This is a blog by Natasha Watts, Client Success Team Lead at Waypoint, an MRI partner.
Which budgeting solutions should be implemented to improve the real estate budget planning process? This is a question that comes to the forefront of property managers’ minds at the start of each budgeting season, but in actuality, it’s a question that should remain top of mind throughout the year.
For commercial property managers and asset managers, market benchmark data helps move the budget discussion past whose assumptions are most correct. As pointed out in this article from National Real Estate Investor, doing so brings the “context of the larger market” into the budget conversation. However, what’s really needed isn’t the context of the “larger” market, but the context of your market. You need benchmark data that is truly comparable to the properties in your portfolio.
Bringing the benchmarks to your market
Where are you getting the commercial property data for your projections? Are you pulling them from a pro forma supplied by a broker? Did you get a colleague to forward you their budget for another building in the same area? Do you dig into the BOMA EER? The chances are high that you don’t have a huge amount of faith in those numbers because they aren’t directly applicable to your situation.
Reliable benchmark data must be comparable, normalized and comprehensive.
The problem with comps from a broker is that you don’t know if they are exaggerating anything or if the property used for reference has an issue that skews its numbers. National survey data is more comprehensive, but you might need something more specific to your local market. Plus, it can be challenging to figure out how the survey data maps to your own chart of accounts.
To help address these issues, Waypoint, the leading real estate performance management platform, offers the largest data set of operating expense and revenue numbers available for the commercial real estate industry. We pull data straight from accounting systems, anonymize and normalize it, and then average it together. With detailed asset and market peer sets, Waypoint’s market analysis is more accurate than pulling up your broker’s pro forma and easier to view than national survey results.
How to reduce budget season stressors
CRE asset managers are not the only ones who report that real estate budgeting and forecasting is fraught with difficulties. Research organization Beyond Budgeting Round Table found that “between 80 to 90 percent of companies are dissatisfied with their planning and budgeting processes,” largely because it takes so long to complete.
We’re not saying that using Waypoint for your benchmark data is going to solve all your budgeting headaches. But the more objective data you have, the better your foundation will be going into the process. Here are some of the ways that starting with better benchmark data helps make the process faster and more accurate:
1. Get the first draft budget done more quickly
Long before the haggling even starts, your first hurdle as a real estate asset manager is getting that first draft of the budget done. Let’s assume that all your property managers have done a good job of entering their numbers into MRI Software and you have a base budget for the portfolio to work with. (Heaven help you if your firm’s CFO is pushing you to do zero-based budgeting. Then you will really need good benchmark data!)
When establishing a successful budgeting program, your first step is to look at what has happened over the course of the given year across all properties. You’ll have several buckets of data to work with, and you’ll want to have a look at all of them:
|Details to Look at||Where to Find Them|
|What was originally projected for this year and the coming year||This year’s budget and the pro forma rate of growth|
|What actually happened and why||Your analysis of the recent variance reports|
|What is happening to other properties like yours||Market benchmark data|
The goal here is to form an opinion about whether things will continue the same trend or if there are areas ripe for change. With reliable benchmark data that is normalized to your chart of accounts, you now have a handy reference to get the draft done quickly and move forward to the next stage of the process.
2. Speed up the approval process with validated assumptions
A common complaint about the budget process is that it takes a long time to get all the necessary approvals – too much back and forth negotiating.
Using better market data provides an objective view of whether revenue and expense assumptions are reasonable, helping you frame the conversation in a more constructive way. All too often, budget performance results live in disparate sources, such as local spreadsheets. Fortunately, Waypoint provides a cloud-based solution that standardizes your chart of accounts and provides an interactive way for asset managers and property managers to review and comment on budget performance in real-time so that these conversations are more fluid. The result is a unified, single source of truth for budget performance that allows asset managers and property managers to spot issues before the end of the budget cycle.
Ultimately, everyone can benefit. Asset managers who need to put pressure on property managers to bring certain line items down can let the data speak. Property managers who need to get more money for certain line items have data to back up their requests. Portfolio executives and investors will be glad to see the data validating your assumptions.
Real estate budget planning will likely always be a stressful exercise because it is linked to performance reviews for both asset and property managers. It is critical to use accurate information to set the numbers at the outset so that superior performers can stand out and be recognized.
Treat this as an opportunity to motivate your team to focus more on ways they can personally impact the firm’s strategic goals. With more accurate forecasts and better prioritization of projects, team members will feel more empowered to do their best to meet the objectives set for the coming year.
Download the case study to find out how LBA Realty, a full service vertically integrated real estate investment and management company, uses Waypoint and MRI Software to improve data aggregation and reporting across their portfolio. You can also read more about how Waypoint partnered with MRI to reduce LBA’s operating expenses for real estate budgeting on the Waypoint blog.