How to Analyze CRE Deals | RefineRE


How to Analyze CRE Deals | RefineRE

CRE investment is increasing on all fronts from who is investing, to what is being bought, to how it’s being bought. As the corporate real estate market grows so do the opportunities, but along with that comes more competition.

Giving yourself a competitive edge to lock down the best deals possible must be a top priority. There’s no better way to give yourself a competitive edge than by analyzing corporate real estate deals. CRE analysis of various factors at the macro and micro level will tell you if a deal is good by comparison in terms of current value, potential value, operation costs, and risks.

Having access to data on corporate property deals is the first step, but you must know what to look at and how to interpret the data to really give yourself an advantage in today’s competitive CRE markets.

Look at the News and Market Trends When Evaluating CRE Deals

Before you get into the granular details of individual CRE deals, you’ll want to analyze what’s happening in the market as a whole. The health of the economy and market trends have a heavy influence on recent corporate real estate deals. They set the tone for sales across asset classes, impact your ability to attract tenants, and can have an effect on lease terms.

Macro market factors you want to analyze include:

  • Population growth – expansion and contraction
  • Shifting demographics
  • If big businesses are moving to the area
  • Economic and corporate sector growth, expansion, and retraction
  • What drives demand in the CRE sectors
  • Hiring trends
  • Employment rate
  • Major economic advantages and limitations
  • Trends in average household income

One clear example of how important market trends can be is the dramatic shift to remote work in recent years. In some markets, there has been a significant decrease in demand for office space which impacts value and leasing rates. Remote work is affecting corporate real estate in some sectors more so than others, but it can have a ripple effect. For instance, if you own a strip mall and the tenants include an office furniture retailer and restaurant that depends on professionals coming in for their lunch break, then the remote work trend can have negative consequences for the strip mall’s profitability. 

It’s also important to keep up with the news in the area in general. It will give you a better feel for how trends are moving and if a major event is going to shake things up. Anything from a Fortune 500 moving into town to a natural disaster can have a profound effect on corporate real estate deals because CRE properties are extremely price sensitive.

Using Market Data for Macro Level Corporate Real Estate Analysis

When you are looking at CRE deals from the macro-level you’re trying to get a feel for what’s influencing the market, as well as if a specific deal is on par with similar properties in the area. With a macro-analysis, the metrics you focus on matter, and competitor analysis is critical.

Competitor CRE Analysis

Corporate real estate analysis should include data on the deals of your competitors. Being able to benchmark during this part of the analysis is highly beneficial. Benchmarking software gives you a way to compare a property against the market as a whole and competitors to clearly determine if a CRE deal is good by comparison.

When benchmarking, you’ll need to first choose key performance metrics that will be used to gauge how a property in question compares to competitors based on size, asset class, location, and more.

Important Metrics for Analyzing Corporate Property Deals

What key performance metrics should you be analyzing at the macro level? With so much data available today it’s important to focus on the metrics that matter most so that macro-level analysis doesn’t get bogged down with too many details.

The secret to zeroing in on the right metrics is clearly identifying your investment objectives. The asset class or property type also makes a difference in determining which metrics are the best for analyzing CRE deals. For example, if a corporate real estate team is considering the purchase of an office building, metrics like average vacancy rates, tenant turnover, and employment trends are important. If you’re a developer trying to analyze CRE deals for a multi-unit housing project, you’d look at construction cost per square foot and annual population growth for the market area.

Some key performance metrics are commonly used to analyze corporate real estate deals, but which specific metrics are analyzed should be unique to each project or property, even if your portfolio only includes one asset class.

Analyze CRE Deals by Specific Property Attributes

Once you’ve analyzed the macro market data, it’s time to get deeper into the analysis and look at metrics for a specific property and how it compares to similar properties. This is the analysis that’s going to reveal if a certain CRE deal is worth making.

At this stage, the metrics that are analyzed are focused on calculating the potential return on the investment for a specific property. Below is a list of property attributes that are typically factored into CRE analysis. We have even more in our CRE Glossary.

Net Operating Income (NOI)

If you have data on the gross operating income and operating expenses (not including mortgage debt) you can determine the net operating income or NOI. The NOI gives you an idea of the income-generating potential in order to gauge market value.

Cash Flow

You can figure out how much income is generated by a property using cash flow metrics. They give you an even better idea of the actual return by factoring in debt repayment, capital expenditure, and leasing commissions.

