Joe Conroy doesn’t have the easiest job in the world. Half the time people don’t return his calls. But that’s not quite so bad as the other half of the time, when they just hang up on him.
Some days his fingertips go numb from punching buttons as he whittles down the list of 1,500 calls he has to make, a task that must be repeated every three months.
Other days Conroy doesn’t even look out the window, but stays hunched over his phone, hoping he’ll connect with a leasing agent who can answer the 10 standard questions he asks about their office building.
Despite all this, Conroy likes his job as a researcher for CB Commercial Real Estate Group in Rosemont, where he gathers the data that is such a vital element in the world of commercial real estate.
Conroy may feel as isolated as a long-distance runner in his race for the most accurate market data, but he is just one in a crowded field of researchers who regularly pick up the phones and take to the streets to find out which tenants have moved, who has leased space and what buildings have raised or lowered rents.
“It takes me one month to do my phone calls each quarter,” says Conroy, whose experience is fairly typical of researchers at other real estate firms. “Some people are cooperative and some aren’t, but our response rate is about 80 to 90 percent.”
It’s not one of commercial real estate’s glamor jobs, but it is one that is of immense importance to the operation of brokerage firms, which often distinguish themselves by the value of the proprietary information they provide to clients.
The raw numbers Conroy and others collect wind up in everything from quarterly vacancy reports, which can be the basis for newspaper stories about the market, to periodic investment analyses, which can sway pension fund managers wavering between buying a building on LaSalle Street or Wall Street.
Although Conroy lets his fingers do the walking when he canvasses buildings, his predecessors didn’t have that luxury. Market statistics were first collected back in the 1960s by brokers on foot. Often, it was the rookies who would be forced to slog from building to building counting tenants and available space.
The growth of the Chicago area office market, both in size-now about 183 million square feet in 1,300 buildings-and sophistication make foot surveys unwieldy and slow today.
Now telecanvassing is the primary means of data collection, although legwork is still used for occasional spot checks of phone responses, and as a way for leasing agents to find tenants.
“It’s more than gathering factual information,” says Mark Vollbrecht, vice president, Miglin-Beitler Inc., who still spends two hours three days a week canvassing buildings by foot. “It’s also gathering emotional information, what people like and don’t like about their building.”
The two main barometers of market health charted in the reports are vacancy and absorption rates, defined as the net change in square feet of occupied space over a specified period of time.
Often in dispute, these figures have tremendous implications for forecasting and decision making. Investors may elect to buy a building, raise rents or rehab a property based, in part, on these numbers.
In the lastest round of reports, CB Commercial said vacancies in downtown office buildings climbed to 19.7 percent at the end of the year from 19.6 percent on Dec. 31, 1992. The news in the suburbs was much better; vacancies there dropped to 17.5 percent from 19.2 percent a year earlier.
Grubb & Ellis also reported that downtown office vacancies were 19.7 percent, but it said that was actually a decline from 21 percent a year ago. And it pegged suburban office vacancies at 17.3 percent, a drop from 18.8 percent at the end of 1992.
Frain Camins & Swartchild said its numbers show office vacancy downtown at 21.4 percent, down from 23.3 percent a year ago. In the suburbs, the real estate firm said vacancies hit a four-year low of 19.6 percent, down from 22.1 percent at the end of 1992.
Surprisingly, even though the big national brokerage firms and a handful of other smaller companies collect market data from many of the same sources, their findings often differ. It’s a conundrum that vexes market observers and that brokerage firms do little to fully explain.
“Fundamentally, we are tracking the same information,” says Brian Hunter, director of research, Julien J. Studley, Inc. “But everybody’s report is different.”
Discrepancies usually can be explained by how information is tracked and sorted. The biggest areas of disagreement include:
– Sublease space. Most companies include sublease space in their totals, but some don’t. This can account for as much as a three-point difference in the overall vacancy rate marketwide.
– Building size. Every company surveys a different base of buildings. Some do not survey buildings under 50,000 square feet, while others include everything.
– Building type. Not all surveys include rehabbed buildings. And most surveys exclude owner-occupied buildings. Also, buildings are tracked by class-either A, B or C, with A being the top of the line-and the numbers can vary depending on how one company decides to rate a building.
– Geography. Numbers change based on how a company defines certain neighborhoods or submarkets. One company may count the 4.3 million-square-foot Illinois Center development as part of the Michigan Avenue submarket, while another may place it in the East Loop.
Judgment calls also come into play when the numbers are finally crunched.
“The absorption calculation is different among all the companies,” says Peggy Luckey, market research director, Cushman & Wakefield of Illinois Inc. “It’s sometimes a matter of timing.”
Luckey points to the example of People’s Gas, which leased 255,000 square feet at One Prudential Plaza in 1993, but will not move until 1995.
“Do you take the space off the market at One Prudential Plaza because it is not available? Yet, it’s not occupied,” says Luckey, who still wrestles with the question. She will probably let the brokers who live with the numbers on a daily basis make the call on when to count the space at One Prudential Plaza as absorbed, she said.
