Comparing apples to oranges in most cases is a study in futility. Fitting a round peg into a square hole usually isn’t possible.
But in multifamily, equating two properties in different asset classes through benchmarking can offer some valuable insight, and even an opportunity to compete on a playing field that may seem uneven.
RealPage Industry Principal Andrew Bowen describes how in the recent webcast, “Benchmarking and Business Intelligence: Stay Ahead of Your Asset Strategy.” He shows the way a renovated Class B property can compete for higher rents that a competitor’s Class A community generates in a similar geography.
The example is one of a few that he and industry expert Tracy Saffos outline in describing why leading asset managers and property managers are leveraging business intelligence and benchmarking tools to drive portfolio performance.
Understanding the market through benchmarking
Benchmarking allows properties to compare asset performance within or out of a certain geography to peers, typically within a particular asset class. It is a growing trend in multifamily which leverages lease transaction data to see how similar properties compare on lease rate, retention, amenities and other operational factors.
In the case of the B property – which compares in Bowen’s example to an A asset in size, age of construction and building type within close proximity regardless of submarket – an analysis of in-place rent and executed rent differences can make a case for a renovation and a good return on value-add capital.
Bowen said many in the industry are deciding whether or not they renovate – and how much – using RealPage’s vast repository of lease transaction data to determine a return on investment.
“Our partners who are leveraging benchmarking for renovation are better able to determine what the market will bear for them, which means they are making more informed decisions about the extent of the renovation the market can support,” Bowen said.
Making comparisons on multiple fronts
Benchmarking can help make easy determinations of a value-add project, such as the case for upgrading to compete against a competitor’s property in a higher class when the rent difference is significant.
However, a renovation project that doesn’t appear to have teeth on paper can be worthy of a second look, depending on how benchmarking tools are used.
Bowen compares a property that generates average rent of $2,085 to one that gets $2,118 in one asset class above, leaving only $32 separating the two. Despite the low separation that leaves little room for rent lift, the lower-priced effort has more latitude to earn the owner a nice return on a renovation.
Using benchmarking in a different vein can shed new light on the project.
“We would likely focus on maximizing NOI of that property versus really focusing on the rent of that asset,” Bowen said. “I would want to evaluate our renewal effort on both measured in-conversion as well as lease trade-out on the renewal side. Are we potentially leaving money on the table by not being aggressive on renewals as we should be?”
Benchmarking relative to market performance
The comparison shouldn’t stop there.
As time goes on and the renovation progresses, the property’s rent roll will obviously move upward. Eventually the asset will bump a class or elevate within a classification. By continuing to measure against the baseline at the start of a renovation throughout its progress, the true movement of the market can be clearly understood, he said.
In one example, an asset experienced lease-over-lease growth of 13.6 percent but benchmarking and market analysis showed 3.6 percent market growth. Thus, the true growth from the renovation was 10 percent.
“Simply measuring lease over lease growth does not measure the actual return in the investment,” Bowen said.
Benchmarking evaluates property performance relative to market performance and asset class.
BI about the how and who of property performance
Business Intelligence is another cart of apples. BI is designed to put the right internal information into the right people’s hands in nearly real time to maximize operational efficiency. Simply, it’s about taking the information learned through benchmarking and exacting a strategy.
Being a data driven organization does not mean that every metric should be focused on all of the time, Bowen said. Key components to leverage data both to operate and invest in multifamily real estate is managing the incredible amount of data that an organization is exposed to each day.
“Where performance analytics benchmarking reveals that what and why around performance, business intelligence is all about how and who,” he said. “How do we do more of what we do well and less of what we don’t. And who needs to see what in order to accomplish it.”
Bowen says that each organization is different and recommends choosing the metrics that are most important to meeting goals. RealPage’s Star Reporting is a feature with its business intelligence platform that gives users the flexibility to focus on what matters most.
A powerful one-two punch in apartment operations
Couple with benchmarking, business intelligence becomes a powerful force in driving business, he added.
“While benchmarking has revealed that truth of what our performance is and why is it what it is, our partners who are the most forward thinking are leveraging BI to position their internal data in a way that empowers their people to do more of what they do well and less of what they don’t do well.”
To learn more, watch the webcast.