Custom vs. Standard Benchmarks in Real Estate
When evaluating real estate performance, benchmarks provide essential tools for comparison. Standard benchmarks, like the NCREIF Property Index or MSCI US REIT Index, offer easy-to-use, industry-wide metrics for broad market evaluations. They’re transparent, widely accepted, and ideal for general comparisons. However, they may not reflect the nuances of specialized portfolios, such as niche property types or unique investment strategies.
Custom benchmarks address this gap by tailoring metrics to specific portfolio needs, incorporating factors like asset type, location, or risk profile. While they provide precise insights for complex portfolios, they require more resources to create and maintain, and their unfamiliarity can complicate stakeholder communication.
Key Takeaways:
- Use standard benchmarks for simplicity and broad market alignment.
- Opt for custom benchmarks for detailed, portfolio-specific analysis.
- Consider a hybrid approach for a balance of general context and tailored insights.
Quick Comparison:
| Attribute | Custom Benchmarks | Standard Benchmarks |
|---|---|---|
| Relevance | Tailored to portfolio needs | General market alignment |
| Ease of Use | Complex to create and maintain | Simple and widely accessible |
| Transparency | May require explanation | Highly transparent and recognized |
| Flexibility | High | Limited |
| Cost/Resources | Higher | Lower |
The choice depends on your portfolio’s complexity, strategy, and stakeholder needs. Tools like CoreCast can simplify the process, combining both benchmark types for efficient management and reporting.
Standard Benchmarks: How They Work and When to Use Them
What Are Standard Benchmarks
In commercial real estate, standard benchmarks are industry-wide metrics designed to help investors and property managers measure their portfolio's performance against broader market averages. These benchmarks pull data from thousands of properties across various markets, creating a consistent baseline for evaluating performance.
A few key examples include:
- NCREIF Property Index (NPI): Tracks institutional-grade commercial properties held for investment, using quarterly data and appraisal-based valuations to calculate income and appreciation returns.
- MSCI US REIT Index: Measures the performance of publicly traded real estate investment trusts (REITs).
- FTSE NAREIT All Equity REITs Index: Covers all tax-qualified REITs.
- NCREIF ODCE Index: Focuses on open-end diversified core equity funds.
These indices rely on value-weighted averages, meaning larger properties carry more influence on overall performance. They calculate metrics like capitalization rates, occupancy rates, and total returns using standardized methods.
Benefits of Standard Benchmarks
Standard benchmarks are widely used because they are easy to access, transparent, and broadly recognized in the industry. They eliminate the need for custom data collection, allowing investors to quickly compare their portfolio’s metrics to published index results, saving both time and effort.
Another strength lies in their transparency. Organizations such as NCREIF and MSCI openly share their methodologies, property characteristics, and historical data, giving investors confidence in their comparisons. This clarity helps ensure that benchmarking is both straightforward and trustworthy.
For institutional investors, standard benchmarks also carry regulatory credibility. Pension funds, insurance companies, and fiduciary entities often need to report their performance against recognized benchmarks. This makes these tools essential for board presentations and demonstrating fiduciary responsibility.
Additionally, these benchmarks provide broad market coverage, incorporating data from thousands of properties across different markets and asset types. This scope allows investors to place their performance within a wider market context. Many benchmarks also offer decades of historical data, enabling long-term trend analysis and deeper insights into market cycles.
GIPS standards further require that benchmarks include both property price evaluations and net cash flow from rental income to ensure comprehensive performance comparisons[2]. This approach captures the full investment picture, going beyond simple price appreciation.
However, while standard benchmarks have clear advantages, they are not without their shortcomings.
Drawbacks of Standard Benchmarks
One major limitation of standard benchmarks is their lack of customization. Because these metrics aggregate data across broad categories and regions, they may not accurately reflect the performance of specialized or niche assets. For instance, portfolios focused on medical office buildings or data centers might find that standard office indices fail to account for their unique operational factors, tenant profiles, or risk-return dynamics.
Another issue is strategy misalignment. Investors pursuing value-add opportunities - such as properties with below-market rents or renovation potential - operate under different return expectations compared to the core institutional-grade properties that dominate most standard indices. This mismatch can lead to misleading comparisons.
Appraisal-based benchmarks also have their drawbacks. They can smooth out data and lag behind real-time market changes, understating volatility and failing to capture sudden shifts in market conditions. Geographic limitations further complicate matters, as these benchmarks often over-represent primary markets while under-representing secondary or tertiary markets where many investors operate.
Additionally, standard benchmarks tend to exclude private transactions, off-market deals, and properties held by non-institutional investors. This creates blind spots, leaving out important market segments. They also lack the ability to provide customized summaries that align with specific asset combinations or unique investment strategies, making it harder to analyze past performance or predict future outcomes for complex portfolios.
