MARKET STUDIES / FEASIBILITY ANALYIS
The Benefits of Data-Driven Real Estate Market Analysis
Carpenters will often use the motto, measure twice, cut once. That is the wisdom in a real estate market study. No one wants to build to a market that is saturated. Empty buildings are expensive.
The first step in conducting real estate market analysis is to clearly define the specific goal at hand. Is the primary aim to identify the ideal market for self storage units, car washes, indoor Pickleball and on and on? But whatever the main goal, hard data is key. In this guide, we’ll uses best practices for conducting commercial real estate market analysis and leverage location intelligence to boost the accuracy and quality of real estate market analysis and improve your CRE decision-making.
Key Factors in Real Estate Market Analysis
Broadly speaking, the factors that go into real estate market analysis can be divided into two main categories: market-level factors and property-level factors.
- Market-level Factors
The old saying in real estate is that three things that matter are location, location, location. Then Mr. Trump came along in the art of the Deal and says you have to have the best deal. As Florida becomes more populated and the best locations have been developed, it is apparent to me that location is important but the economics are also critical and so all elements Even before delving into the data on specific properties, real estate market analysis must account for a wealth of information on the broader geographic areas where potential properties are situated. Some of the main data points that go into market-level analysis include:
Demographic trends and local employment patterns: Is the area growing or losing population? Are young families moving in or leaving? How does the local median household income (HHI) compare with the national average? And is the area experiencing job growth?
- Local amenities and infrastructure: Does the area boast a variety of retail centers, restaurants, parks, and other places of interest? Are local business centers lively and bustling, or do they appear to be languishing? If the property is a retail venue, how much competition is its planned usage likely to face?
- New and planned development and construction: What kinds of major development projects are planned for the next several years? Is residential housing demand likely to remain ahead of supply, or will there be a glut of available homes? What is the local regulatory environment like?
- Real Estate Prices and Occupancy Rates: How do local occupancy and vacancy rates compare to other similar areas? Are rents and prices going up or down?
Most of these factors should be analyzed on both a local (metropolitan area) and hyperlocal (neighborhood) level. Different areas within cities may experience varying growth trajectories and may be positioned to support very different kinds of businesses
Domestic migration trends are key to conducting a real estate market analysis
2. Property-Level Factors
In addition to market-wide factors, real estate market analysis should account for a variety of factors relating more specifically to the properties under consideration. Some of the elements that should be considered include:
•Specific location and accessibility: How close is the property to good schools, public transportation, and other amenities? If it is a retail business, how central is the location? How many people pass by it each day? How accessible is the property by car or by public transportation? Is there sufficient parking?
•Maintenance and improvement costs: How much does it cost to build the property? If existing, what improvements will be needed before it can start to generate income? On the flip side, does the property present an opportunity to add value through renovations or redevelopment?
•Tenancy and rental income: If the property includes units to be leased, how much rental income does it generate? What are its estimated occupancy and vacancy rates?
•Foot traffic patterns: For customer-facing businesses like shopping centers and other retail establishments, traffic patterns are key. How many people frequent the location each day? Are visits increasing or decreasing? What is the demographic profile of the property’s visitor base? And How do visitation levels compare to similarly situated properties?
•Comparative Benchmarking: In addition to the above factors, commercial real estate analysis should account for the price of comparable properties and for how well they’ve done in recent years.
Metrics for Assessing the Profitability of Income-Generating Properties
If the main goal in purchasing a property is to achieve long-term value appreciation, analyzing the factors listed above can help assess potential real estate deals and determine whether a given property is expected to appreciate at a good rate.
If the goal, on the other hand, is to generate rental or other more immediate income, a variety of additional metrics will be useful for comparing different opportunities and evaluating profitability. Some of the most important of these include (this is not an exhaustive list):
Cap Rate: A property’s cap rate (capitalization rate) is its net operating income (NOI), divided by the total purchase price – including any repairs and closing costs, but excluding the cost of financing. Cap rates help investors quantify and compare the earning potentials of different properties.
Cash on Cash Return: This metric helps investors manage cash flow and determine how much they stand to earn at the end of the first year. Cash on cash return compares a property’s annual income to the actual annual outlay – including down payments, mortgage payments, repairs, and more.
As the real estate market continues to evolve, it’s critical for CRE brokers, investors, and others to keep pace with evolving best practices for conducting real estate market analysis. The rise of accessible location intelligence tools in particular offers professionals an unprecedented capacity to analyze the behavior of markets and sub-markets, and to evaluate the performance and revenue-generating potential of specific properties. By leveraging these tools, CRE professionals and stakeholders can generate more accurate and informed market analysis and stay ahead of the curve.
Unlocking the Potential of Data-Driven Real Estate Market Analysis
Embarking on real estate market analysis requires a clear understanding of your objectives. Are you aiming to build equity through property investment? Or perhaps seeking the perfect location for retail expansion or rental property development? Whatever your goal, robust data is your compass. In this guide, we delve into optimal practices for conducting commercial real estate (CRE) market analysis and how industry players—brokers, owners, and buyers—can harness location intelligence to elevate the precision and caliber of their assessments, thereby enhancing decision-making in the CRE realm.
As the industry evolves, staying abreast of emerging best practices is indispensable. Accessible location intelligence tools empower stakeholders to dissect markets, assess property performance, and make informed decisions. By leveraging these resources, CRE professionals can navigate the evolving landscape with precision and foresight.
Not every market study may include all of the items mentioned here. The analyst and the client ultimately agree on the scope of work necessary to answer the client’s needs. As the scope of work increases, so does the fee and having been in the development business, I am sensitive to pre-development expenses.
Not every market study may include all of the items mentioned here. The analyst and the client ultimately agree on the scope of work necessary to answer the client’s needs. As the scope of work increases, so does the fee and having been in the development business, I am sensitive to pre-development expenses.