Commercial Real Estate News / Technology / What Are Commercial Comps & How Do They Work?

What Are Commercial Comps & How Do They Work?

Published: 03-07-22 Category: Technology

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

These days, succeeding in the world of commercial real estate feels like being two parts detective and one part X-Files. The truth is out there, but when it comes to examining the value of commercial properties, it can feel like trying to compare a dragon against a unicorn.

Contrary to popular belief, comparables within the commercial property space do exist. However, it isn’t as easy to spot comparables in the commercial world compared to its residential sibling. Breaking away from residential real estate means looking at plenty of different aspects, and measuring comparables is an important skill to develop.

Thankfully, free commercial real estate comps, or information on comparable properties located in a geographic area that you’re looking to do business in, help smooth the way forward.

The Data Problem (and the Solution)

One of the Wall Street Journal’s most famous advertisements, A Tale of Two Young Men, sets a stage so familiar to not just real estate professionals, but any business professional: two men with equivalent upbringings and trajectories, gathered for a 25th-year high school reunion.

However, despite working at the same place, one is a department manager, and the other is the president of the company. What made the difference? Well, the ad says it’s the fact that one subscribed to the WSJ, and the other did not.

Stepping away from the obvious promotional overtones, there is something to be said about this tale: there are those that have access to data, and those who don’t. Who’s winning the real estate battles?

The data providers, of course. OK, that’s a bit tongue in cheek. The answer is that those with access to data are far more likely to have tools for success than those who don’t. In the earlier days of the Internet, good data access was reserved for those that could afford expensive database access.

Thankfully, this is no longer the case: free commercial real estate comps are plentiful, useful, accessible, and powerful.

Important Data Points for Matching

Comparing properties is more complicated with commercial real estate, but it’s certainly far from impossible. Here are a few considerations:

Line up the data point to point. What that means in the context of the comparative search is to avoid comparing a 5000 sq ft self-storage property with a 30-unit apartment complex.
Location still matters, so don’t skip over ensuring that the neighborhoods line up. Property in the waterfront district will not be the same as downtown or out towards the suburbs.
Be mindful of the issues that can affect valuation, such as road access, built-in structures, parking lot space, and even zoning/sub-zoning concerns.
Incentives can play a role depending on the specific location within an area. For example, if one area qualifies for economic opportunity incentives given a low-income population and another area is far more affluent, this will impact valuation.

It does take time to get used to pulling down data, studying deals, and making decisions based on valuations. Don’t expect to get it right on the first try. There are entire books devoted to valuations within the commercial real estate space.

Keeping Data Organized

Building comps is a strong aspect of building the overall commercial real estate acquisition strategy. As the portfolio expands, storing data is just as important as the analysis phase. Being able to build and reference your own database over time allows for comparative advantage within the marketplace.

Regardless of your role within the CRE ecosystem, building knowledge is a powerful tool, and turning data into real-time information for decision-making is the key to ongoing success.

For professionals looking at partnerships, joint ventures, and even syndicate membership opportunities, being able to pull down data is incredibly important.

Strengthening Alliances and Connections with Strong Analysis

Building good commercial property comparables is a skill that can open doors to new connections. Like any other aspect of real estate, deals involve more than just one person. By providing good data analysis and drilling down into deals, new partnerships are only a matter of time.

This should be comforting to newer folks entering the ecosystem, as there often comes a “chicken and egg” problem of how to connect with seasoned pros. Sharpening strong skills like working on CRE comps is a great way to turn a mild connection into a deeper one.

Providing value is a solid and time-tested way to ensure that people not only connect with you, but introduce you deeper into their networks. The old saying that people do business with others that they know, like, and trust is very truer.

Updating Comps for Profit and Power

The idea that comparables stay the same over time isn’t the case at all. If anything, areas can change rapidly. The post-pandemic era’s lesson to everyone is that data should not be considered static. After all, there are plenty of local markets that turned absolutely insane at the height of the pandemic.

Remote work unlocked unprecedented movement and opportunities for workers to essentially give themselves raises by moving out of the high cost of living areas. The movement from a high cost of living place to one with lower costs has created new market conditions.

As we step deeper into unknown times, it’s important to review comps as the area grows or retracts. Real estate in general is a cycle, and riding that cycle’s patterns out through the data is very important. This is why keeping a database of your own comps and research is essential.

Battle Plans and Battle Action

Hitting the ground running is important for anyone within the commercial real estate ecosystem. This is not just about investors or agents. Anyone working on deals can benefit from free real estate comps. The first few valuations are the hardest, and practice really does make perfect.

The main takeaway is simple: commercial comps make the difference between a bad deal and a good deal, but also a good deal and a great deal. At the heart of economics is the fact that society has unlimited wants and limited resources.

Therefore getting better at real estate comps is a way to make the most out of limited resources. Even if you won the lottery tomorrow, putting resources to work for maximum profit is still a skill worth honing. Sharpen your sword, get deeper into the research, and close more deals.

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