Commercial Real Estate Metrics: Pitfalls and Potential - S2E2

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About this Episode – Commercial Real Estate Metrics: Pitfalls and Potential

Welcome to the A.CRE Audio Series! On this episode, I am here once again with the creators of the Adventures in CRE website, Spencer Burton and Michael Belasco. Today we are talking about return metrics, pitfalls and potential.

During this episode, we also discuss common misconceptions and how to take these return metrics and look at them together. We start off by discussing various metrics that are commonly used in the industry today including cash-on-cash return, internal rate of return, equity multiple, etc.

We also talk about the importance of how you analyze metrics. Each metric alone will not give a clear picture. You must look at everything from a broad, holistic perspective. Learn about metrics and getting the most out of your return during this episode.

Show Notes – S2E2: Commercial Real Estate Metrics: Pitfalls and Potential

Commonly used return metrics in the industry [2:09]
- By using consistent metrics, you can compare one deal to another.
- These metrics only show you a piece of a puzzle unless they are used in combination with other metrics.
Cash on cash return [3:32]
- People don’t typically properly use the cash on cash metric.
- Generally, your cash on cash return is your net operating cash flow after debt divided by your equity contributed to date. Different shops will have a different twist to that.
- This metric is not the end all be all.
- Cash on cash is not the only metric that matters.
Where is the AIR value coming from? [9:51]
- AIR is a function of time which helps with time piece. Alone it isn’t valuable but should be looked at alongside other metrics.
- AIR can be misleading at times.
Any metric is irrelevant in a vacuum [12:26]
- It should be compared against other deals using the same methodology.
- Finance is all about comparison.
- These metrics aren’t worth anything unless there is convention across your underwriting.
Developing conventional underwriting standards [20:31]
- Pair return metrics with that strategy and underwriting standards.
- Check off the boxes of each one.
The art and science [22:21]
- There is always an art and a science to anything.
- Everyone wants it to be a science because it’s black and white. It’s more about marrying the art and the science.
Continuing to analyze [26:45]
- Looking at everything holistically.
- It’s important to constantly reevaluate.

Resources from this Episode

Adventures in CRE: https://www.adventuresincre.com/
A.CRE Accelerator: https://www.adventuresincre.com/accelerator
Adventures in CRE Glossary of CRE Terms: https://www.adventuresincre.com/glossary/

Frequently Asked Questions about Commercial Real Estate Metrics: Pitfalls and Potential

What are the most commonly used return metrics in CRE?

Some of the most common return metrics include cash-on-cash return, internal rate of return (IRR), and equity multiple. These are widely used to compare deals when consistent methodologies are applied.

Why shouldn’t metrics be analyzed in isolation?

According to the episode, “Any metric is irrelevant in a vacuum.” Metrics only show part of the picture. A broad, holistic perspective is needed to make sound investment decisions.

What are some common pitfalls of using cash-on-cash return?

Cash-on-cash is often misused. It is generally calculated as net operating cash flow after debt divided by equity contributed to date, but this varies. Importantly, “Cash on cash is not the only metric that matters.”

How should AIR (Annualized Internal Rate of Return) be interpreted?

AIR is useful as a function of time, but on its own, it “isn’t valuable” and can be misleading. It should always be analyzed alongside other performance metrics.

Why is standardization important in underwriting and metrics?

Without standardization, comparisons are meaningless. “Finance is all about comparison,” and metrics “aren’t worth anything unless there is convention across your underwriting.”

What do the hosts mean by “the art and science” of underwriting?

There’s no purely scientific formula in real estate analysis. “Everyone wants it to be a science… It’s more about marrying the art and the science.” Judgment and intuition play a key role alongside data.

Why is continual analysis important in real estate?

Markets and assumptions evolve. It’s critical to “look at everything holistically” and “constantly reevaluate” to ensure strategies and expectations remain aligned with current realities.