Real Estate Market Analysis
The Overall Market Forcasts
Market Analysis : Why do it? ●
“Real estate market analysis” refers to analyzing a variety of real estate decisions.
» What size or type of building to develop on a specific site? » What type of tenants to look for in marketing a particular building? » What the rent and expiration term should be on a given lease? » When to begin construction on a development project? » How many units to build this year? » Which cities and property types to invest in so as to allocate capital where rents are more likely to grow? » Where to locate new retail outlets and/or which stores should be closed?
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Broadly Speaking… ●
Real estate market analysis usually requires quantitative or qualitative understanding (& prediction) of both the demand side and supply side of the space usage market relevant to some real estate decision.
» Feasibility analysis for a specific site or property » General characterization of the supply/demand conditions in a particular space submarket.
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Variables of Interest in Market Analysis A few primary indicators that characterize both the supply and demand sides of the submarket and the balance (equilibrium) between them. ●
Vacancy rate
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Market Rent
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Quantity of new construction starts
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Quantity of new construction completions
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Absorption of new space
The Concept of “Months Supply” ●
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The concept of “months supply” combines several of these variables to help us understand a market even better. Months Supply is the sum of current vacant space in the market and new construction started but not completed, divided by 1/12 th of the annual net absorption in the market. VacanctSpace + ConstructionSpace Months Supply = NetAbsorption /12 This measure tells how long it will take (in months) for all of the vacant space in the market to be absorbed, driving the vacancy rate to zero. Analysts compare the months supply to the length of time it takes to complete new construction to see if the market can support a new project. If the months supply is much greater than the average construction period, the market is “oversupplied.” Otherwise, it might be time to start a new project in this market. –
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Some Tips for Market Analysis ●
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Define the market carefully along geographic and usage dimensions, recognizing that most metropolitan areas form markets that can be usefully divided into smaller submarkets. The next slide describes how the Atlanta office market can be “divided.” Carefully consider the time period to be covered in the analysis 5 – 10 years into the future is desirable 3 years is more feasible in most cases –
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Recognize the differences between and the benefits of a simple trend extrapolation and a structural analysis Trend extrapolation predicts the future purely based on historical trends and patterns Structural analysis attempts to predict the future by identifying and quantifying the underlying determinants of market trends. –
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Understanding a Market Analysis
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In both types of analysis (extrapolation and structural) the steps are:
» Inventory the existing supply and evaluate the pipeline. » Relate the demand sources to the space usage demand. » Forecast future demand for and supply of
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Chicago Forecasts ●
Imminent Demand No signs of a dramatic increase in demand on the local level (no industry shift moving towards chicago) U.S. economy may be “fragile” – oil prices/global economic uncertainty acting on a drag on U.S. economy Demand predictions “moderate” at best –
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Supply
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Chicago Retail Forecasts ●
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Retail development is a better opportunity –
Vacancies are lower
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Effective rents have been increasing slightly
People still consuming in Chicago (both natives and tourists). Residential areas of Chicago are still developing (south/west loop). Interest rates will still likely increase – as a result, financing costs will still rise.
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Other Thoughts…. ●
Macro assessment –
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Fundamentals “solid” not “strong” Oil and Inflation (has me worried) Consumers and Business (going strong) Government (too much debt) Net Exports (of no concern to me) Business investment is most stable! Lots of capacity to expand – they are hesitant given past mistakes (late 1990s) and oil/political uncertainty.
Residential Property Markets –
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They will come down (either bubble burst or supply adjusts) Increase in interest rates may quicken this effect Re-adjustment will occur slowly (it always does) Will investors adjust to/plan for a higher (normal) interest rate regime?
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