Chapter 17
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Chapter 17






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Chapter 17 Document Transcript

  • 1. Real Estate Market Analysis I. Market Analysis as a Process - Market analysis is key ingredient in feasibility study, used to provide inputs on rents, vacancies, etc. Can be done by developer if small deal, or contracted out if large. The more complex the deal, the more extensive the study should be. Market analysis is the identification and study of market for a particular economic good or service. Different types of markets, typically based on property types, then segmented by price, location, size and functionality. A. Market Studies – report and analyze aggregate supply and demand data to help developer understand relevant market. 1. Supply Analysis – uses data from local, regional and national providers, and includes: a. inventory and quality of existing space b. new construction of space (under and proposed) c. features, functions and benefits of existing and proposed space
  • 2. d. overall vacancy rate and characteristics of vacant stock e. recent absorption rates f. market rents g. lease terms and concessions. 2. Demand Analysis – investigates potential users of space. Although need to look at current and expected needs and preferences of users (especially change over time), most demand analyses will include inputs such as: a. population and population changes b. employment and employment changes c. income and income changes d. other macroeconomic and local factors e. psychological, image, and other perceptions that indluce factors difficult to quantify. B. Marketability Studies – covers a specific property and identifies the property's demand attributes. Purpose is to generate income assumptions (rental rates, growth rates, space absorption rates) for the specific development. It takes the findings of the market study and applies them to the spcific property by: 2
  • 3. a. profile the target space user b. identify revenue unit and service necessary to capture that revenue unit c. define the product in terms of features, functions, and benefits d. delineate pricing strategy. C. Market Analysis as Part of Feasibility – helps developer ensure assumptions made in idea inception and refinement are realistic, and to create tools for ensuing marketing of project. Also provides the revenue estimates to be used in the financial feasibility analysis, and can be used to get a feel for the degree of risk that will need to be incorporated in the discount rate. The results of the market analysis will be useful in dealing with other participants (investors, lenders, etc.) in the process. D. Format for presenting Market Analysis – generic outline provided in Figure 17-1. Most important element of the analysis presentation conveys trends of data over time. Be careful not to hide problems, because if they surface later it will likely discredit your entire analysis, and 3
  • 4. possibly kill the deal. (adage – if you have a problem, circle it in red!) II. Problems, Pitfalls and Limitations - regardless of whether developer or analyst does the market study, must recognize that weaknesses exist. A. Problems - Market studies may lack reliability and validity. If can't get good information, or be sure of source or quality of information, then hard to put a great deal of confidence on results coming from research. Also may have problem with surveys and data not actually measuring what intended to measure. And when take limited sample to identify supply or demand factors, may not get a reliable picture of what is going on (sampling error), especially if extend to a different population. B. Standards and Sensitivity Analysis - Must recognize that often use rules of thumb and standards that are based on historical information. These relationships are 4
  • 5. changing over time, so extending historical might lead to erroneous conclusions (ex. vacancy allowance). One way to reduce risk is to do sensitivity analysis on input assumptions to see how impact the bottom line (ex. reversion calculations). C. Limitations: 1. Market Study does not necessarily address itself to other types of studies listed (such as Highest and Best Use of site, or best site for proposed use). 2. Market Studies do not necessarily have a great deal of accuracy in determining supply and demand due to constantly changing market conditions. 3. Governments can impact markets with increase/decrease in regulations. 4. Do not know how other market participants are going to respond to changes in market. 5
  • 6. 5. Demand can change rapidly due to changing market conditions that can invalidate a very thorough market analysis. 6. Many Market Studies are not fully developed because of time and cost constraints. III. Data Collection and Validation - critical part of Market Study that is often the weakest link. Many potential sources, some easy to access, others more difficult. With increased technology, becoming much easier to find relevant data (see, for example: Also, there are many local sources available that provide critical input data of absorption and rent levels (see Blosser Report for private sector survey) as well as public sector reports (see City of Lubbock Economics: DemographicEstimates.aspx). These sources will not only provide a 'snapshot' of current conditions, but will typically provide 6
  • 7. historical perspective as well to allow the determination of trends. A. Tools to help analyze markets: 1. Economic Base Analysis (EBA) - traditional approach developed by Homer Hoyt. EBA utilizes the relationship between basic and non-basic employment as a means of predicting population, income or other variables. Developed as system of multipliers, where basic premise is that if can establish relationships of various economic components from historical perspective, then can use tht relationship to predict what is expected to happen in the future. Key assumption is that relationship that existed in the past will continue in the future: 1. Et = Eb + Es and Et = Eb x ke where ke = Et / Eb P = Et x kp where kp = P / Et ΔEt = ΔEb x ke where Et = Total Employment 7
  • 8. Eb = Basic Employment (net exporter) Es = Non-Basic Employment (service) Example: Lubbock Population (P) = 200,000 Et = 100,000 Eb = 40,000 ke = 100,000/40,000 = 2.5 kp = 200,000/100,000 = 2.0 If new industry locates in Lubbock, such that Eb increases by 3,000, total impact? ΔEt = 3,000 x 2.5 = 7,500 and Et = 100,000 + 7,500 = 107,500 and ΔP = 7,500 x 2.0 = 15,000 and Population = 215,000 Could also look at changes in income by calculating income multiplier. 8