Custom Benchmarks: How They Work and When to Use Them
What Are Custom Benchmarks
When standard benchmarks fall short of capturing the unique aspects of a portfolio, custom benchmarks step in as a tailored solution.
Custom benchmarks are designed to align with your portfolio's specific goals, incorporating criteria like property type, location, risk profile, or even sustainability objectives. They can be created by blending multiple standard indices or building entirely new reference points that reflect your portfolio's composition - for instance, 40% multifamily, 35% industrial, and 25% medical office properties.
The process of constructing these benchmarks often uses portfolio-weighted methodologies that adjust periodically based on the initial values of your holdings. This ensures the benchmark stays relevant as your portfolio evolves over time.
Under GIPS standards, custom benchmarks require both property price evaluations and net cash flow from rental income. They can also factor in leverage ratios, exclude non-property assets, and focus on specific property traits that align with your investment strategy. This detailed and precise approach ensures that the benchmark directly supports your portfolio's objectives.
Benefits of Custom Benchmarks
Custom benchmarks offer a range of advantages tailored to specialized investment strategies. Their biggest strength is their ability to mirror the unique characteristics of your portfolio. Instead of comparing your performance against a broad commercial real estate index, you can measure it against a benchmark that truly reflects your portfolio's makeup.
One standout feature is their ability to incorporate detailed and proprietary data that standard benchmarks often miss. For example, James Gueits, Principal at a family office, shared:
"Our family office needed a solution to manage legacy real estate assets. They have been instrumental to streamline our valuation and underwriting processes."
This customization is especially valuable for complex projects. Tamer Celik, COO at VisioneCo, highlighted:
"I needed a mixed-use development model that would impress key stakeholders. Their model provided an exceptional level of detail, making it easy to present insights to our investors."
Another advantage is the ability to generate instant, detailed portfolio summaries by selecting specific asset combinations. This allows for real-time analysis of past performance and future potential, offering insights that standard benchmarks simply can't provide.
Drawbacks of Custom Benchmarks
Despite their benefits, custom benchmarks come with their own set of challenges. Building and maintaining them is resource-intensive, requiring expertise, significant effort, and ongoing attention. You’ll need to define methodologies, source reliable data, establish weighting systems, and meticulously document every aspect to maintain transparency for stakeholders.
Another hurdle is the lack of industry standardization. While standard benchmarks are widely recognized and accepted, custom benchmarks often need extensive explanation. Investors or lenders may question unfamiliar methodologies or worry about potential biases in their construction.
Meeting documentation and disclosure requirements under GIPS standards can also be demanding. You’ll need to clearly outline the benchmark’s components, weights, methodology, and any differences from your actual portfolio, including details like leverage ratios, excluded assets, and rebalancing schedules.
There’s also the risk of unintentionally creating benchmarks that make your portfolio look better than it is - a phenomenon sometimes referred to as "benchmarking to success." Without proper oversight or third-party validation, custom benchmarks can mislead rather than inform.
Finally, managing custom benchmarks requires ongoing effort. Unlike standard benchmarks maintained by established organizations, custom benchmarks need constant data updates, recalibration of weightings, and accuracy checks. This can be a heavy burden for smaller organizations or those without dedicated analytics teams.
Another drawback is reduced comparability with industry peers. While this trade-off may be acceptable for highly specialized strategies, it can complicate board presentations, investor discussions, and competitive analyses when your performance metrics don’t align with common industry standards.
What Is A Benchmark In Real Estate? - AssetsandOpportunity.org
sbb-itb-99d029f
Custom vs. Standard Benchmarks: How to Choose
This section dives into the key attributes of custom and standard benchmarks, offering a direct comparison to help you decide which approach best suits your portfolio and stakeholders.
Side-by-Side Comparison: Custom vs. Standard Benchmarks
When choosing between custom and standard benchmarks, it helps to weigh their attributes side by side. Each offers unique benefits depending on your portfolio's goals and the preferences of your stakeholders.
| Attribute | Custom Benchmarks | Standard Benchmarks |
|---|---|---|
| Relevance | Specifically tailored to portfolio needs | Broad, but may not reflect unique strategies |
| Transparency | Can be less transparent based on design | Highly transparent and widely recognized |
| Ease of Use | More complex to create and maintain | Easy to adopt and compare |
| Stakeholder Communication | Requires detailed explanation | Familiar and simple to communicate |
| Flexibility | High | Limited |
| Cost/Resource Intensity | Higher (requires time, expertise, and detailed data) | Lower |
Standard benchmarks, like the NCREIF Property Index or MSCI indices, are widely accepted and straightforward to use. They provide instant credibility and make it easy to compare performance across the industry. However, they might not capture the nuances of portfolios with unique strategies or specialized assets.
Custom benchmarks, on the other hand, shine when your portfolio doesn’t fit conventional categories. They allow you to reflect specific leverage ratios, exclude non-property assets, or emphasize property traits that align closely with your investment strategy.
