Independent commercial real estate researchers based in the U.S. have embarked on ambitious expansions across the globe to create more transparency in international property markets.
Institutional investors exploring overseas buying opportunities are driving the build out, demanding more and better data in emerging markets and even in some developed countries where statistics are still hard to come by.
The researchers, which include Real Capital Analytics, Smith Travel Research, Torto Wheaton Research and Lodging Econometrics, have spent tens of millions of dollars over the past few years to establish a worldwide presence. Generally the firms are partnering with foreign companies, opening offices overseas or combining their strategies.
In many cases, the data providers started offering international real estate data products just as the credit crunch and recession began putting a stranglehold on the worldwide economy.
The sharp downturn has made potential real estate investors and developers more cautious, and ultimately could hurt demand for the new data products.
“Given the budget situation and more uncertainty, clients are a little slow to add another product to their research tools at this point,” says Arthur Jones, a senior economist with Boston-based Torto Wheaton Research, which last year began covering 15 office markets in Asia. “But we're hearing that the need for data is still great.”
Indeed, in some cases the global downturn has put a premium on information. New York-based Real Capital Analytics, which launched its international expansion in 2005 and began releasing its first global reports in January 2008, tracked some $1.2 trillion in commercial property sales around the world in 2007. Through the first 11 months of 2008, sales fell to $513 billion.
“The only way to get investors back in the market is for buyers to feel comfortable with where true pricing really is,” says Dan Fasulo, managing director of research for Real Capital Analytics, which tracks property sales of more than $10 million for its global reports compared with $2.5 million for its U.S. products.
“Nobody wants to be the investor who jumps in and buys a property only to find out that it's worth 20% less the next day. Investors across the world are waking up to the fact that we need to have transparency,” adds Fasulo.
The boom before the bust
Investment interest overseas surged earlier this decade and coincided with increasing trade between countries that encouraged corporations, manufacturers and law firms to expand into Asia, Europe and other global markets. The healthy business climate also enhanced the free flow of capital across borders, particularly for real estate.
As a result, U.S. mutual funds, private equity firms, developers and others started raising cash for overseas investing. Investors are still interested in buying real estate overseas markets despite slowing economies, says Kevin White, senior real estate economist for Boston-based Property & Portfolio Research. The financial crisis has simply forced the market to pause, he suggests.
“Over the last couple of years, investors awoke to the importance of putting money to work outside their own borders to exploit opportunities,” says White, who uses Real Capital's data in evaluating markets for Property & Portfolio's investment clients. “The underlying drivers remain in place: a desire for better diversification, a broader investment universe, and potentially superior returns.”
Although real estate investment activity has waned in recent months, interest in overseas properties and growing international trade helped spark the largest lodging expansion ever during the first decade of the 21st century, says Patrick Ford, president of Portsmouth, N.H.-based Lodging Econometrics.
The company, which bills itself as the global authority for hotel real estate, began building its international business about four years ago. Lodging Econometrics tracks hotel development pipelines, among other information, in eight regions around the world.
Major hotel brands, for example, rushed into new markets to serve an increasing number of business and leisure travelers, explains Ford. In the first half of 2008, some 1.8 million rooms were in the construction pipeline globally, a 28% increase over the number in the pipeline during first half of 2007.
Lodging Econometrics notes that construction cancellations are on the rise thanks to the closed credit markets and general economic slowdown. But recessionary environments typically only shift the focus of hotel developers to different data sets, he says.
“When we're going up in the cycle, investors are very concerned with how much development is planned,” says Ford, who launched his inaugural global construction pipeline report in November 2008. “When the cycle starts going down, people want to know what developments are real — what has been canceled or postponed.”
Smith Travel Research, based in Hendersonville, Tenn., also has expanded into overseas markets. In the spring of 2008, the company completed the formation of STR Global by merging with The Bench and Deloitte's HotelBenchmark, two former lodging research competitors based in London.
STR Global, also based in London, covers European and Asian markets. The merger ended Smith Travel's roughly two-year push to solidify an international presence. In 2006, it bought a minority stake in The Bench for an undisclosed amount.
Among other measures, the new global organization has tailored occupancy, average daily rates and other data that it collects in Europe and Asia to fit into Smith Travel's methodology, says Mark Lomanno, president of Smith Travel. Previously, different data collection and analysis methods among competing researchers essentially mixed apples and oranges.
That change alone has improved the clarity of the information, says Isaac Collazo, vice president of performance strategy and planning for InterContinental Hotels Group, a United Kingdom-based client of STR Global and Lodging Econometrics.
“Having a single view or presentation makes our lives so much easier — we don't have to massage the data,” says Collazo, who is based in InterContinental's Americas headquarters in Atlanta. “Before it was like trying to put a puzzle together with pieces that came from different boxes.”
