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

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

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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.

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?

Overview of Market Analysis Components

6. Subjects marketability

Capture Analysis Is it a good investment? What is its market value? Is the propertys 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

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

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2

/2 05

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

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 subjects 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 Thats
An Overview of Real Estate Market Analysis

Wayne Foss, DBA, MAI, CRE, FRICS Fullerton, CA USA Email: waynefoss@usa.net

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