To determine the right approach, consider the following key factors.
Key Factors to Consider When Choosing
Portfolio Complexity
If your portfolio includes diverse asset classes or focuses on niche areas, custom benchmarks are better suited to capture unique risk-return profiles. For traditional core strategies, standard benchmarks are often sufficient.
Investment Strategy
Portfolios with specialized focuses - like data centers or ESG-driven investments - benefit from the precision of custom benchmarks. Standard benchmarks work well for broader, more traditional strategies.
Data Availability and Integration
Custom benchmarks require detailed, asset-level data and specific risk factors, making strong data integration essential. Standard benchmarks, by contrast, rely on aggregated market data that is easier to access and apply.
Stakeholder Preferences
Some investors and lenders prefer the simplicity and transparency of standard benchmarks. Others value the precision and customization that align with complex or specialized portfolios. Understanding stakeholder expectations is key in making the right choice.
Reporting Requirements
Regulatory or investor-driven needs often dictate benchmark selection. For instance, under GIPS standards, custom benchmarks demand detailed disclosures, including methodology, component weights, and any deviations from the actual portfolio (e.g., adjustments for leverage or excluded assets).
By considering these factors, you can align your benchmarking approach with your portfolio’s strategy and stakeholder demands.
Current Trends in Real Estate Benchmarking
The way benchmarks are applied is evolving, with several trends shaping the industry.
Blended Benchmarks
A growing number of institutional investors are adopting hybrid benchmarks that combine elements of standard indices with tailored adjustments. This approach balances industry comparability with portfolio-specific insights, offering both external credibility and internal relevance.
Technology-Driven Solutions
Modern platforms are transforming benchmark management through real-time data collection, automated analysis, and dynamic benchmark creation. These tools make it easier to create and maintain custom benchmarks while supporting sophisticated portfolio analysis across various asset classes.
Data-Driven Customization
As data-driven decision-making becomes the norm, custom benchmarks are gaining traction in portfolios with legacy assets, emerging property types, or complex development projects where standard benchmarks fall short.
Automated Reporting
Streamlined reporting tools now allow for professionally branded, automatically generated reports that improve stakeholder communication. These features enhance the accessibility and professionalism of benchmark reporting.
ESG Integration
The increasing emphasis on sustainability and ESG metrics is driving demand for benchmarks that can incorporate environmental and social governance criteria - areas where traditional benchmarks often lack focus.
These trends highlight how benchmarking is adapting to meet the demands of a more dynamic and data-focused investment landscape.
Using Technology for Benchmark Management
Today’s real estate professionals are increasingly turning to technology to simplify and improve the benchmarking process. By automating data collection, providing real-time analytics, and enabling advanced reporting, these platforms are making benchmark management more efficient. Tools like CoreCast are at the forefront of this shift, offering new ways to manage benchmarks with precision and ease.
Data Requirements for Effective Benchmarking
For real estate benchmarking to be effective, having accurate and up-to-date data is non-negotiable. The foundation of a reliable benchmark lies in the quality of its data, which typically includes details like property characteristics, transaction histories, rental rates, occupancy levels, operating expenses, and broader market trends. High-quality data ensures benchmarks reflect true market conditions and property performance, allowing for meaningful comparisons and better decision-making. On the other hand, incomplete or outdated data can lead to flawed benchmarks and poor investment decisions.
Technology platforms are stepping in to solve these challenges. They automate data collection from various sources, standardize formats, and deliver real-time analytics - all while helping users stay compliant with regulations. For example, creating custom benchmarks requires transparency about their components, weights, and methodology. Standards like the Global Investment Performance Standards (GIPS) ensure that benchmark reports include total returns (income and price) to avoid misleading comparisons.
How CoreCast Supports Benchmark Management
CoreCast is a comprehensive real estate intelligence platform designed to streamline benchmark management. By integrating data from multiple sources into one system, CoreCast allows users to create custom portfolio summaries instantly, supporting tailored benchmarks. The platform’s real-time portfolio tracking makes it easy to monitor asset performance against both custom and industry-standard benchmarks, meeting the detailed data needs of modern real estate professionals.
Some of CoreCast’s standout features include:
- Integrated property maps for visualizing assets.
- Pipeline tracking to monitor deals at various stages.
- Advanced portfolio analysis tools that let users set performance targets, receive alerts for deviations, and compare assets across multiple metrics.
CoreCast’s flexibility is key - it lets users define benchmarks that align with their portfolio’s unique traits, such as specific asset classes, risk levels, or locations, while also providing access to broader market benchmarks for context. It supports a range of commercial real estate asset types, including multifamily, office, retail, industrial, self-storage, and development projects.
