What are the common methods and tools for commercial rent forecasting?

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Commercial rent forecasting is a crucial skill for commercial real estate analysis, as it helps investors, developers, and tenants evaluate the potential income and expenses of a property. However, forecasting commercial rents is not a simple task, as it involves many factors, such as market conditions, supply and demand, location, property characteristics, lease terms, and tenant preferences. In this article, we will discuss some of the common methods and tools for commercial rent forecasting, and how they can help you make better decisions.

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1 Historical Trends

One of the most basic methods for commercial rent forecasting is to use historical trends, which means analyzing the past performance of rents in a specific market or property type. Historical trends can provide a general indication of how rents have changed over time, and what factors have influenced them. For example, you can use historical trends to identify cyclical patterns, seasonal variations, or long-term growth rates. However, historical trends have some limitations, as they do not account for future changes, such as new developments, economic shocks, or shifts in consumer behavior.

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Lilian Chen

Commercial Real Estate & Proptech Founder @ Accentir
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Using historical data is a good way to get started, but as we all know, past performance is not always indicative of future results. To get accurate forecast we need to get two things right simultaneously: the direction and the magnitude of change — that’s a hard task! The easiest way is to look up industry reports that contain rent projections. It would be great if you can understand their methodology, or read the description of what contributes to growth, but this information is not always readily available. The practical way is to create two variations of your analysis: a base case and an upside. This is a more useful approach in communicating risk and reward.

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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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I think common methods and tools for commercial rent forecasting include: 1. Time Series Analysis: Uses historical rent data to identify trends and project future rents. 2. Market Comparables: Analyzes current lease rates of similar properties in the same market. 3. Economic Indicators: Incorporates data like employment rates, GDP growth, and inflation. 4. Software Tools: Utilizes platforms like CoStar, REIS, and Argus for comprehensive market data and forecasting models. 5. Expert Opinions: Gathers insights from real estate brokers and market analysts. These methods help create accurate, data-driven forecasts for commercial rent projections.

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2 Regression Analysis

Another common method for commercial rent forecasting is to use regression analysis, which means using statistical techniques to estimate the relationship between rents and various explanatory variables. Regression analysis can help you understand how rents are affected by different factors, such as location, size, quality, amenities, vacancy, competition, and so on. For example, you can use regression analysis to determine how much rent premium a property can command for having a better view, or how much rent discount a property will suffer for being older. However, regression analysis also has some challenges, such as choosing the right variables, dealing with multicollinearity, and ensuring data quality and validity.

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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 use this method often! I have found it to be successful for me and the properties I am using it on. Personally, choosing the right variables isn't too big of a challenge for me but I can understand how that would present challenges at times!

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3 Hedonic Models

A more advanced method for commercial rent forecasting is to use hedonic models, which means using econometric models that decompose rents into the implicit prices of different attributes. Hedonic models can help you capture the heterogeneity and complexity of commercial properties, as they allow you to measure the marginal contribution of each attribute to the rent. For example, you can use hedonic models to estimate how much rent a property can generate based on its location, size, quality, amenities, lease terms, tenant mix, and so on. However, hedonic models also require a lot of data and expertise, as they involve estimating complex nonlinear functions and testing various assumptions and specifications.

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4 Machine Learning

A more recent method for commercial rent forecasting is to use machine learning, which means using artificial intelligence algorithms to learn from data and make predictions. Machine learning can help you overcome some of the limitations of traditional methods, as it can handle large and diverse data sets, detect hidden patterns and relationships, and adapt to changing conditions. For example, you can use machine learning to forecast rents based on a variety of data sources, such as market reports, property listings, social media, satellite images, and so on. However, machine learning also poses some challenges, such as explaining the results, validating the accuracy, and ensuring the ethical and legal implications.

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Rad Valentine R.

Associate | Commercial Real Estate Research at Carter Jonas
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Commercial rent forecasting employs various methods: Time Series Analysis (ARIMA), Machine Learning (Random Forests, GBMs), Deep Learning (RNNs, LSTM), and Geospatial Analysis (GIS). In myy approach used Ridge Regression on polynomial features, effectively capturing non-linear trends and managing overfitting. This method balances complexity with accuracy, fitting well within the broader context of sophisticated predictive modelling techniques in real estate. Each method's choice depends on data specifics, accuracy needs, and forecasting horizon.

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5 Tools and Software

Besides the methods mentioned above, there are also various tools and software that can help you with commercial rent forecasting. These tools and software can range from simple spreadsheets and calculators to sophisticated platforms and applications. Some of the benefits of using tools and software are that they can save you time and effort, provide you with consistent and standardized results, and enable you to perform various scenarios and sensitivity analyses. However, some of the drawbacks of using tools and software are that they can be expensive and complex, require regular updates and maintenance, and depend on the quality and availability of data.

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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 common methods and tools for commercial rent forecasting?

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1 Historical Trends

2 Regression Analysis

3 Hedonic Models

4 Machine Learning

5 Tools and Software

6 Here’s what else to consider

Commercial Real Estate Analysis

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