What should we really be comparing a building to?

What should we really be comparing a building to?

When setting asking rentals, assessing market conditions or valuing a property, property professionals almost always start with comparable buildings. But which buildings are actually comparable?

Ask two experienced professionals to identify comparables for the same building, and they’ll probably produce two different lists. Both may be defensible, but the choices made can significantly change the conclusions reached.

Does a 3,000 m² industrial unit really compete with a 9,000 m² unit? Does a building just outside a node compete with one inside it? How much difference do grade and location make?

Definitions add another layer. Rentable area, grade classification, operating costs and what counts as a prime catchment area aren’t always clearly defined. As a result, the same property can be interpreted, and valued, differently.

Compare a building with a small group of better-located properties, and its asking rental may look expensive. Widen the comparison to the surrounding area, and the same rental looks reasonable. The building hasn’t changed. Only the comparison set has. Yet these comparisons shape rental decisions, rental growth assumptions and, ultimately, valuations.

Three questions for comparing like with like:

1. What is being compared, and why?

Are the buildings in the same sector, of a similar grade and size, and in a realistic competing location? Are rentable area, grade, operating costs and market location defined consistently? And is there a clear reason for selecting each comparable?

2. Are the properties genuinely comparable?

A comparison is less meaningful than it appears when it uses information from different periods, different measurement methods or different grading criteria. A familiar building isn’t necessarily a comparable one. Without consistent definitions, some of the differences in the data reflect how properties were measured or classified, not real differences in the market.

3. What has actually changed?

When tracking market movements, a change in the average asking rental may simply reflect a different group of buildings from one quarter to the next. The same applies when definitions or market coverage change. Changes in the market need to be separated from changes in the data.

Reducing the noise

Datazone was developed to bring greater consistency and transparency to how the commercial property market is understood. Each month, it tracks space marketed across the office, retail and industrial sectors, including location, size, grade and asking rentals. It applies consistent definitions so that real market movements can be told apart from changes in the properties being measured.

This doesn’t replace professional judgement, nor should it. But better data and clearer definitions reduce unnecessary variation and make the reasoning behind conclusions easier to explain and test. Where Datazone’s coverage or definitions change, it will be transparent about that. Next week, Datazone will publish details of its market coverage by sector and province.

Ask what sits behind the numbers

There will never be one perfect comparison set. But before relying on any market figure, such as an average asking rental or a rental growth trend, property professionals should ask how representative the underlying data really is.

Which properties does the databank track? How many buildings in that node does it cover, and of what size and grade? Is the sample large enough, and consistent enough over time, to indicate market trends in that particular node reliably?

A market indicator is only as reliable as the data behind it. Good property decisions should rest on evidence that can be explained, tested and trusted, and that starts with knowing exactly what is being compared.