Key performance indicators (KPIs) in the commercial real estate sector are essential benchmarks for assessing and comparing different facets of a real estate portfolio. These metrics encompass a range of data, like asset quality, efficiency ratios, occupancy rates, operational costs, sustainability performance, tenant satisfaction, and utilization levels.
CRE professionals can leverage these KPIs to:
- Conduct a comprehensive performance evaluation, analyzing their portfolio performance against industry standards and historical trends
- Pinpointing weaknesses and uncovering untapped opportunities for enhancing profitability and efficiency
- Setting data-driven, realistic, and achievable targets for key performance areas
- Monitoring performance over time to assess implemented strategies’ success
- Communicating value effectively to stakeholders, including senior management, investors, and potential buyers/tenants
Effective CRE portfolio management hinges on strategic data analysis and performance tracking. The key is understanding which KPIs truly drive value and how they relate to properties and market conditions.
CRE performance metrics types and sources
You can source your benchmarks from three different avenues: internal, external, and hybrid data. For example, internal data is collected and maintained from within the organization via property management software and financial records. This historical data is valuable for trend analysis and internal comparisons.
Industry associations (e.g., NAREIT, IREM), research firms (e.g., CoStar, Green Street), and government agencies (e.g., US Bureau of Labor Statistics) are just a few examples of this data source. Information gleaned from these and other external sources facilitates comparisons to industry averages, competitor performance, and broader market trends.
As its name suggests, hybrid data blends internal and external data. It offers the most comprehensive and tailored approach, allowing for customized benchmarks that address specific portfolio characteristics and objectives.
By leveraging these diverse data sources, you can:
- Gain a 360-degree view of performance, comparing internal data against external benchmarks to identify strengths and opportunities
- Benefit from expert insights to gain valuable industry knowledge and best practices
- Develop customized benchmarks tailored to specific property types, locations, and investment strategies
Ultimately, a well-rounded approach to benchmark selection helps you make informed decisions and achieve optimal performance within the CRE market.
Metrics that matter
Capital expenditures (CapEx)
CapEx funds represent a company’s investments in physical assets and infrastructure, including purchasing and maintaining facilities, equipment, machinery, and technology. Companies record CapEx on their balance sheets as long-term investments rather than regular expenses.
Strategic CapEx investments help companies expand operations and enhance their competitive position. For property companies specifically, regular capital investments in building improvements help attract and retain tenants. When occupants see ongoing property upgrades and maintenance, they tend to extend their leases, benefiting both parties.
Capitalization rates
Cap rates serve as both valuation tools and risk indicators. Market-specific cap rate analyses reveal investment opportunities. For example, a property showing 8% in a 6% cap rate market may indicate potential value-add opportunities or underlying issues requiring due diligence. Savvy investors track cap rate compression/expansion trends to time market entries and exits effectively.
Lease renewal rates
Beyond basic tenant retention metrics, renewal rates signal property positioning and management effectiveness. Industry leaders benchmark against similar properties in their submarket, considering factors like tenant improvements, market rent growth, and renewal spreads. High retention rates often correlate with lower operating costs and sustained NOI growth.
Leasing conversions
These conversions serve as a KPI in CRE, measuring the efficiency of tenant transitions. They enable property managers and building owners to track the timeline between lease expiration and new occupancy, as delays can damage reputation and revenue, especially when dealing with business tenants requiring immediate occupancy. Extended vacancy periods between tenants often signal deeper operational issues or market misalignment requiring strategic intervention.
Market rate
Also important? Tracking market rate indicators, like asking rates, effective rates (including concessions), and absorption rates. Understanding rate dynamics across different submarkets and property classes reveals emerging opportunities. Historical rate analysis helps identify market cycles and pinpoint optimal timing for executing repositioning strategies.
Net operating income (NOI)
NOI remains the cornerstone metric for commercial property analysis. Beyond basic profit calculation, investors use NOI trends to identify operational inefficiencies and forecast property appreciation potential. Regular variance analysis against industry benchmarks helps identify underperforming expense categories and revenue optimization opportunities. Property managers track NOI monthly, adjusting for seasonal variations and market cycles.
Occupancy rate
Analyze physical occupancy rate with economic occupancy. Understanding tenant credit quality, lease term distribution, and market vacancy trends helps forecast stability. Property managers track occupancy costs (including tenant improvements and leasing commissions) to optimize marketing strategies and maintain competitive positioning.
Operating expenses
Strategic expense management directly impacts investment returns. Leading operators benchmark each expense category against similar properties, identifying opportunities to improve operational efficiency. Key focus areas include utility optimization, preventive maintenance programs, and vendor contract negotiations. Understanding expense ratio trends helps forecast capital expenditure needs and reserve requirements.
Operating expense ratio (OER)
The OER is calculated by dividing a property’s operating expenses by its gross operating income. A lower OER is generally better, as it indicates more efficient property management. A higher OER suggests that a greater percentage of a property’s income goes toward operating expenses (property taxes, insurance, etc.), which can reduce the investor’s ROI.
The expense ratio is valuable, especially when investors evaluate asset performance and management competency. A well-managed OER directly impacts NOI and property valuation, making it a key consideration in investment decisions. Property managers should regularly benchmark their OER against industry standards, analyze trends across their portfolios, and implement strategic cost management initiatives.
Rental growth rate
Investors analyze rental growth rates, market absorption rates, and new supply pipelines. Understanding rent growth drivers — local economic indicators, demographic shifts, and infrastructure improvements — helps forecast future performance. Comparing property-specific growth rates against market averages reveals competitive positioning and potential repositioning opportunities.
Tenant turnover
Turnover represents another important financial metric in CRE portfolio management. High turnover rates directly impact profitability:
- Increased marketing costs
- Leasing commissions
- Tenant improvement expenses
- Potential income loss during vacancy periods
Property managers implement proactive retention strategies by monitoring early warning signs, like payment patterns, maintenance request frequency, and tenant satisfaction. Regular market rate analysis ensures competitive pricing while maintaining property standards and amenities that encourage renewals.
Portfolio managers can establish systematic tenant communication protocols and conduct periodic property reviews to address concerns before they trigger move-out decisions. This preventative approach typically yields higher ROI than constant tenant acquisition efforts, particularly in competitive markets where replacement costs continue to rise.
Are you a commercial real estate investor — or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
