Real Estate appraisers can be a Builder’s or Real Estate Developer’s best friend and a partner and consultant when it comes to evaluating if your planned project will be successful.
A good real estate market analysis can make or break a development project and it is better to learn about the market before the mistake then after, which then ultimately is a failed development.
The real estate boom made it easy for developers to do their own math and poor planning most often resulted against all odds in successful business endeavors. But these times are over and due diligence once again has become an integral consideration of every prudent business person. The question of When, Where, How Much and How Fast needs to be answered to plan the built-out appropriately.
Timing is essential, not only in terms of when you will hit the market with your product, but also in terms of a correct prediction of absorption.
Let me help you analyze the current real estate market correctly with a Market Study or a Marketability Analysis Report.
Marketability Analysis vs. Market Study
My friend and mentor Robert Dunham explained the two in a perfect way:
“A use in search of a site calls for a market study.
A site in search of a use calls for a marketability analysis.”
For the real estate developer, the Marketability Analysis is the most important tool. The development site is already in possession, but the product is still unclear.
The steps in a Marketability Analysis are as follows:
Step 1: Property Productivity Analysis:
The first step of the process is a thorough analysis of the site and improvements, if applicable, examining the physical attributes, advantages and disadvantages which affect the property’s ability to be competitive in the defined market place. The study moves on in this step to analyze the location of the property by studying:
Linkages and Land Use: An analysis of the surrounding land uses and their impact on future development together with an overview of linkages to and from the subject site, including roads, utilities and services and broader linkage categories as they affect the site and marketability.
Urban Growth Structure: This is an analysis of the current direction(s) and volume of urban growth and a review of the subject property location in terms of that growth and its effect.
Preliminary Inventory of Competitive Supply: This provides a review of existing and contemplated supply and development activities within the trade area of the subject property.
Rate & Evaluate Subject’s Competitive Position in the Market/Trade Area: This qualitative analysis provides a view of the competitive advantages and disadvantages of the subject site and proposed improvements in relation to either major competitors or market standards. This bears upon the property’s ability to capture future demand based on the characteristics examined above.
Step 2: Define the Users of the Property and the Market Area:
This step is critical in the process as it physically and practically defines the market area in which the subject property will likely compete. In turn this is the area with the potential demand for the services provided by the subject and its competitors. Too broad an area or too narrow a focus skews the resulting analysis by failing to properly identify the true competitive marketplace. For instance, retail trade areas are generally thought of as being a function of both time and distance and therefore convenience. This is less so with regard to residential properties where there are other important considerations. While there are some industry guidelines such as those promulgated by the Urban Land Institute, nothing is that concrete and the so-called standards must also be modified to incorporate existing competition and growth patterns for new households.
Step 3: Analyze Existing and Potential Demand:
While it is advisable to have several different sources to estimate demand for the subject property’s particular goods or services, each ultimately deals with the following steps:
- Forecast the Current Population in the Primary Market Area Now
- Estimate the Change in Population over the Projection Period
- Estimate the Average Household Size
- Estimate the Total Number of Housing Units Required in the Market Area
- Segment the Demand for Owners and Buyers
- Segment by Housing Type
- Segment by Ability to Pay
- Adjust for Frictional Vacancy
Step 4: Inventory and Forecast Competitive Supply:
This inventory process is conducted within the defined trade area in which the competitive process will take place. As in the case of the Demand data, there is a degree of impact felt from those properties with special location characteristics or those located at the edge of the forecast area. This process identifies the existing retail base, the planned and underway additions to supply and any proposed projects with a reasonable expectation of approval and completion.
Step 5: Analyze the Interaction of Supply and Demand:
This is often called the equilibrium step, where the balance of the market is measured. The market or markets in general are seldom at equilibrium; that is where supply and demand is balanced. This step will identify any unmet demand in the defined market area, or alternatively the amount of oversupply and the time required to absorb the oversupplied space.
Step 6: Forecast the Subject Capture
Based in large part on the analysis of the subject property’s rating of competitive advantages and disadvantages an estimate of the range of capture can be made. This is an attempt to recognize that each location and each property within a location are all competing for housing sales and they seldom compete on equal footing. Obviously there are a myriad of reasons why one property can be more efficient than another in capture, and the bottom line usually relates to location, price, amenities, travel time and access to work, shopping, schools and conveniences. Each of these items can become a tradeoff for the preferred property characteristics.
Call Me for a free consultation and allow me to assess your appraisal needs.