December 28, 2021 |
Updated February 18, 2022
Nontraditional data is helping operators and investors outperform their competitors.
The role of data in the modern multifamily housing investment process is pivotal. While some legacy metrics will always be accessible, a greater number of real estate investors are turning to nontraditional data points to gain a competitive advantage. Nontraditional data points help investors increase their returns on their multifamily transactions and provide a leg up when it comes to winning those hard-earned deals.
“What it comes down to is thinking about what the world around us is doing,” said Brad Dillman, Chief Economist at Cortland, a global multifamily investment, development and management firm. “Real estate firms very often focus just on their own operations. The reality is a lot of what determines the course of a real estate investment is macro-cyclical and it has more to do with what’s going on beyond what is in our own control as a firm.”
Multifamily operators and investors are discovering and using nontraditional data points to discover opportunities in lesser-known submarkets, secure higher risk-adjusted returns and maximize portfolio value. Here are some of the ways nontraditional data is helping operators and investors outperform their competitors.
It’s no secret that real estate is a hyper-localized industry. Traditional data may exist only at the market level, and to gain a true competitive advantage, operators and investors must dive a bit deeper. The most successful operators and investors are looking at granular, geographic data at the zip code level or block group for deeper insight. Not only are these granular metrics more accurate, but they’re also more predictive.
“The metrics we think are important are allowing us to add in a secret sauce,” Dillman said. “There is a lot of data out there and you can’t include everything. Not only is it cost prohibitive, but it runs into the quantitative issues associated with simply too much information. We have to pick and choose the metrics we think are important.”
Some of the metrics that provide extra insight at the local or submarket level are employment growth, job growth and gross personal income. Census data includes metro-level migration, but employment growth data sets can inform a more comprehensive metro-level forecast and underscore better indicators of rent growth.
Recency is also critical. Operators and investors are now looking forward and leveraging real-time data and insights to see a true snapshot of market activity.
Looking at local-level employment, income and migration trends in real time can lead investors to make more accurate rent growth projections, which leads to more profitable investment decisions.
Rent growth typically follows employment growth and income growth. A good proxy for affluent renters and rent growth is the number of six-figure earners within a submarket. Investors can use this type of information to identify expansion opportunities in specific submarkets and neighborhoods.
“First and foremost, the most important metric is rent growth,” Dillman said. “There was a need to forecast what the recovery would look like after the pandemic. Within that context, rent growth is critical when it comes down to underwriting models and to actually looking at a specific investment. It is consistently the most used metric.”
Key rent growth drivers, like income and employment growth, combined with granular, real-time insight is more reflective of market activity and how much rents can be increased in certain markets. Markerr, a real estate analytics and intelligence platform, analyzed granular income and employment data and found it indicates an 80% higher correlation to rent growth relative to the Bureau of Labor Statistics’ (BLS) job growth numbers. Those metrics, on a granular level, accurately highlight what is happening in the surrounding world.
Efficiency is Key
One of the common pain points in multifamily investment and research, especially when it comes to looking in new markets, is sifting through the surplus of available data, then analyzing what it all means. Having a centralized dashboard takes the time and guesswork out of the process and presents immediate, actionable insights.
Competitive operators have developed research models and implemented centralized data dashboards to inform expansion opportunities. This creates additional time for tactical decision making, and less time spent on data wrangling.
“Data moves a lot faster than people, and once you have a data system built out and flowing, you can get into a lot of automated processes,” Dillman said. “We’re starting to do more and more underwriting at our corporate headquarters as opposed to in the field because so much information is in data now. There are still boots on the ground and people visiting every asset. We’re not eliminating people. They’re just re-tasked to other things.”
Data has never been more important than it is today from operations to investment to raising capital. Nontraditional data incorporates the granularity, recency and efficiency to streamline research and analysis processes while highlighting important rent growth indicators, giving operators advantageous insights to compete and succeed.
“We’re compiling all this information and all these projections for our own use,” Dillman said. “Investors like to see that. At the end of the day this function helps us raise and deploy capital better, and those two really feed off of each other.”