The hotelier remains an active developer. It increased its supply by 10,000 rooms to 608,225 rooms in the third quarter of 2008, a 7% increase over the period in 2007. More than half of those rooms were added outside of the Americas, and the company has an additional 243,000 rooms in its development pipeline.
For most researchers that are expanding globally, the products released to date reflect several years spent overseas digging up information sources, building relationships and even opening new offices.
Officials with the research organizations declined to quantify the investment they've poured into the strategies, although many acknowledge that they've spent tens of millions of dollars flying millions of miles, hiring new employees and forging agreements with local vendors in foreign markets.
The researchers also have executed different plans to build their overseas business. Lodging Econometrics officials, for example, decided against partnering with research organizations in foreign cities because it would have interfered with the company's preferred and proprietary data collection and processing methods, Ford says.
Among other stipulations, Lodging Econometrics includes in its data only publicly announced projects that developers are actively pursuing and that have a dedicated land parcel. Plus, instead of establishing permanent offices overseas, company researchers constantly travel to meet with developers, hotel companies and investors.
Lodging Econometrics has tripled in size to 50 employees since it began its international push, Ford says. The company has tripled its client base, too. In addition to InterContinental, Marriott International and other well-known hotel brands, Lodging Econometrics counts vendors like Delta Faucet Co. and Shaw Floors among its customers.
“We investigated all the options of buying other firms and setting up offices, but we just felt it was better to go another direction,” Ford says. “So much of what we do has to be done in a very systematic and complex manner that we're better off not adapting ourselves to others, but having them adapt to us.”
Real Capital, in contrast, is establishing partnerships with existing data providers in foreign markets and opening its own offices, too. As of late 2008, the company had established two European offices and was planning to open a Hong Kong office. Real Capital also has partnered with 10 data firms around the world, and Fasulo anticipates adding up to three more partners over the next couple of months.
Still others are leveraging connections with affiliates already operating internationally. Case in point: Torto Wheaton, a division of real estate service provider CB Richard Ellis, is taking raw fundamental data from CB Richard Ellis offices overseas to craft its international reports.
In the fall of 2008, Torto Wheaton released its premier China report, which includes office property forecasts for Hong Kong, Shanghai and Beijing as well as historical office fundamentals for 12 other Asian cities. Torto Wheaton is ramping up similar products that will target major markets in Europe, says Arthur Jones, a senior economist with Torto Wheaton.
“As we finish in one region, we're moving onto another,” he adds. “[CB Richard Ellis] has a significant presence around the globe, and we're fortunate to be able to leverage the information they collect.”
Despite spending years and millions of dollars to build international platforms, independent information providers readily admit that they still confront several challenges as they attempt to advance deeper into foreign markets.
Finding trustworthy data in emerging markets is chief among the concerns, but number crunchers say that information in well-developed countries such as France can be tough to retrieve, too.
Employment is considered a key indicator of commercial real estate health, for instance, and Torto Wheaton utilizes reliable Department of Labor statistics to craft its U.S. forecasts. Dependable employment numbers are harder to find in China, Jones says.
Conversely, labor laws in some European countries make it difficult to fire and hire employees, rendering job numbers useless as an economic indicator, he says. Thus, Torto Wheaton studies national consumption taxes in those markets.
Other challenges center on changing cultures within organizations. When Smith Travel launched STR Global with Deloitte's HotelBenchmark and The Bench, the new company had to retrain its overseas sales force, Lomanno says.
Before the merger, HotelBenchmark salespeople were focused on converting Bench clients to their system, and vice versa. That strategy focused on hotel executives who already recognized the value of benchmarking services. Thus, it eliminated the extra work required to sign up lodging officials who had yet to buy into the practice.
STR Global's emphasis has now shifted to the so-called nonbelievers. “We're not converting Catholics to Protestants anymore,” Lomanno adds. “We need to find the atheists.”
Real Capital, meanwhile, discovered early on that it couldn't simply blanket its international markets with the same methodology that it applied in the U.S., Fasulo says.
Like most other organizations expanding overseas, the company continues to adapt to its new surroundings to discover the most accurate information possible.
“We've been awfully nimble in the way we're doing business in all these countries,” Fasulo notes. There are good reasons for that approach. “Real estate is a very local business, and we don't want to lose the local flavor in our global data.”
Joe Gose is a Kansas City-based reporter.
FREQUENT FLYERS: Independent commercial real estate researchers in the U.S. are branching out as interest in overseas investment grows.
|Company||Sector||Coverage||Date Global Strategy Launched|
|Lodging Econometrics||Hotel||EMEA*, South America, Asia-Pacific, North America||2004|
|Real Capital Analytics||All||EMEA, Asia-Pacific, South America, North America||2005|
|STR Global||Hotel||EMEA, Asia-Pacific, North America||2006|
|Torto Wheaton Research||Office||Asia||2007|
|* Europe, Middle East, Africa||Source: Company data|