The Lure of Averages


What is “average”?

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It’s a term we see regularly on research reports throughout the real estate industry. Average price per square foot. Average sale price. Average rent. Average cap rate.

We take it for granted that these industry averages are dangling in front of us to fuel our knowledge. But when we talk about the average price per square foot of multi-family buildings in Brooklyn, for instance, what does it actually mean? Are we looking at nourishment, or are we taking the bait on the hook?

I recently watched a TedX Talk by Harvard faculty member Todd Rose on “The Myth of Average.” In his lecture, he describes this myth as a pervading belief in the education system that statistical averages reveal something meaningful that allows us to better understand individuals.

He cites a story from the United States Air Force in which, in order to optimize the performance of their fighter pilots, cockpits were designed to fit the “average” person—logic indicating it would then fit “most” people.

As you can probably guess, this didn’t go according to plan. When performance suffered, the Air Force studied more than 4,000 pilots to see how they measured up against the average-sized cockpit. Turns out, across 10 different measurements, precisely zero pilots fit the “average” mold.

In essence, by designing an average cockpit, the planes were optimized for literally no one.

What does this mean for commercial real estate? Applied to our industry, the Myth of Average posits that a boroughwide statistic can educate us about what’s happening in various submarkets: from north of 125th Street to south of Central Park, or from Downtown Brooklyn to East New York.

Does it? Using a blanket average of $397 per square foot for Brooklyn multifamily walk-ups, do we feel more informed about Downtown Brooklyn ($1,144 per square foot) and East New York ($116 per square foot)?

Only after examining those specific submarkets and comparing them to the average can we understand what’s happening; otherwise, the nuances, variances, and trends in the market—locations on the rise, or hidden value for certain asset classes—disappear like so many ripples in the pond.

To put it crudely: If you have one foot in scalding water and the other on ice, do you feel room temperature?

The average is a dangerous lure that distills complex market factors and trends into easily digestible “Snapple Facts.” It’s how you can end up both numb and with a second-degree burn.

With the Myth of Average in mind, we at CPEX look deeper into the borough and examine pricing and trends in sales and leasing on a much smaller, more localized scale.

Our latest Brooklyn sales report, for instance, breaks down transactions by ZIP code for a clearer snapshot of how activity and pricing are trending in these separate submarkets.

There are smaller variations of this issue even within a single ZIP code—Williamsburg by Bedford Avenue remains a different market than farther east on the L train (though East Williamsburg is catching up).

In our annual Brooklyn retail report, we examine rental rates on a nearly block-by-block basis. Court Street is just one example of a commercial corridor further divided into different subsections. Stretching from Montague Street to Garnet Street, each section of Court Street is a snapshot of a changing retail market the farther north you go, ranging from $65 to $79 per square foot to as much as $250 per square foot.

In some cases, such as 86th Street in Bay Ridge, we see a drastically different market on opposite sides of the same street, tracing back all the way to which side received better natural light and attracted more foot traffic (drawn to the sun.)

Yes, there is a time and place for averages. Sometimes, a single data point serves as an outlier that doesn’t accurately portray the current state of the market as much as create statistical noise. In these cases, it’s important to look at the broader scope of transactions to see the full picture.

Therein lies the point: When presented with an average, it’s important to understand where it came from, be it two prices on either end of the spectrum, or a series of transactions at the center of the bell curve.

It’s only by taking a deeper look beneath the surface that we can understand what “average” really means—and whether it’s a lure to avoid or a law by which to abide.

Timothy King is co-founder and managing partner at CPEX Real Estate. For a deeper dive in the data pool, and to make more informed investment decisions, see CPEX’s first-quarter survey of sales in Brooklyn by visiting