Part I: Project Feasibility – Market Analysis
a project feasibility study enables the developer to minimize time, effort, and money to focus on projects that make sense. Today, we will discuss the importance of the market analysis in conducting a feasibility study (the first of a four part series). First and foremost, before proceeding with any project, a developer must be well-informed about the real estate market. In essence, the real estate developer is proceeding in an organized fashion to analyze market opportunities much like an entrepreneur starting a business as outlined in this article. Evaluating trends and understanding key factors allows the developer to understand the needs of the market and whether a project (if develop) will fulfill the needs of the community. If you need a primer on real estate market analysis, look into reading this book
To fully understand the importance of a market analysis, let’s explore a proposed retail development project: a shopping center. In order to decide whether or not to proceed further and what type of project to build, a more in-depth analysis of the market is required. Retail markets are often defined by a specific geographic trade area. Factors considered in assessing the market include understanding demographic characteristics, overall economic trends, existing retail supply, and suitable development sites. Claritas is one of the largest providers of demographic and market information for real estate projects. A detail demographics report is shown below (courtesy of Claritas and shown for mere educational purposes):
Understanding the boundaries of the primary, secondary, and tertiary trade areas surrounding a site are extremely important in retail development. For example, automobile and transit access, physical barriers, location of competing projects, and population influences the size and the boundaries of trade areas. By better understanding the trade areas, a real estate developer can better assess the target market of the proposed retail project. Conducting a demand analysis focuses on a variety of key factors that are crucial to retail. Key elements include demographic data and employment growth trends in targeted trade areas, household characteristics such as lifestyle and age, income for various populations within a trade area, and spending patterns. Much of the market information and data can be extracted from census data, sales tax reports, and data from local planning and economic development offices. Likewise with a demand analysis, a supply analysis should also be conducted in the primary trade area. Supply analysis involved understanding the location, characteristics, and sales figures for competitive retail centers, estimated market share of existing centers and sales performance, availability of retail space, absorption, and sales trends, and status of proposed and planned retail developments. Finally, statistics on the physical characteristics and market performance of centers are available such as the Dollars & Cents Guide of Shopping Centers compiled by ULI based upon a survey of more than a thousand shopping centers.Traditionally, a market analysis was conducted prior to identifying a site and developing it. However, in urban markets where potential sites are scare, a real estate developer may identify a site and then conduct market analysis afterwards. Depending on which option the real estate developer chooses, a market analysis enables the developer to make an information decision concerning the project’s proposed use, location, and size. Often, real estate developers can find location quick market information from talking to real estate brokers. Retail real estate brokers such as Terranomics or the Shopping Center Group provide a wealth of information. For must larger retail development projects (i.e. a power center or a 20+ acre master-planned retail development), a real estate developer will turn to specialists to conduct market analysis studies. CB Richard Ellis, Cushman & Wakefield, and others are willing to provide these studies at a cost to the real estate developer. By spending some money upfront, real estate developers can save themselves from a “world of hurt.” As oppose to finding out post-construction that that there is no market for a power center due to another existing power center being located 10 miles away, it is better to find out now rather than later before a ton of money has been expended.
An Example
Let’s apply what we discussed to looking at a potential retail development project in Southern California. Below, you will find attached a flyer (courtesy of NAI Capital and its respective listing brokers) outlining some details about a parcel of land that we considered for a small single tenant retail project. Aside from basic property listing information, pay attention to the market information attached.
If you notice, demographic and income profile information was generated on a radial basis using ESRI software. Pertinent market information was provided on a 1-mile, 3-mile, and 5-mile radius. Demographics and income profile of the nearby popular are important reference points for retailers. By understanding the income profile of the potential consumer base, retailers can better understand whether their products fit within their target consumer profile. Understanding household growth, household dynamics, and ethnicity also influence the type of retailers that are attracted to the retail site. Although the market information is not as comprehensive as described above, the information provided is sufficient in terms of making an informed decision about the site and the general market area. For must larger retail projects, a developer may want to have a professional market analysis done. As one becomes more experienced and better informed about the local real estate market, the amount of market information and analysis to be conducted may vary. Besides, a market analysis is useful information to provide to a lender when procuring a loan (a topic for a later discussion).
To conclude the example, we has in mind a potential restaurant user for the site. The market information provided confirmed that the potential restaurant user would fit right into the mix. For other reasons aside, we decided to pass on the site. However, another real estate developer like yourself may find the site particularly appealing. Remember, market analysis is only the first step in conducting a feasibility analysis.
Next time, I will continue the second of our four part series in project feasibility. Site Selection will be our next topic for discussion. Meanwhile, read up
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