Show me the comps - Valuing real estate is an art and a science. Use the science to inform the art. - by David Skinner

I have a friend who, back in COVID-19, used to work at one of the middle market private equity industrial real estate funds in Eastern Massachusetts. This firm would likely be upset that I just called them middle-market, and my friend would be upset thinking about the fact that he used to work there. No matter. Anyway, this nameless middle-market firm was considering purchasing a 300,000 s/f industrial building in the south market in hopes of signing the next Amazon. My friend was working as an analyst, and his job was to underwrite the deal. After a while of looking at all the market sale and lease data, he looked up and raised his hand and said, “Everyone is saying we need more warehouse space, but if that’s the case why is the largest lease that is neither Amazon nor a built-to-suit only 200,000 s/f?”

My friend’s firm had gotten caught up in the market froth where everyone talked about buying industrial real estate because of this Amazon leasing boom and the free money that accompanied it. This is not just a problem for the institutional capital people, it is an even bigger problem for the brokerage community.

In a former life, I had a managing broker that was infamous for his constant refrain during our opinion of value discussions and I was getting a little too creative with my property values: “Show me the comps!”

Particularly in the wild world of IOS, brokers are notorious for seeing one or two lease comps in a marginally related submarket and then giving false hope to owners everywhere about the rate at which the property should lease. One buyer I spoke with recently is looking at a lightly-marketed industrial outdoor storage (IOS) opportunity, and we were both amazed at the advice and pricing guidance being thrown around with very little data to support it. These brokers seem to look at one comp and then share the most aggressive interpretation of that comp with the buyer in order to hopefully get the leasing business.

This, along with the overfunding of private equity, may lead to property purchases with underwriting that can never be realized. When this happens, nobody wins except the seller who sold for more than they should have sold for. Everyone else loses. I guess the attorneys who worked on the deal also win. However, the buyer obviously loses because they now are burdened with a property that will not rent for their target number, if it will rent at all. The broker, while winning in the short-term, will look like a fool in the long-term for overselling the deal and then being stuck with the leasing and possibly getting fired and sullying their own reputation. The tenants in the market lose because rents get artificially high for no reason. The property owners in the neighborhood lose because their lease and sale expectations become so inflated they won’t know an actually good offer when they see it. And over the long-term, the local submarket suffers because bad valuation assumptions keep good businesses from doing good work at profitable prices.

This may seem like a grim picture. But as CS Lewis would say, “While the witch knew the deep magic, there is a deeper magic still.” I am very confident that in the long term, both the micro and the macro markets will suffer due to this valuation that is not based on the relevant comps. However, the deeper magic that will prevail will look like the following: healthy businesses that did not overextend themselves will come in to buy or build companies in the wake of the failed ones. Conservative real estate investors will buy properties out of bankruptcy. Landlords will lower lease rates to make up for the rising vacancy rates. 

But we can avoid ALL OF THIS if we just do the right thing, and use relevant comps that relate to the subject property when valuing property for sale or for lease.

Prescott IOS leases and sells industrial outdoor storage (IOS) real estate everywhere. If you need to find IOS property for your business or have IOS property and you would like to better understand its value, email help@prescottios.com or call us at (617) 999-0057.

David Skinner, SIOR, is an advisor, partner of Prescott, Lincoln, Mass.