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Real Estate Market Analysis
Basic Principles, anOverview of the Process and
Levels of Study
Wayne Foss, DBA, MAI, CRE, FRICS Fullerton, CA USA Email: [email protected]
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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
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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
Investment Analysis Evaluates a specific property as a potential
investment. Investor specific.
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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
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?
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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
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Step 1: Define the ProductProperty 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
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Step 1: Define the ProductProperty 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 ProductProperty 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 UsersMarket 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 AnalysisCurrent plus 5 years plus 10 years
Square Feet Square Feet Square FeetEstimate of supportable retail space in primary and secondary trade areas adjusted for vacancy 582,308 718,083 922,371
Deduct existing competitive retail space 1,100,976 1,100,976 1,100,976
Marginal demand (excess or shortfall) estimate (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 Fundamental Demand Studies
Levels C and D Emphasis is on quantifiable data and
forecasting
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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
B. Supply and demand analysis Demand Supply
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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
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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 TrendsOrange County, CA
Zip Code 92831
$-
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
$350.00
$400.00
$450.00
Jan-0
3
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Nov-0
3
Jan-0
4
Mar
-04
May
-04
Jul-0
4
Sep-0
4
Nov-0
4
Jan-0
5
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Time
Md
/sf
Md Price per Sq. Ft.
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Regional Sales Trends
Residential Building Permit ActivityFullerton, CA
0
200
400
600
800
1,000
1,200
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
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2000
2001
2002
2003
2004
Date (Year)
Num
ber
Single Family Multi-family Total Residential
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Regional Sales Trends
Industrial Sales Trends, Orange County
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
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140.00
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180.00
88/2
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01/2
02/2
03/2
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06/2
Year/Half
Md.
Pri
ce /
Sq. F
t.
All Data
North
Central
South
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Regional Sales Trends
Commercial Sales Trends, Orange County
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
220.00
240.00
260.00
280.00
300.00
320.00
340.00
Year/Half
Md
. P
rice
/ S
q.
Ft.
All Data
North
Central
South
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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
Year 0 Year 1 Year 2Population 215,717 217,874 220,053 Population Increase 2,157 2,179
Persons per household 3.50 3.50
Total number of households 616 622
Percentage of owner households 55.0% 55.0%
Demand for Subject Unit Type 339 342
Plus normal vacancy 3.0% 3.0%
Total demand for subject housing 349 353
Affordability percentage 25.0% 25.0%
Total Demand for owner occupied units 87 88
Demand Calculations Summary
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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
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SummaryLevels 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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SummaryLevels 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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SummaryLevels 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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SummaryLevels 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
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Criteria for Selecting AppropriateLevel 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: [email protected]