will be affected very differently from knowledge worker groups like Austin.

In order to account for these fluctuations and ensure more accurate assessments, alternative data must be incorporated into future modeling equations. Factors such as public markets, alternative or retracted sales data, and local market information should be used alongside real estate fundamentals when developing cash flow assumptions and pricing parameters. Hale also recommends looking at both short-term and long-term projections, “Short-term considerations such as rent collection and rental timing may factor into the early years of cash flow projections, but the possibility of longer term impacts and potential structural changes should be factored into discount and cap rates.

One of the worst things to do in a blizzard is to stand still. The important thing is to make sure that any movement you make is towards your destination and not away from it. While many real estate companies may be waiting out the storm when it comes to new deals, they should use this time to try to advance their valuation techniques. Relying solely on historical data and traditional valuation methods could lead to inaccurate estimates and costly errors. Even in the worst visibility conditions, we must use all possible sources of information to guide us. These same sources could help guide us again when the next blizzard eventually hits. [Propmodo]