If a potential client asked how your commercial real estate investments were performing, what would be your answer? Your portfolio’s recent capital investment returns? The internal rate of return for your assets?

Before you can measure your commercial real estate investment performance, you need to decide what will indicate success. What are your goals and objectives? Is it a certain KPI? Is it a certain FCI score? Are you trying to extend a useful life?

Straight line financial performance is obviously key for any commercial real estate investment. But there is a host of other metrics that real estate executives should examine.

Many firms do not have the resources or reporting structure to look at these alternative indicators. In fact, some organizations may not be familiar with these metrics at all. This article provides some additional analytics firms can use to measure the performance of their investments in commercial real estate.

Benchmarking

Benchmarks are a widely used and understood term when it comes to commercial real estate investments. However, many people do not appreciate their scope. They can tell you a lot about your performance. Many firms understand benchmarks as comparing a certain aspect of a building or portfolio to a desired target. But there is much more to that analysis. Here are some additional benchmarking methods:

• Quartiles: measuring a commercial real estate investment not just against a single benchmark number, but against the range of values as well. Is the subject property or portfolio in the top 25%? Bottom 25%? An average might not give you a clear picture of the highest and lowest values and where a particular property falls.
• Attribution: many portfolio managers use attribution analysis for other asset classes, but real estate can also benefit. This report from Deloitte is a good resource.

Key Performance Indicators (KPIs)

Key performance indicators focus on only the most critical data points related to commercial real estate investment performance. They provide more or less a “snapshot” of critical aspects of performance. Some common financial data points include:

• Profit per square foot: total net profits divided by the total area of your portfolio
• Net income growth: how is your building actually able to drive rental growth and total cash flow growth?
• Equity to value ratio: how much money have you invested relative to the market value of assets?

KPIs are great indicators for dashboards and other reporting summaries.

Operating Indicators

How your property performs over time is just as important as year to year financial returns. Things such as capital expenditures and maintenance can help maintain building value long term. This enhances commercial real estate investment performance:

• Life cycle or total cost of ownership. What is the cumulative or gross cost of managing a building over time, and relative to return on investment?
• Facility condition index. What is the state of your buildings and their infrastructure? What needs repair over the short, medium and long term? A facility condition index is a scale measuring needed capital investments.
• Life cycle capital. Many real estate firms view capital on a project by project basis. You should also calculate the total expected capital over the lifetime of a building. Assess it relative to figures such as market value or operating costs.

The Performance of Your Commercial Real Estate Investment

If your commercial real estate investment isn’t performing as well as you’d like, the next step is to build a plan to correct it. 4tell™’s Portfolio Solution can show you what’s not working. Then, it will help you make a plan and figure out the costs and resources needed to optimize it.

Photo: MichaelGaida