Market Analysis for Office Buildings

Building Users
Differentiated by Users/Tenants
Major Institutional/Professional
Occupied by banks, insurance companies, professionals, corporate headquarters
General Commercial
Smaller buildings, accessible to workers and markets
Parking is important, tenants are sales oriented
Medical and/or Dental
Generally located near hospitals

Building Users
Differentiated by Users/Tenants
Quasi-industrial
may be located in industrial parks
flex and/or research and development
Pure industrial
part of a manufacturing operation
Government and/or Education

Building Terms
Gross Building Area (GBA)
Total area of the building in square feet
Rentable Area
Usually considered the tenant’s pro rata share of the entire building.
Excludes elements of the building that penetrate through the floor

Building Terms
Rented Area
Amount of space under lease in a building
Net Occupied Space (Useable)
Area within the building occupied by the tenant(s)
Efficiency ratio
Rentable area divided by gross building area
Store Area
Number of square feet in ground floor store area

Gross
Building
Area

Rentable
Area

Useable
Area

Building Terms – an Example

Building Types
Trophy
highest quality building, one-of-a-kind
unique architectural design
outstanding location
Class A
excellent location and access
good quality materials and workmanship
good to excellent condition

Building Types
Class B
good location and good construction
may suffer from physical deterioration and some form of functional obsolescence
Class C
Older (15 to 25 years), may not meet current codes
may suffer from physical deterioration and some form of functional obsolescence
Rehab
older vacant or poorly occupied that if rehabbed could become Class A

General Concepts and Terms
Analysis of Competition
should recognize differences between building types
segmentation of supply by building classification
Office Space per Employee
norms change from market area to market area, and even between submarket areas within the same general market
generally average is 175 to 200 sq. ft. per employee

BOMA
Survey
Data

Market Analysis: the Six Steps
Step 1: Define the Product
(property productivity analysis)
Step 2: Define Users of the Property
(market delineation)
Step 3: Forecast Demand Factors
Step 4: Inventory and Forecast Competitive Supply
Step 5: Analyze and Interaction of Supply and Demand
(residual demand study)
Step 6: Forecast Subject Capture

Step 1: Define the Product
Property Productivity Analysis
Identify the type of Office Building
tenants and construction quality
Analyze the site and the building
rate the subject in relation to the typical competition and/or industry standards
Analyze the location
rate the node to other competitive nodes within the metropolitan area. Consider linkages and direction of urban growth.
analyze the characteristics of the subject’s location within it’s node.

Location Analysis
Often reflects its convenience to office workers, support facilities and executive housing areas
Office node where the subject property is located is analyzed for its linkages and position in the urban growth pattern
comparing subject’s node to competitive office nodes
direction and rate of urban growth

Location Analysis
Identification of Office Nodes
Downtown (central business district)
Uptown
located along major arterial highways providing access to the suburbs
Shopping Centers
Office Parks
tend to be oriented toward manufacturing or research and development activity
Special Nodes
buildings serving attorneys, title companies and other uses often develop around major government buildings
Universities often provide a focal point for research and development and other office development

Typical Nodes of Office Building Development

Location Analysis
Identification of Node Linkages
Employee and Management Housing
Support facilities within the node
hotel, restaurants, health clubs, shopping, printing, etc.
Associated office uses
i.e.: attorneys and courthouses; doctors and hospitals
Traffic conditions
Proximity or travel time to airports
Proximity to mass transit
Proximity to interstate highways

Location Analysis
Land Use considerations
Reputation of the area
Nuisances in the area
Traffic conditions adjacent to the site
One way streets
Curb cuts and median cuts
Pedestrian access to and from major support facilities
Parking availability and access
Natural amenities
view
beaches, lakes, etc.
Size and tenant mix
office clusters are based on the idea of face to face contact

Location Analysis
Citywide growth analysis
Procedure for analysis
map current major urban centers and housing areas
map current and committed roads, transit systems, airports, and other transportation facilities expected in the next 5 to 15 years
project and map any major land use expansion anticipated in the next 1 to 10 years
map the growth forecast for 10 to 20 years
locate the subject property within the present and forecast land use patterns
Questions to consider
where has office growth occurred in the past five years?
where are the largest residential and retail growth areas?

Step 2: Define the Users of the Property
Market Delineation
Specify the market of possible property users
the tenants in the building
the clientele the tenants will draw
most office space does not have a contiguous market area, generally broad metropolitan area, or sub-area
tenants and clientele will vary with the character of the cluster or node.

