What are the best sources of data for estimating operating expenses in NOI analysis?

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Net operating income (NOI) is a key metric for evaluating the performance and value of a commercial real estate property. It represents the income generated by the property after deducting all operating expenses, such as taxes, insurance, maintenance, utilities, and management fees. To calculate NOI, you need to estimate the operating expenses accurately and realistically, based on reliable and relevant data sources. In this article, we will discuss some of the best sources of data for estimating operating expenses in NOI analysis, and how to use them effectively.

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1 Historical data

One of the most reliable sources of data for estimating operating expenses is the historical data from the property itself, or from comparable properties in the same market. Historical data can provide you with actual figures and trends of how much it costs to operate the property over time, and how the expenses vary by season, occupancy, and other factors. You can obtain historical data from the property owner, manager, or broker, or from public records, such as tax assessments, financial statements, and rent rolls. However, you should also adjust the historical data for any changes or anomalies that may affect the future operating expenses, such as capital improvements, deferred maintenance, vacancies, or rent concessions.

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Lilian Chen

Commercial Real Estate & Proptech Founder @ Accentir
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When you receive a new deal, sometimes the operating expenses will be very different in the offering memorandum projections and in the financial statements. Always start by underwriting with historical data and grow the expenses by a CPI. Then, once you start getting more details on how much things would cost for you, gradually replace each line with your new assumptions. Finally, ask for a detailed breakdown after you’ve done the preliminary analysis. Check for how things are categorized to truly kind of full picture of why expenses are the way they are.

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Samir Bhandari

Co-Founder and CFO @ hBits | Ex MD - Nomura | JP Morgan | UBS | Bank of America | IIM-A | CA | Banker for more than 3 decades.
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The best sources for estimating operating expenses in NOI analysis include: 1. Reports from organizations like BOMA and IREM provide standardized expense data. 2. Internal financial records from similar properties. 3. Local real estate market reports and surveys. 4. Estimates from service providers for maintenance, utilities, and insurance 5. Expense data from similar properties in the same market. These sources ensure accurate, comprehensive expense estimation for informed financial modeling.

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2 Industry benchmarks

Another useful source of data for estimating operating expenses is the industry benchmarks or averages that reflect the typical or expected costs of operating a certain type of property in a certain location. Industry benchmarks can provide you with a baseline or a range of operating expenses that you can compare with your property or market. You can find industry benchmarks from various sources, such as industry reports, publications, associations, or databases, such as the Institute of Real Estate Management (IREM), the Building Owners and Managers Association (BOMA), or the CoStar Group. However, you should also customize the industry benchmarks for your specific property or market characteristics, such as size, age, condition, amenities, tenant mix, or lease terms.

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Beau Beery

I sell multi-family at record setting IRRs.
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In multifamily I find the National Apartment Association (NAA) annual Income and Expense Report to be a fantastic resource. Their "summary" report gives you the quick and dirty results on thousands of apartment complexes across the country and gives you average information on income, vacancies, and each expense line item like repairs/maintenance, contract services, marketing, payroll, administrative expenses, property taxes, insurance, utilities, and reserves. I then compare those report expenses with like kind assets I'm doing a valuation for (BOV) in order to list it for sale. When the subject property differs drastically, I'll then follow up with the owner and their property manager on those specific line items to find out why.

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3 Market surveys

A third source of data for estimating operating expenses is the market surveys or studies that collect and analyze the actual operating expenses of a sample of properties in a specific market. Market surveys can provide you with more detailed and up-to-date information on how the operating expenses vary by property type, class, location, or submarket. You can conduct your own market survey by contacting the owners, managers, or brokers of similar properties in your market, and asking them to share their operating expense data with you. Alternatively, you can access market surveys from third-party sources, such as appraisers, consultants, or research firms, that conduct and publish market surveys on a regular basis. However, you should also verify the quality and accuracy of the market survey data, and make sure it is representative and comparable to your property or market.

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4 Budgets and projections

A fourth source of data for estimating operating expenses is the budgets and projections that forecast the future operating expenses of the property or market, based on assumptions and expectations. Budgets and projections can provide you with a forward-looking perspective on how the operating expenses may change or increase over time, due to inflation, market conditions, tenant demand, or regulatory requirements. You can create your own budgets and projections by using historical data, industry benchmarks, market surveys, and other factors that may affect the operating expenses. Alternatively, you can obtain budgets and projections from the property owner, manager, or broker, or from other sources that provide forecasts and scenarios for the property or market. However, you should also test the sensitivity and validity of the budgets and projections, and adjust them for any uncertainties or risks that may impact the operating expenses.

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5 Expert opinions

A fifth source of data for estimating operating expenses is the expert opinions or advice that provide insights and recommendations on how to optimize or reduce the operating expenses of the property or market. Expert opinions can provide you with valuable knowledge and experience on how to manage and improve the efficiency and performance of the property, and how to avoid or mitigate potential issues or challenges that may increase the operating expenses. You can seek expert opinions from various professionals, such as property managers, engineers, contractors, consultants, or appraisers, that have expertise and familiarity with your property type, market, or operating expense category. However, you should also evaluate the credibility and objectivity of the expert opinions, and compare them with other sources of data for estimating operating expenses.

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Marc Kuhn

Real Estate Investor and CEO at MAK Capital | Luxury Storage Developer | 200+ CRE units | Financial Freedom Mentor
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I truly value expert opinions. Almost every deal, I seek counsel from a credible expert who has great knowing in the market. I'm no expert and things are always changing so I find it beneficial to get their opinion. It is invaluable!

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Jess Larsen

Fund Manager, Podcaster, Counter Child-Trafficking Charity Founder.
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One of Warren Buffett's biggest mentors was Phil Fisher. In his book "Common Stocks, Uncommon Profits," he teaches a great principle that can be adapted for CRE Investing: "scuttlebutt." It's basically just asking around to all the people who have had interaction or might know little-known info like sales reps, competitors, vendors, etc. A great source I like at my Fund for expert opinions on NOI in a given area is property management companies nearby. We like to interview local property managers and see if there are any great ones we might want to hire, and while we're at it, we run our NOI projections by them and get their feedback. This year, we got significant changes to our models this way in an AZ deal and a UT deal.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best sources of data for estimating operating expenses in NOI analysis?

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1 Historical data

2 Industry benchmarks

3 Market surveys

4 Budgets and projections

5 Expert opinions

6 Here’s what else to consider

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