In the modern economy, data powers modern enterprise. But data is a two-edged sword. Is your data good enough to be used, and do you have the ability to use it in a meaningful fashion? Data by itself is useless, but it can be harnessed to find operational efficiencies, market trends, increase revenues, and so much more — all of which gives you a competitive edge over your competitors.
Data analytics is the process by which we harness data and turn it into useful information.
There are four primary types of data analytics and how they apply to CRE:
Descriptive Analytics — When you hear the word “analytics”, this is probably what most people think of. As its name suggests, this form of analytics is used to describe something that occurs over a specific span of time. How much debt matured over the last year? How has my average portfolio interest rate changed over the last 3 years? This type of analytics looks at data from a diverse range of sources to derive useful insights from the past.
Diagnostic Analytics — This is the next layer of analytics. It takes other sets of data to help describe why something has occurred. Why did our average prepayment penalties paid on refis spike last year? Why did our DSCR increase over the last 2 years? This is where the real usefulness of your data starts to come into play.
Predictive Analytics — Like its name suggests, this uses data to try and project what might happen in the future. We want to use clusters, exceptions, and trends in our historical data to work out a prediction of what the future might hold to improve decision making. For example, using our loan cashflows, prepayment penalty schedules, and market projections of interest rates, we can make useful predictions about what a loan’s prepayment penalty might be and whether a refi or sale will make sense in the next 24 months.
Prescriptive Analytics — The aim of this form of analysis is to determine one or more courses of action to take advantage of an opportunity to avoid a problem in the future. Let’s say our predictive analytics says we should be in a favorable prepayment position on a loan in 6 months. Should we refinance this deal with a 3, 5, or 10 year loan? Should we choose fixed or floating rates? Should we pursue a sale instead? Prescriptive analytics can take inputs like desired exit dates or targeted return metrics to determine a recommendation. This form of analytics generally requires the use of modern technologies like CRE management platforms, algorithms, business rules, and/or machine learning, making it difficult to implement and manage.
So we’ve established what constitutes as data analysis and touched on how each type of analysis could be seen in the commercial real estate world. But what does that mean for commercial real estate professionals? And how can a data analysis software help?
Every so often those in the CRE industry have to gather their data and generate reports to run an analysis and make informed decisions about their debt and their portfolio. From mitigating risk by determining exposure to budgeting in the next quarter, a lot of information can be obtained when you turn your static data into actionable data — i.e. you do something about your information through strategic analysis.
Data analytic software can help in a myriad of ways. Some are able to provide insight with automatically generated reports so you can skip the compiling and be presented with an easy-to-digest visualization of your data. Some are able to present options and make predictions so you can determine the best course of action such as which loan term/loan type to refi your property as or where it makes most sense to be allocating a larger share of your budget. Others simply process data, showing you what happened and waiting for you to analyze. Ideally data analytic software will help shape strategic decisions about your portfolio that you can make quickly and confidently.
General analytics tools, like your favorite spreadsheet software, will only take you so far in your goal to gain an edge over your competitors. But not just any platform will do. The best tools out there won’t try to replace your years of experience and finely tuned intuition, but instead enhance your skills. They will take your information and provide you with the actionable data you need to weigh all of your possible courses and make the best decision possible.
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