Real Estate Market Analysis
Basic Principles, an Overview of the Process and Levels of Study
Wayne Foss, DBA, MAI, CRE, FRICS Fullerton, CA USA Email: waynefoss@usa.net
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 Study of the demand for a particular property type
Market Analysis
A site in search of a Use A Use in Search of a Site
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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
Evaluates a specific property as a potential investment. Investor specific.
Investment Analysis
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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
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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
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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.
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Overview of Market Analysis Components
4. What is the Competition?
Supply Analysis
Equilibrium Analysis
5. Analysis comparing demand and supply
How much rent can be charges? Is the location competitive? Are the property attributes competitive? How much of the demand can be captured?
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Overview of Market Analysis Components
6. Subjects marketability
Capture Analysis
Is it a good investment? What is its market value? Is the property’s value more than its cost?
7. Does the subject make financial sense?
I.e.: is there any entrepreneurial reward for the risk?
Feasibility Analysis and/or Highest and Best Use
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Step 1: Define the Product Property Productivity Analysis
A. Physical Attributes B. Legal and Regulatory Attributes
Private Public 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
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C. Location Attributes
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
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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
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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)
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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
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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
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Step 5: Analyze the Interaction of Supply and Demand
Residual Demand Study A. Competitive environment B. Residual Demand Concepts
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Marginal Demand Analysis
Current Square Feet Estimate of supportable retail space in primary and secondary trade areas adjusted for vacancy plus 5 years plus 10 years Square Feet Square Feet
582,308
718,083
922,371
Deduct existing competitive retail space Marginal demand (excess or shortfall) estimate
1,100,976
1,100,976
1,100,976
(518,668)
(382,893)
(178,605)
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Step 6: Forecast Subject Capture
A. Capture rate and absorption period for subject property B. Risk Analysis C. Reconciliation of market analysis and conclusions
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Market Analysis Levels
Inferred Demand Studies
Levels A and B Emphasis is on knowledge and historical data
Levels C and D Emphasis is on quantifiable data and forecasting
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Fundamental Demand Studies
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
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Level A Market Analysis
A. Property productivity analysis
Physical attributes Legal attributes Location attributes
Demand Supply
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B. Supply and demand analysis
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 Use – Usually uses permitted by current zoning Timing – Considered immediate
Vacant land or land as though vacant
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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
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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
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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
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Regional Sales Trends
Single Family Price Trends
Orange County, CA Zip Code 92831
$450.00 $400.00 $350.00 $300.00
Md/sf
$250.00 $200.00 $150.00 $100.00 $50.00 $-
M ar -0 3 M ay -0 3 Ju l-0 3 Se p03 N ov -0 3
M ar -0 4 M ay -0 4 Ju l-0 4 Se p04 N ov -0 4
Time
Md Price per Sq. Ft.
M ar -0 5 M ay -0 5 Ju l-0 5 Se p05
n03
n04
Ja
Ja
Ja
n05
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Regional Sales Trends
Residential Building Permit Activity
Fullerton, CA
1,200 1,000
Number
800 600 400 200 0
19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
Date (Year) Single Family Multi-family Total Residential
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Regional Sales Trends
Industrial Sales Trends, Orange County
180.00 170.00 160.00 150.00 140.00
All Data North Central South
Md. Price / Sq. Ft.
130.00 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00
88 /2
89 /2
90 /2
91 /2
92 /2
93 /2
94 /2
95 /2
96 /2
97 /2
98 /2
99 /2
00 /2
01 /2
02 /2
03 /2
04 /2
05 /2
Year/Half
06 /2
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Regional Sales Trends
Commercial Sales Trends, Orange County
340.00 320.00 300.00 280.00 260.00 All Data North Central South
Md. Price / Sq. Ft.
240.00 220.00 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00
93 /1 93 /2
94 /1 94 /2
95 /1 95 /2
96 /1 96 /2
97 /1 97 /2 98 /1
98 /2 99 /1
99 /2 20 00 /1 20 00 /2 20 01 /1 20 01 /2 20 02 /1 20 02 /2 20 03 /1 20 03 /2 20 04 /1 20 04 /2 20 05 /1 20 05 /2 20 06 /1 20 06 /2
Year/Half
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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
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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
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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
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Level C Market Analysis
Demand Calculations Summary Year 0 215,717 Year 1 217,874 2,157 3.50 616 55.0% 339 3.0% 349 25.0% 87 Year 2 220,053 2,179 3.50 622 55.0% 342 3.0% 353 25.0% 88
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Population Population Increase Persons per household Total number of households Percentage of owner households Demand for Subject Unit Type Plus normal vacancy Total demand for subject housing Affordability percentage
Total Demand for owner occupied units
Level D Market Analysis
Usually handled by professional real estate market analysts A. Property productivity analysis
Includes detailed projections of probable future land uses Forecasting demand and supply
B. Supply and demand analysis
C. Marketability/equilibrium analysis/highest and best use conclusions
Improved existing or proposed properties Vacant land
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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
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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
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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
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Summary Levels of Market Analysis
Inferred Demand Studies Sub-Level: A & B Emphasis is on:
Fundamental Demand Studies Sub-Level: C & D Emphasis is on:
Instinctive knowledge Historical Data
Quantifiable data Forecast
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Criteria for Selecting Appropriate Level of Market Analysis
Prevailing Market Conditions on the Study Date Project Type
Project Size
Client Needs
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So That’s
An Overview of Real Estate Market Analysis
Wayne Foss, DBA, MAI, CRE, FRICS Fullerton, CA USA Email: waynefoss@usa.net
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