Cash on Cash Return

Cash on cash return is expressed as a percentage by dividing the annual cash flow by the total cash investment. A cash-on-cash return of 8-12% is considered good.

Capitalization (Cap) Rates

The sale price for a property divided by net operating income is the capitalization rate, also known as the cap rate. If you paid cash for a property, the cap rate would tell you the annual rate of return. A good cap rate is going to vary from one deal to the next, but 3-10% is a common cap rate range investors aim for. Generally, the riskier the deal is the higher the cap rate should be.

Property Construction

There are several important data points related to property construction. One of the key comparison points for corporate property deals is the age of the properties being analyzed. The age of the property gives you an idea of the condition and even the quality of the construction. More importantly, it also gives you an idea of how likely it is that repairs and renovations will be needed soon.

Lot size, number of units, and square footage are some other metrics that are commonly compared when analyzing CRE deals.

Remodeling Expenses

Often corporate real estate investments involve a certain level of remodeling or retrofitting, and it ends up being one of the largest expenses. It’s not uncommon for tenants to request a buildout as a part of the lease agreement, so it’s important to understand those costs to accurately estimate the return on investment and create fair lease terms.

History of the Building

The history of the building can give you an idea of how the property can be used and what the current owner has put into the property. Things to look at include the length of the current ownership, what the property previously sold for and when it was remodeled last. The type of tenants that have been in the building is another factor to be considered. Always include the data from the pro forma, which should include a historical record of income and operating expenses for the property you’re looking to purchase.

Zoning and Land Use

The potential return and future opportunities of a CRE property is going to rely in large part on the zoning and land uses. They put parameters on what the property can be used for, which could expand or limit the pool of possible tenants. The zoning and land uses can also help you determine the highest and best use of a property, especially if you plan to change the way it’s currently used.

Lease Terms

Analyzing lease terms is an absolute must because they dictate income generation. How much is the average rent price per square foot of a comparable property? Is the tenant turnover rate high or low? What is the vacancy rate? What is the average length of leases? The lease terms tell you what to expect when you take ownership, what’s typical for the market and if there are opportunities to increase revenue. Much of this information for a property can be found in the estoppel certificate.

Finalize Your Decision After the CRE Analysis

Through comprehensive CRE analysis you’ll uncover macro-level trends, see detailed CRE data, and benchmark a specific property against others to get a better idea of what would be considered a fair deal in a market. It’s data-driven decision-making, which is crucial for gaining an advantage in competitive CRE markets that move quickly.

Data analysis takes the guesswork and bias out of decisions so that investments are based on performance first and foremost. You’ll be able to make confident decisions in less time once you have data to back them up.

Once you decide to move forward with a deal, this same corporate real estate analysis can be used to continue monitoring the market and maximizing return on the investment.

Using Corporate Real Estate Analysis Software to Get Ahead

Corporate real estate analysis used to be a very labor-intensive endeavor that required the assistance of an analyst, but today the right technology makes it incredibly simple for almost anyone. With RefineRE’s CRE software solutions, corporate real estate teams are able to analyze and track more information in less time.

Everything you need to analyze CRE deals is part of our platform that was purpose-built specifically for corporate real estate teams. We understand what metrics matter most and how to make the complex analysis process usable for all stakeholders.

The platform includes CRE analysis tools that help investors go into negotiations from a stronger standpoint:

  • Market Intelligence – The Market Intelligence module tells you everything you need to know on a macro level. You’ll also be able to analyze and compare lease terms on the individual level. 
  • BenchCore – RefineRE sets itself apart from other CRE software solutions by offering best-in-class benchmarking tools. BenchCore makes it easy to compare CRE properties by location, property attributes, asset class and more.
  • Data Foundations – The Data Foundations module gives you a central location for bringing all the information together. From the dashboard you can see key metrics at a glance, organize information, and share results with others on your team.

Once you’ve taken ownership or tenancy of a property you can use our other software solutions to increase the return on your investment. From the ESG module that helps reduce carbon footprint, to the Workplace Analytics tool that ensures you’re getting the most value out of every square foot, RefineRE provides reliable data analysis that can be used before and after corporate real estate deals are finalized to improve your portfolio.

Keep exploring to see what our CRE software can tell you about your next investment opportunity. You can also contact our team directly to schedule a complimentary demo of the RefineRE software solutions to discover how they can be leveraged to analyze your CRE deals. 

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