Navigating to Superior Performance with CRE Benchmarking
The only way to know if you’re operating at the peak is by comparing the performance of your commercial real estate properties and enterprise to comparable assets in your market.
While conventional wisdom on a personal level is that we shouldn’t compare ourselves to others, in business and CRE, benchmarking is essential in reaching the top of the bottom line. Whether in a geographic- or a niche-based context, benchmarking is a crucial decision-powering tool that provides insights that guide us toward optimal efficiency and performance.
In this article, we’ll talk about the value of benchmarking and how it can help you take your properties and enterprise to the next rung of growth and NOI.
1. Why benchmark?
How is your company performing relative to similar firms in your industry and niche?
It’s an important question to ask so we can get a better understanding of our operational potential and weaknesses. We may be either falsely satisfied with or overly critical of our performance without examining how competitors and peers perform in the same asset class and market.
To address this business need, benchmarking as a concept was developed nearly 100 years ago and was notably implemented by Xerox in the 1970s to compare its production costs to Japanese competitors.
Leveraging the insights it harvested from the data, Xerox won an American award in 1989 for quality while also reducing expenses. Benchmarking subsequently became popular in the corporate world in the 1990s.
For clarity, benchmarking is the process of comparing the quantitative or qualitative performance of one of our assets or businesses against that of others we own or those operated by third parties.
To make the comparison, we gather data on the various metrics used to measure the performance of properties and ventures. We assemble this data for our subject asset as well as that for external assets. With this information, we can identify where we need to improve and optimize — and where our core competencies and competitive advantage prevail.
2. Collecting and analyzing the data
We can aggregate the data we need for commercial real estate benchmarking in a variety of ways, including internal/primary research, private firms that conduct benchmarking, and industry organizations that draw operating data from their members.
To start the benchmarking process on the internal side, we need a way to collect, store, and analyze the data. We can do this manually and hire a team to conduct and oversee the process; however, this can be highly time-consuming and costly. Alternatively, we can leverage data management systems specific to our industry that handle these processes continuously in the background.
Getting set up for the first time can take a bit of work, but once implemented, a data management system keeps the knowledge at hand and ready for application in the benchmarking and other decision-making processes.
3. Internal benchmarking
If you own a set of assets of the same type, whether commercial real estate properties, businesses, portfolios, or operating departments and teams, you can compare their performance.
With the operating information centralized and organized in data management software, you or your team of analysts can spot the most significant variations in performance and start to investigate the causes.
In the framework of CRE assets and operating companies, a few of the typical metrics to contrast include:
- Net operating income (NOI).
- Net effective rent.
- Gross rents.
- Loss/gain to lease.
- Rent adjustments.
- Gross potential rent.
- Ancillary revenue.
- Repairs and maintenance.
- Leasing expenses.
- Operating expenses.
- Taxes and insurance.
- Management fees.
- Utility costs.
- Vacancy/occupancy rates.
- Tenant turnover rates.
Looking at these data points across our assets and departments/subsidiaries, we can see trends and opportunities and form actionable insights regarding how to operate more efficiently and enhance our valuations and NOI.
We may realize that one or a group of our assets aren’t performing as well as another due to factors we can easily remedy. Or we might decide that one market holds greater potential than another and start to reallocate our capital toward building our portfolio there.
Whatever the case, we’ll be moving forward informed and purposely, armed with concrete data to support our actions and make our case to investors.
4. External benchmarks
Once we have our internal performance data together and analyzed, we’re ready to compare our properties and enterprises to third parties. External benchmarking allows us to observe and gauge against how other operators across geographic areas and business models perform.
The broad data provides objectivity and sufficient sample size to draw tempered conclusions regarding our performance and what potential exists to optimize our assets.
External benchmarks can also help us identify markets ideal for future investment and know what to expect based on a robust, real-world data set. In addition to opportunity, we can also see where the most significant risks are based on vacancy, late rents, and eviction rates in other metros.
Scale with precision
Leveraging available internal and external resources and technologies, we can efficiently gather data, enhance our awareness, and make informed moves that enable us to scale with precision and managed risk. Growth-minded operators and investors incorporate benchmarking as an integral component of their operating and decision-making processes.