The future of automated valuation models in CRE

Blog Post, by FUEL Valuation and Valcre

If you were selling your house, you could go to one of the popular residential real estate websites, click a button and see an instant estimate of your home’s market value. While commonplace in residential real estate, automated valuation models (AVMs) for commercial real estate (CRE) only recently became available.

Today, AVMs for CRE are replacing traditional paper processes with automated data integration, streamlined forecasting and real-time scenario modeling — and that’s only the beginning of their potential.

AVMs in commercial real estate

To understand the future of AVMs, it’s helpful to understand how they work. AVMs are software applications that use algorithms — calculations based on automated processes — to estimate a property’s market value. For a residential property, an AVM typically generates a value by looking at the sales prices of properties with similar characteristics in the same geographical area. Homes are relatively straightforward, so AVMs can be reliable tools for determining home prices.

Commercial properties, on the other hand, are anything but straightforward. For starters, the volume of CRE transactions is much smaller than that of residential properties. Even if you simply want to look at comparable property sales, you’ll have a much smaller dataset of properties to compare. And you might not even find any recent sales or relevant properties for comparison.

Furthermore, the value of a commercial property depends — of course — not only on its general condition, but also on how much income a building can generate. The property’s revenue potential depends, in turn, on lease terms, rental rates, the creditworthiness of the tenants and more. And you need to factor in expenses such as deferred maintenance, operating costs and taxes.

All those factors involve data — and that’s historically been the obstacle blocking widespread use of AVMs for CRE. In the past, critical CRE data existed only in paper records and wasn’t necessarily publicly available.

Today, however, we’re in an era of digital transformation in which the amount of CRE data available in public and private electronic databases is growing exponentially. And it’s become easier to integrate data into an AVM’s modeling functionalities. As a result, a modern CRE AVM can integrate data from multiple public and private sources that provide far more than simple sales data.

Transforming the art of CRE investment

These new capabilities are rapidly replacing the old manual processes of the past. The following are three ways that today’s AVMs are changing the art of CRE investment.

  • Increasing accuracy and timeliness. A modern AVM can integrate many real-time data sources to inform investment modeling and scenarios. Automated data integration provides a tremendous competitive advantage for users over those who rely upon painstaking manual data entry and spreadsheet manipulation. Automation makes your valuations and models more accurate, not only by reducing human error, but also by drawing from real-time data that is more likely to reflect the reality on the ground.
  • Accelerating transactions. The old approach of assembling data from multiple sources into various spreadsheets is not only error-prone, but also requires painstaking, time-consuming effort. And, you need additional time to manually create cashflow forecasts, debt models and scenarios. In contrast, an AVM can shorten the CRE valuation process from weeks into days or even hours, accelerating your ability to close transactions. With real-time data integration, a modern AVM’s modeling capabilities lend the power of predictive analytics to the job of analyzing debt and equity scenarios related to CRE investment. Create a scenario, adjust the inputs and presto! Your scenario is instantly updated.
  • Streamlined CRE portfolio management. With a modern AVM, you can create a portfolio in seconds, monitor portfolio changes and manage your holdings holistically with sophisticated modeling tools. Change an assumption, and you’ll see the change implemented across your portfolio.

The future of AVMs in CRE

What we’re seeing is how different innovators are integrating AVMs and data to create new kinds of valuation, appraisal and investment tools. The more data and software integration that happens in the investment management marketplace, the more we’ll be able to eliminate the friction that slows down transactions.

For example, Valcre’s CRE appraisal platform integrates FUEL Valuation’s calculation engine for cashflow projections. FUEL Valuation integrates real-time data from RealPage, Yardi, Enriched Data, JD Edwards, REIS and other sources to inform its valuation reports.

Also exciting, machine learning is becoming more sophisticated, enabling faster and more accurate use of integrated data. Machine learning capabilities enable a software application to, for example, determine whether a particular property fits into the “comparable” category. The more data the application can tap, the better it gets at selecting the right properties for comparison.

Mind you, we’re not talking about artificial intelligence (AI) — yet. An AI-driven AVM would come up with valuation judgments on its own, without human decisions or interventions. Those capabilities are a long way off and may never come to life where CRE valuation is concerned.

Valuations will continue to be only as good as the human judgment used to create them, because there’s no substitute for the experience that a professional brings to determining a property’s investment potential. And there’s no substitute for the relationships that make the deals go ‘round.

Yet, as CRE AVMs and data analytics become more sophisticated and mainstream, appraisers and other CRE investment professionals can seize the opportunity to impress clients with data-rich, accurate and timely valuation reports. With greater speed and accuracy, you can accomplish more valuations more quickly — and what’s not to like about that?

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