Real Estate Market Analysis Basic Principles

Real Estate Market Analysis
Studies that Focus on the Market
Analysis of Local Economic Conditions
Study of the fundamental determinates of the demand for all real estate in the market
Market Analysis
Study of the demand for a particular property type
A site in search of a Use
A Use in Search of a Site

Real Estate Market Analysis
Marketability Analysis
Study of a specific development or property to assess its competitive position
Studies That Focus on Individual Decisions
Feasibility Analysis
Evaluates a specific project as to whether or not it is likely to be carried out successfully
Investment Analysis
Evaluates a specific property as a potential investment. Investor specific.

Overview of Market Analysis Components
Two Major Study (Question) Types
1. A Site in Search of a Use
2. A Use in Search of a Site

Overview of Market Analysis Components
The Study Process
1. What attributes does the subject property offer to the market?
2. Who are the potential, typical users/most likely purchasers of the subject?
Most Probable Buyer Analysis

Overview of Market Analysis Components
3. Is the property use needed?
Demand Analysis
Population ⇒ Households ⇒ Housing Units
Income ⇒ Effective Buying Power ⇒ Retail Sq. Ft.
Jobs ⇒ % Use Office ⇒ Office Sq. Ft.
Jobs ⇒ % Use Industrial ⇒ Industrial Sq. Ft.

Overview of Market Analysis Components
4. What is the Competition?
Supply Analysis
5. Analysis comparing demand and supply
Equilibrium Analysis
How much rent can be charges?
Is the location competitive?
Are the property attributes competitive?
How much of the demand can be captured?

Overview of Market Analysis Components
6. Subjects marketability
Capture Analysis
7. Does the subject make financial sense?
Is it a good investment?
What is its market value?
Is the property’s value more than its cost?
I.e.: is there any entrepreneurial reward for the risk?
Feasibility Analysis and/or Highest and Best Use

Step 1: Define the Product
Property Productivity Analysis
A. Physical Attributes
B. Legal and Regulatory Attributes
Private
Public
C. Location Attributes
Identification of economic attributes – the association between land uses and their linkages
Identification of the movement of demand in relation to the direction of urban growth

Step 1: Define the Product
Property Productivity Analysis
Analysis of Urban Growth Structure
Pattern, Direction and Rate
Analysis of factors influencing urban growth structure
Natural, Manufactured and Political
Identification of competition and comparison of location advantages and disadvantages between competition and subject

Step 1: Define the Product
Property Productivity Analysis
D. Market appeal Attributes:
Identification of specific features such as design or amenities that appeal to market participants

Step 2: Define the Users
Market Delineation
A. Market area concepts
Time-distance concepts
Area over which equally desirable, substitute properties tend to compete with the subject
B. Geographic Market Delineation
C. Identification of Characteristics of Most Probable User (consumer profile)

Step 3: Forecast Demand Factors
A. Major demand types
Population creates households
Income creates retail buying power
Employment creates office and industrial users
B. Tastes and preferences: behavioral, motivational, and psychological factors
C. Demand segmentation

Step 4: Inventory and Forecast Competitive Supply
A. Existing stock of competitive properties
B. Potential competition
Proposed construction
Probable additional construction
C. Factors influencing completion of potential competition
Land availability and costs
Interest Rates
Material and labor costs
Entrepreneurship

Step 5: Analyze the Interaction of Supply and Demand
Residual Demand Study
A. Competitive environment
B. Residual Demand Concepts

Marginal Demand Analysis

Step 6: Forecast Subject Capture
A. Capture rate and absorption period for subject property
B. Risk Analysis
C. Reconciliation of market analysis and conclusions

Market Analysis Levels
Inferred Demand Studies
Levels A and B
Emphasis is on knowledge and historical data
Fundamental Demand Studies
Levels C and D
Emphasis is on quantifiable data and forecasting

Level A Market Analysis
Draws on readily available regional and city data, a general area description provides the backdrop for the comparable property data used to represent market conditions
Analyses are more descriptive than analytical
Historically oriented rather than future oriented
Rent and comparable sales are relied upon

Level A Market Analysis
A. Property productivity analysis
Physical attributes
Legal attributes
Location attributes
B. Supply and demand analysis
Demand
Supply

Level A Market Analysis
C. Marketability/equilibrium analysis/highest and best use conclusions
Focuses on use conclusions
Timing based on analysts feel for the market
Improved Properties
Use and timing for property use
Vacant land or land as though vacant
Use – Usually uses permitted by current zoning
Timing – Considered immediate

Level B Market Analysis
Relies upon broadly based surveys of the market for estimating supply and demand
Uses quantifiable data as a basis for judgments about highest and best use and timing

Level B Market Analysis
A. Property productivity
Physical Attributes
Legal Attributes
Includes a check for deed restrictions, easements, and other legal attributes
Location attributes
B. Supply and demand analysis

Level B Market Analysis
C. Marketability/equilibrium analysis/highest and best use
Uses specific quantifiable data for use and timing
Employs data that relate to timing of demand – timing becomes function of demand relative to supply

Regional Sales Trends

Regional Sales Trends

Regional Sales Trends

Regional Sales Trends

Level C Market Analysis
Employs fundamental forecasting techniques
Can discern whether there is an excess or supply, an excess of demand, or a balanced market

Level C Market Analysis
A. Property productivity analysis
Physical attributes – same as level B
Legal attributes – same as level B
Location attributes
Analyzed with a location rating grid to provide some quantified analysis of the subject’s competitive position

Level C Market Analysis
B. Supply and demand analysis
Uses future oriented forecasting techniques for forecasting demand and supply
C. Marketability/equilibrium analysis/highest and best use conclusions
Probable use
Probable use of vacant land

Level C Market Analysis

Level D Market Analysis
Usually handled by professional real estate market analysts
A. Property productivity analysis
Includes detailed projections of probable future land uses
B. Supply and demand analysis
Forecasting demand and supply
C. Marketability/equilibrium analysis/highest and best use conclusions
Improved existing or proposed properties
Vacant land

Summary
Levels of Market Analysis
Inferred Demand Studies
Sub-Level: A & B
Infer subject attributes
Infer location determinants of use & marketability by macro analysis
Fundamental Demand Studies
Sub-Level: C & D
Quantify subject attributes
Quantify and analyze location determinants of use & marketability by macro and micro analysis

Summary
Levels of Market Analysis
Inferred Demand Studies
Sub-Level: A & B
Infer demand by general economic base analysis of others
Infer demand by selected comps
Fundamental Demand Studies
Sub-Level: C & D
Forecast demand by original economic base analysis
Forecast demand by subject specific market segment & demographic data

Summary
Levels of Market Analysis
Inferred Demand Studies
Sub-Level: A & B
Infer supply by selected comps
Infer equilibrium highest and best use and capture conclusion
Fundamental Demand Studies
Sub-Level: C & D
Quantify supply by inventorying existing & forecasting planned competition
Quantify equilibrium
Graphic map use for H&BU
Timing – quantified capture forecast

Summary
Levels of Market Analysis
Inferred Demand Studies
Sub-Level: A & B
Emphasis is on:
Instinctive knowledge
Historical Data
Fundamental Demand Studies
Sub-Level: C & D
Emphasis is on:
Quantifiable data
Forecast

Criteria for Selecting Appropriate
Level of Market Analysis
Prevailing Market Conditions on the Study Date
Project Type
Project Size
Client Needs