And it is not just the space that is being occupied that has to be calculated, but that being vacated as well.
For instance, at One North Franklin, 100,000 square feet of leasing has been done in the last year. But three of the largest deals were for tenants leaving other buildings nearby. In each transaction, data collectors must decide how much space has gone off and come on the market-and decide just when it happened even though moves can take place over many months.
The charting of the industrial market is even more cumbersome. While the big companies generally agree on the size of the office market, estimates of the industrial base range anywhere from 800 million to 1 billion square feet.
“We have such a diversity of industrial space out there,” says Kevin L. Kete, executive vice president, Paine/Wetzel Associates Inc. “There are thousands of buildings to keep track of and there could be a swing in the numbers of millions of square feet (if some are missed in the count.)”
Although it may be hard to gain consensus on the actual figures, some industry experts argue that the only important element is that the numbers are moving in the same direction.
Everyone agrees the market is far from robust. And no matter how the numbers are looked at, they have not been good for some time.
A healthy vacancy level, one that supports some new development and rents that make some money for the landlord, would be somewhere around 10 percent, according to most industry experts. But those experts are quick to point out that one number cannot be used to judge the strength of the market.
But taking other numbers into account doesn’t seem to help brighten the forecast these days. In better times, the absorption rate is positive. But recently absorption has been only slightly positive, or negative, depending on whose numbers are used.
CB reported that absorption downtown was just over 4,000 square feet last year, although that was a marked improvement from 1992 when absorption was a negative 638,500 feet.
“Someone may say the negative absorption is 800,000 square feet, and another may say it is 200,000 square feet,” says Van L. Pell, executive vice president and chief operating officer, Miglin-Beitler Inc. “The big issue is that the market is going nowhere and not getting better, even though the construction cranes have come down.”
But other industry players, especially those who control the money, say that consistent numbers and reporting mechanisms are essential to help skittish investors get back into the market after overly optimistic forecasts led to a disastrous round of overbuilding in the 1980s.
“Standardization would be terrific,” says Wylie Greig, principal and director of research, The RREEF Funds, the San Francisco-based firm that manages more than $5.2 billion in real estate investments for tax-exempt pension funds. “From my perspective, I shouldn’t have to worry if the numbers are right.”
Greig has a staff of 12 analysts who do nothing but follow real estate markets around the country. Their job is to reconcile reports from the various local real estate companies so better real estate decisions can be made.
“I could use 30 more people,” Greig says. “It’s very time consuming, very labor intensive and can be very frustrating.”
Industry efforts at standardization have fallen short, however. The Building Owners and Managers Association developed a book of office market terms and definitions in 1990, but has been unable to implement them on a widespread basis.
Likewise, the Society of Industrial and Office Realtors publishes its own standard report on 150 different real estate markets, although SIOR’s bigger member firms continue to gather their own statistics.
Resistance to standardization comes primarily from the brokerage community, which jealously guards market data-often collected over a 20-year period-claiming that their proprietary information provides a competitive advantage.
“Everyone reports vacancy and absorption figures,” says Harold S. Ulvestad Jr., executive vice president, Chicago regional manager, CB Commercial Real Estate Group. “What’s important is taking that information and interpreting it to help the client. If the information is more accurate and more timely, the clients will make a better decision.”
With an intuitive understanding that market knowledge is money in their pockets, brokerage companies have stepped up the sophistication of their collect-and-crunch data operations. Several have hired university professors to provide the added dimension of mathematical modeling and forecasting ability.
For example, six years ago, CB Commercial purchased Torto Wheaton Research, a Boston-based real estate consulting firm run by two economics professors. Torto Wheaton now audits the CB Commercial data bank for errors, provides econometric models to explain market trends, and has developed a computer graphics package that marries the statistics to color-coded maps.
Obviously, this type of research operation, which can run into the millions of dollars, is cost prohibitive for many companies. For firms with neither the desire nor the resources to maintain a data bank, there are outside research companies that will do the work for them.
“Our job is to provide the raw data,” says David C. Davenport, president, The Chicago RE Source, a third-party research company based in Mt. Prospect.
Davenport, who likens his system to a sophisticated residential multiple listing service, has 15 researchers who call 2,400 office building representatives each month to track property.
In some cities, such as Washington, outside research companies have become the sole provider of data in the market simply because their information is the best available. This serves as a kind of de facto standardization, although most firms tailor third-party research to fit their own needs.
Davenport says more local real estate companies are turning to third-party research not only to save on costs, but also to show clients an unbiased perspective.
“There is an overall paranoia on the part of institutional owners who are demanding more accurate and more standard forms of reporting,” he says.
This view is echoed by industry experts who say that the growth of publicly traded real estate companies or REITs will lead to some type of standardization in order to satisfy skeptical investors.
“Standard definitions will have to apply across the country as the tools of sophisticated investment analysis are translated from the stock and bond market into the real estate market,” says Hugh F. Kelly, director of economic research, Landauer Associates, a New York-based real estate consulting firm. “Also, the banks have to be able to show regulators that this time around they can make better real estate decisions.”