The platform also integrates seamlessly with tools like Buildium, QuickBooks, and RealPage, further simplifying data collection and ensuring accuracy. Looking ahead, planned updates like AI-driven automation and enhanced reporting promise to make benchmark management even more efficient.
Creating Reports for Stakeholders
CoreCast doesn’t just streamline data management - it also makes stakeholder reporting easier and more effective. With its robust reporting tools, users can create branded reports that highlight benchmark performance, trends, and actionable insights. These reports are fully customizable, catering to different audiences such as investors, lenders, and partners, and they can even be distributed automatically.
The platform’s detailed reporting capabilities make it simple to present complex information in a clear and accessible way. As Tamer Celik, COO of VisioneCo, noted:
"I needed a mixed-use development model that would impress key stakeholders. Their model provided an exceptional level of detail, making it easy to present insights to our investors."
CoreCast’s Investor Relations feature takes things a step further by enabling secure access to key documents, personalized returns, and distribution timelines. This functionality is invaluable for professionals like Mitchell Rice, Principal at Elkstone Capital, who shared:
"As a capital raiser, having reliable financial analysis is crucial to building trust with investors. They provided the expert financial analysis support I needed to strengthen my efforts."
Dynamic, branded reports represent a big improvement over traditional manual reporting. With real-time updates and automated report generation, stakeholders always have access to the latest performance data, helping them make smarter, faster investment decisions.
Conclusion: Selecting the Right Benchmark Approach
Choosing the right benchmark depends on the unique makeup and goals of your portfolio. Standard benchmarks are a solid choice when your portfolio closely aligns with broader market trends or when you require quick, easy comparisons. These benchmarks are especially useful for national REITs or diversified portfolios that naturally align with indices like the NCREIF Property Index.
On the other hand, custom benchmarks are indispensable for portfolios with specialized characteristics that standard indices can't accurately represent. For instance, a firm managing suburban office properties in the Southeast discovered that using a national index, which leaned heavily toward urban markets, distorted its performance evaluation. By adopting a custom benchmark tailored to suburban Southeast office assets, the firm achieved a clearer understanding of its performance, enabling smarter investment decisions and boosting stakeholder confidence.
Custom benchmarks shine when portfolios are complex and specialized, offering insights that standard indices might miss. When deciding between a tailored or broad approach, consider factors like your portfolio's goals, asset composition, data quality, and the needs of stakeholders. It's all about balancing the broad comparability of standard benchmarks with the precision of custom ones.
Technology tools like CoreCast make managing benchmarks easier by blending both standard and custom metrics into a single system. Justin Britto, Principal at Maddison Communities AZ, emphasized this advantage:
"Having a tailored and precise model became the cornerstone of our capital-raising efforts. Their ability to simplify complex structures gave me & my investors the confidence to move forward" [1].
To maintain trust in your benchmarking strategy, focus on best practices: ensure benchmarks are transparently constructed, review them regularly, and communicate clearly with stakeholders.
For many, a hybrid approach - using standard benchmarks for broader market context and custom benchmarks for portfolio-specific insights - offers the most effective solution.
FAQs
How do I choose between custom and standard benchmarks for my real estate portfolio?
When deciding between custom and standard benchmarks, it all comes down to the specific goals and unique traits of your real estate portfolio. Custom benchmarks are designed to mirror the distinct features of your assets or investment strategy, offering a more precise way to measure performance. Meanwhile, standard benchmarks provide a broader market comparison, giving you a sense of how your portfolio measures up against industry trends.
Platforms like CoreCast can make this process easier. With tools that deliver real-time insights and advanced analytics, you can analyze your portfolio's performance and confidently choose the benchmark approach that best supports your objectives.
How does a platform like CoreCast improve the use of benchmarks in real estate?
Platforms like CoreCast make managing real estate benchmarks easier by offering real-time insights, simplifying workflows, and supporting smarter investment choices. It provides tools to handle different asset types, monitor deal pipelines, and analyze portfolios, helping professionals base their decisions on solid data.
By bringing essential features into a single platform, CoreCast enables users to assess properties, compare benchmarks, and create branded reports for stakeholders. Looking ahead, planned updates like AI-powered automation and improved reporting tools promise to refine benchmark accuracy and enhance real estate strategies even further.
What challenges can arise with custom benchmarks in real estate, and how can they be effectively managed to ensure reliable reporting?
Custom benchmarks in real estate come with their fair share of hurdles. Issues like inconsistent data sources, challenges in standardizing metrics, and biases in how benchmarks are created can make reporting less reliable and harder to trust if not handled with care.
To tackle these problems, the key lies in setting clear data selection criteria, using consistent calculation methods, and routinely checking benchmarks against current market trends. Tools like CoreCast can make this process smoother by offering features for precise data analysis, portfolio monitoring, and real-time insights. These capabilities help professionals ensure their reporting stays both accurate and transparent.