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The Curious Case Of Real-Estate Statistics

|Includes: CPT, Equity Residential (EQR)

The curious case of real estate statistics

Given the ubiquity and pop-culturization of stock market investing, most people have at least, some basic understanding of how the stock-market works and how companies get valued. P/E ratios, indices, sector specific funds, passive investing, etc., are terms very familiar to even the most casual stock market observers. It is no wonder then, that most talk about real-estate investing in the national press flows through this flawed prism of stock investing.

In my very brief - 4-year long - real-estate investing career, I have gradually come to realize that most real-estate statistics that are floated around in national publications such as the WSJ or New York Times, or CNBC overly generalize and are of little, if any, help while considering specific investment decisions. Not just for small, private, mom-and-pop investors like myself whose portfolios are not representative of broad statistics. Often, these statistics are not even representative of larger REITS - for instance, Equity Residential (NYSE:EQR) whose holdings comprise mainly Class A, luxury apartments in dense 24-hour cities and who recently sold its portfolio of suburban garden apartments to Starwood Capital has a very different portfolio than say, Camden Properties (NYSE:CPT) that focuses on Class B/A communities mainly, in the sun belt (Southern CA, Texas, AZ, Florida, among others).

Talking heads on CNBC talking about national or metro-level statistics such as apartment vacancy rates, or rent growth, or household formation, can thus give investors a false sense of security that they are making the right decision or may dissuade them from digging deeper to look for opportunities that these broad-based statistics do not capture - for instance while most talking heads may swear by the strong housing price growth for a city like Phoenix - you will never hear them say that price growth is twice as strong in central phoenix or Scottsdale (a suburb in the Phoenix MSA) than the west valley - say, Glendale, AZ (another suburb of the Phoenix MSA).

And while, anyone with even basic real estate experience understands how meaningless (or at least, of very little value) these statistics are, this realization doesn't seem to dawn on most talking heads. While, I can only speculate as to what drives this phenomenon, I feel that people from the general investing world - raised on a diet of efficient markets, trading fungible securities (a common stock of Amazon is identical to any other common stock of Amazon in every respect) fail to realize how inefficient real-estate markets can be and how unique each investment is.

Some of the inefficiency stems from the unique abilities of different investors - some investors have an enviable ability to remodel homes at very competitive costs, others are masters at marketing and property management, still some are great at rezoning and regulatory issues - so a given piece of real estate can deliver very different returns to different investors based on their unique skills - unlike stock prices which can't be influenced by a particular investor's specialized skills.

Another reason is how unique each real-estate investment can be - the amount of variability can be truly large. For instance, even in a small, 7-unit property that we own, the two end units rent for a higher price than the middle ones. Some people have a preference for being closer to where they park their cars, while others totally hate being close to the parking lot. Not to mention differences in interiors and how they influence renting decisions. The same property would have a very different investment profile had it been 2 miles west in a relatively seedy part of town (Sunnyslope) or 2 miles east in a fairly affluent neighborhood (Northern Mountain preserve). Though it would still be in the same zip code in any of the three locations.

Reducing this level of variability across multiple assets of different qualities, vintage, local market conditions across different neighborhoods - each with its own unique challenges and opportunities to a single statistic - either at the city/town- or national-level - seems like just one of those statistics that are churned out every day to keep statisticians and the journalists and talking heads who reference them employed. It is like making the case for buying or selling Google stock just because the Nasdaq moved by a certain percentage over the last year. While these stats are seemingly harmless, as informed investors, we should demand a more sophisticated conversation from our national media and industry experts. In the era of big data, we damn well deserve it.

Finally, let me end with an excerpt from Sam Zell's article from 1986 as he expresses the same sentiment 20 years back.

"Real estate represents a unique investment in a non-fungible asset. The unique characteristics are indisputable. Modern valuation techniques applicable to industrial analysis are being applied to brick and mortar. Focused analytical approach emphasizes broad numerical assumptions that presume real estate to be a national market.

Real estate decisions do not lend themselves to macroeconomic issues. Real estate is a local market, by definition. it is not possible to focus on national trends; one must focus on local issues and characteristics."

Supporting Documents

  1. zell_sardines.pdf

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.