Step 3: Forecast Demand Factors
Inferred (trend) methods
general employment growth (decline) trends
general secondary data that reports total market occupancy and absorption
general trends in rents and/or sales
Fundamental methods
Forecast work force occupying office space
Estimate the size of the work force occupying space in the subject’s class of office building
Estimate the requisite space per office worker
Calculate demand for the specific class of office space

Inferred Methods
Historical Absorption Trend:
Forecast Employment Growth

Worksheet for Demand and Supply Analysis

Fundamental Method
Project Employment Growth for the Overall Market

Fundamental Method
Estimate Office Space Occupancy
Analysis of NAICS categories for employment that utilizes office space
Ratio Method:

Fundamental Method, con’t….
Convert Office Occupancy into an Office space demand projection
Office Space per Employee
will vary by area
Source: Building Owners and Managers Assn. (BOMA)
Source: Black’s Guide

Fundamental Method, con’t….
Convert Office Occupancy into an Office space demand projection: Ratio Method
Total Occupied Office Space divided by Total Employment equals Occupied Office Space per Employee

Fundamental Method, con’t….
Reconcile Demand Forecast
Inferred Method
Growth Trends: Positive
Market Occupancy: Moderate Positive Citywide
Historical Absorption: 297,840 sf per year average last five years
Fundamental Method
Segmentation New Demand 1,759,750 sf
Ratio Method New Demand 1,634,828 sf
Average per Year: 326,966 to 351,950 sf

Step 4: Inventory and Forecast Competitive Supply
Inventory the current competitive office space within the subject’s building class
Inventory the competitive buildings under construction
Forecast the amount of space expected from proposed competitive buildings
Estimate the amount of space anticipated for demolitions, renovations, and conversions

Survey of Existing Office Space

Inventory of Space Under Construction and Forecast of New Planned Space
Review of Building Permits yields:
25,000 sq. ft. currently under construction in SE area
45,000 sq. ft. currently under construction in SW area
Research planned projects
interview building and planning officials, review newspaper announcements, interview brokers, lenders and developers active in the area.
Compile a list of possible projects and assess the probability of their completion.

Forecast the amount of space expected
from proposed competitive buildings

Step 5: Analyze Interaction of Supply and Demand
Compare supply and demand to estimate residual demand
City wide residual demand:
Existing vacant space: 2,588,500 SF
Space under construction: 70,000 SF
Proposed space: 256,000 SF
Total Available Space 2,914,500 SF
Time needed to absorb the available, developing and proposed space, allowing for frictional vacancy:
1,960,920 sf ÷ 352,000 sf/yr = 5.6 years
(2,914,500 sf - 953,580 frictional vacancy = 1,960,920 sf)

Segment to subject building type and area
Subject is a Class A building in SW area
SW area captures 30% city-wide demand
Class A buildings capture 83% of SW demand
Citywide 5-year new demand: 1,760,000 sf
Pct. SW area demand: 30%
SW demand: 528,000 sf
Pct. SW demand for Class A 83%
SW area Class A new demand: 438,240 sf
SW area Class A new demand/yr. 87,648 sf

Segment to subject building type and area
Compare SW area existing and potential competitive supply
Current Vacant Class A Space: 167,800 sf
Space under construction: 45,000 sf
Forecast new space: 234,000 sf
Total: 446,800 sf
Time needed to absorb the available, developing and proposed space, allowing for frictional vacancy:
223,200 sf ÷ 87,648 sf/yr = 2.6 years
(446,800 sf - 223,600 frictional vacancy = 223,200 sf)

Step 6: Forecast Subject Capture
Inferred methods
analyze the subject’s competitiveness in view of the overall market forecast
Subject’s current occupancy is 85%, consistent with metro area occupancy of 86%, however SW area vacancy is only 4%.
Building rating table indicates that subject building is 10% below average, due to design deficiencies.
Fundamental methods
analyze specific submarket competition; rate the subject against competitive properties
make an inventory of all buildings in the competitive area that correspond to the area of the forecast data
compile a list of the elements to be rated

Step 6: Forecast Subject Capture
Reconciliation
Subject is 85% occupied
Absorption of vacant space is forecast to take about 3 years before the submarket shows excess demand.
Rating analysis suggests that subject is 10% inferior to the market
Forecast is that subject occupancy and rents will lag the market