The ultimate in small sample size. #CRE Comps.

Market Comps are treated as the ultimate indicators of market activity. Businesses are built on collecting them and using them to indicate market velocity and price trends.

I’m here to tell you that comps are crap.  Your typical comp is all about trying to compare apples and donuts.  So what that someone took 20k square feet at 124 Main Street for $17.43 per year with 3% escalations, 4 months free rent, and $5 TI on a 5 year lease.  Someone else took 43k square feet at 518 Sycamore for $19.23 with 2.7% escalations, 6 months free rent, no TI on a 3 year lease with options for another 3 years.

Sure, we can calculate the net effective rate for each of those deals on compare that.  But we’re still missing the quantitative side:

  • Which were renewals and which were relocations?
  • Did one or more of the landlords have incentives to get any cashflow due to upcoming financial considerations?
  • Are the buildings similar in terms of access to restaurants, parking, transportation and interstate?
  • What relationships were leveraged in getting either lease?
  • How many options did each company have for alternatives?

If you don’t know the answers to these questions you have absolutely no idea what each of these comps have to do with the market.

Comps in the residential world make more sense.  You have enough volume to show market indications and it is fairly easy to qualitatively compare a house.  But in the commercial world there are a lot more motivations especially given different types of real estate – retail, industrial, flex, office (class A, B and C), headquarters, owner/occupier, multi-tenant, etc.  Even the services offered within each building is different.

This isn’t to say that comps have no value, it’s to say that you should only trust them in so far as you can put them in context.