A key performance indicator (KPI) refers to a set of quantifiable measurements used to gauge a company’s overall long-term performance. In the commercial real estate (CRE) industry, there are KPIs that many professionals would think of as “industry-standard.” If you are not measuring these KPI metrics at your property, you could quickly fall behind your peers.
To ensure you are in the know, here are eight commercial real estate KPIs every CRE professional should be measuring, their definitions, and why they matter.
Definition: Occupancy rates are the ratio of rented or used space to the total amount of available space.
Why it matters: You should know the occupancy (and vacancy) rates of your building at any given time. Monitoring occupancy rates is most useful if you can compare your numbers with the market average. Beating the market average is a good sign. And if you’re not quite there, you know where to focus your attention.
It’s up to commercial property teams to track how their occupancy rates compare to the national average. Having an exact metric on the number of people in your building can help gauge the success of your property, especially as more tenants begin flowing back into commercial spaces.
Definition: The market rate, as it relates to the CRE industry, is the current price at which an asset, or property, can be bought or sold. The market price is determined by the forces of supply and demand.
Why it matters: Having a constant eye on market rates is essential to determine the value of a property. Knowing market rates helps you to compare your building’s metrics with industry benchmarks to determine where your portfolio lines up in the market.
Definition: An operating expense is an expense that a business incurs through its normal operations.
Why it matters: Operating expenses are KPI metrics that can help you determine where you’re spending money and if you are generating revenue. You should compare your operating expenses to monthly income to determine where you can save and to see if operating expenses are within budget.
Examples of operating expenses include building utilities, repairs and maintenance, insurance, and property taxes.
Capital expenditures (CapEx)
Definition: Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. In other words, CapEx is any type of expense that a company capitalizes or shows on its balance sheet as an investment.
Why it matters: CapEx is often used to undertake new projects or investments by a company. Examples include repairing a roof or purchasing a piece of equipment.
This type of financial investment is made by companies to increase the scope of their operations or to add some future economic benefit to the operation. Because the more you invest in your properties, the more appeal they have to tenants. If tenants see you investing money in the buildings they occupy, they’ll be more likely to renew their leases.
Net operating income (NOI)
Definition: Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments and is arguably the most meaningful number for commercial property managers.
NOI = Total revenue – Operating expenses
Why it matters: NOI determines the precise value of properties and will indicate to an owner if renting their property is worth the expense of owning and maintaining it. It is a commonly used figure to assess the profitability of a property. The higher the revenues and the smaller the expenses, the more profitable a property is.
Note: It’s important to monitor financial indicators like maintenance and repair expenses and revenue to keep bottom lines healthy. When presenting this information to executive teams, be prepared to explain notable variances between actual numbers and the forecast, budget, and benchmark numbers.
Definition: The capitalization rate (cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property.
Cap Rate = NOI/Current property value
Why it matters: Cap rates act as a crucial benchmark for investors to compare against other assets on the market and to identify trends when it comes to risk and return. This risk is measured based on the amount of time it takes for an investor to recover their initial investment. When a cap rate is low, the property has a relatively higher value and lower risk. High cap rates, conversely, indicate that the property’s price is relatively low and will potentially yield high returns — albeit with added risk.
Lease renewal rates
Definition: Lease renewal rates measure the percentage of leases resigned after a period of time. A lease renewal is a legal document that extends the period of time that the original lease is in effect. It may include minor changes to the original lease, such as a modification to the rental amount.
Why it matters: To ensure your building is competitive in the current market, measure your lease renewal rates relative to prior years. Use this baseline to monitor building appeal.
It’s also important to keep an eye on tenant acquisition costs. If you find this cost creeping up while tenant turnover time remains static, consider alternative methods of marketing your space.
Rental growth rate
Definition: Rental growth rate is the expected trend in market rental rates over the period of projection, expressed as an annual percentage increase.
Why it matters: How much are your units renting for? How does this compare to last quarter? Or last year? This CRE metric determines the average monthly rental price to help compare quarterly or annual changes.
It’s important for property managers to keep an eye on rent growth, especially when reporting back to property owners. Rent growth has a significant impact on a property’s revenue and could make or break bottom lines. By closely monitoring rental growth rates, you can see if the demand for your space is increasing or decreasing over time.
A new meaning to commercial real estate KPI’s
The CRE industry is filled with new demands, especially as it continues to evolve in this new-normal world. It’s hard to keep a constant eye on every data point, let alone know where you stand next to your competitors. That’s why measuring and tracking commercial real estate KPIs are so important.
If you aren’t measuring these eight “industry standard” metrics at your building, then it’s time to do so. And if you already measuring these KPIs at your property, kudos to you! But in today’s fast-changing world, that status quo doesn’t always cut it. You may find that you need to go deeper in your data to measure success. We have an additional resource that will help your properties go above and beyond, “CRE Guide: 5 Ways to Maximize Revenue and Reduce Costs”.