Nobody really saw the Great Recession coming.
But if there’s anything that economists have collectively done since their forecasts were trumped six years ago, it’s becoming more cautious in the way they frame the future.
For New York-based Reis, Inc., there are two things its economists focus on from an external point of view. Reis' modeling looks at household formation and its rates, which say plenty about the drivers of demands for multifamily units at a submarket and metro level.
Further, its models allow the economists to make more accurate predictions thanks to the use of historical data.
“What you find is that if you’re just using external and economic variables to try and make predictions about commercial real estate, they don’t do a perfect job,” says Ryan Severino, senior economist at New York City-based Reis. “They definitely give you some insight, but they’re not perfect indicators.”
Sticking to an exact formula every time will have the industry end up in a manufactured mess. Sure, forecasts take a lot of science to figure out–but it takes a bit of art to finesse it, as well.
“What you’re really trying to do is forecast supply and demand,” says Greg Willett, vice president of research and analysis at Carrollton, Texas-based MPF Research. “And you’re looking at a lot of different combinations and variables that are different from market to market.”
The numbers will reflect overall economic growth, demographics, and the competitiveness of other housing alternatives to some degree. The numbers will also take product availability into consideration, and these factors are all unique for each different market.
“Reports are most accurate depending on the market you’re in,” admits Richard Warner, executive vice president and chief credit officer at Bethesda, Md.-based Walker & Dunlop.
Lenders spend plenty of time gathering city data and population growth in relation to a particular market. The information, stemming from Census reports and government websites, can help to determine long-term accurate predictions.
Walker & Dunlop pulls data from research firms like Reis and Washington, D.C.-based CoStar Group daily, along with secondhand information via appraisals, hand-in-hand with information from their own portfolios. But the information only makes up for 2 to 3 percent of Walker & Dunlop's approach, which presents a more pressing question for lenders: Does the deal make sense?
“Today the deal works,” Warner says. “But today, interest rates are around 4 percent or less. Historically, rates have been 7 to 9 percent. If rates go back up, does the deal still work when the loan matures?”
Greensboro, N.C.-based Bell Partners uses third-party research from providers including Axiometrics, Reis, and RCA Analytics. With fundamental forecasts and trend data, along with demographic and supply data, the company is able to bounce accuracy off all providers. They use it to affirm pricing relative to underwriting levels, and it also helps them understand liquidity by market. Like Walker & Dunlop, the reports are supported by the firm's own internal data and research.
“With each of our providers, we have Bell-specific reports added to the contracts themselves,” says Jon Bell, president of Bell Partners. “These reporting additions are developed after taking inventory of the standard provider reports and then deciding what additional information is necessary for our market research needs.”
The models seem relatively simple, and according to economists, nine times out of 10 the forecasts are pretty accurate. But before the Great Recession, no one saw the mess that would come of the housing industry.
“I think the closer to 2008 and 2009 we got, I’d say that no one really predicted this massive implosion,” Severino says. “The closer you got to that, I think everyone in the industry had a difficult time with their forecast.”
