Real Estate Market Analysis
R.E. Market Analysis
is a collection of practical analytical tools and
procedures designed to help answer
decision questions, such as:
Decision Questions
Where to locate a branch office?
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?
Market Analysis usually
requires quantitative or
qualitative understanding (&
prediction) of:
Demand
Side
Supply Side
Of the Space Usage Market relevant to some
R.E. decision.
Types of Market Analysis:
Specific
micro-level analysis
Applies to single property, site, or user
E.g., feasibility analysis or site analysis for a development
project
Broader, more
market
general characterization of a space
Applies to an entire R.E. space market segment or
submarket
E.g., forecast of supply & demand (&/or rents and vacancy
rates) in Jakarta office market.
Focus on latter type (market supply & demand)
Five major market
indicators:
1.
2.
3.
4.
Vacancy rate
Market Rent
Quantity of new construction starts
Quantity of new construction
completions
5. Absorption of new space
Vacancy Rate:
Percentage of the stock of space that is currently
not occupied
Vac.Rate = (Empty SF)/(Total SF) = 1
Occup.Rate
Watch out for sub-lease space:
o
Space leased but unoccupied is vacant.
Vacancy Rate is an indicator of equilibrium
(balance between supply & demand in the space
market)
Some vacancy is normal and
natural in a market, due to:
o Search time & moving costs :
Dont take first deal
Search for good deal (takes time to find)
o Overbuilding:
Impossible to perfectly predict demand growth
Lumpy supply
The natural vacancy rate:
o Rate around which vacancy tends to cycle
o Rate that indicates supply/demand balance
o Above which rents fall, below which rents
rise
o Tends to be higher in more volatile &
faster-growth markets
o Tends to be lower in more supplyrestricted markets
Rent:
Rent on new leases in the market
Another equilibrium variable
Most important space market variable
Tricky to accurately quantify (private
info,apples vs oranges problems)
Consider real rent
rent adjusted for general inflation (as better
indicator of market trend)
Construction:
Supply side variable
Starts & completions
o
o
Starts Pipeline
Completions Additions to supply side of market
Consider net addition to supply:
Construction Completions Demolition &
Conversion Out
o Include re-habs & conversions in also
o
Absorption:
Change in occupied space
Demand side variable
Gross absorption = Total new lease signings
Includes moves within the market
Net absorption = Net increase in occupied space
Net absorption more relevant for indicating market
demand:
(Vacant SF)t = (Vacant SF)t-1 + (Constr)t (Net
Absorption)t
These market indicator
variables:
Vacancy, Rent, Construction,
Absorption
Can be used to help characterize &
understand the current market, and forecast
how it may change relevant to R.E.
decisions.
e.g., The Months Supply
measure:
Vac Constr
MS
NetAbsorp / 12
MS < Typical Construction Project Duration Tight
Market
Room for new development projects
MS > Typ.Constr.Duration May be some slack
(but consider natural vacancy rate).
Defining the scope of the
market analysis
Geographic/Property type market
segments (or sub-markets)
Time-frame of the study (historical,
forecast to when?)
Example of geographic submarkets: Atlanta office market
Exhibit 6- 2: Atlanta MSA Office Sub-markets, 1998.
(Source: Lend Lease Real Estate Investments, Real Estate Outlook: 1999, based on
data from Jamison Research and Lend Lease Investment Research. Lend Lease,
reproduced by permission. )
Market analysis methodology:
Simple trend extrapolation vs Structural
analysis
Trend extrapolation:
Take advantage of inertia in space
market (past partly predicts the future)
Consider trends and cycles
Potential to use statistical techniques
(time-series analysis: autoregression,
ARIMA, VAR, vector error-correction)
Potential to bring in capital market
factors as predictors
Structural Analysis:
Model the structure of the market
(underlying determinants of supply &
demand, e.g. population growth and
employment growth)
Forecast the underlying determinants
(e.g., economic base analysis like we talked
about in Ch.3), then use model to predict
space market.
Formal analysis requires:
o
o
o
Demand model (including elasticities)
Supply model (including elasticities & lags)
Equilibrium model (including landlord behavior)
Useful for gaining fundamental understanding
of the market, and making long-term forecasts
Used more in academic studies than business
decisions
More widely used in business
decision-making are basic short-term
(1-3 yr) structural market analyses
Exhibit 6-3: Generic framework of a basic short-term structural market analysis for real
estate
SUPPLY SIDE
DEMAND SIDE
Inventory existing supply
Identify sources of space usage
demand
Quantify relationship between
demand sources and quantity of
space usage
Inventory construction pipeline
Forecast of new supply
Forecast demand sources
Forecast of new demand
Forecast space shortfall or surplus
Decision implicatons?
Major drivers of the demand
side of the space market
Exhibit 6-4: Major demand drivers by property type
Property Type
Demand Drivers
Residential single family
(Owner occupied)
Population
Household formation (child rearing
ages)
Interest rates
Employment growth (business &
professional
Population occupations)
Residential multifamily
(Apartment renters)
Retail
Office
Industrial
Hotel & convention
Household formation (non-childrearing ages)
Local housing affordability
Employment growth (blue collar
occupations)
Aggregate disposable income
Aggregate household wealth
Traffic volume (specific sites)
Employment in office occupations:
Finance, Insurance, Real Estate
(FIRE)
Business & professional services
Legal services
Manufacturing employment
Transportation employment
Airfreight volume
Rail & truck volume
Air passenger volume
Tourism receipts or number
Market Dynamics
The
real estate cycle may be different from and partially
independent of the underlying business cycle in the local
economy.
The cycle will be much more exaggerated in the
construction and development industry than in other
aspects of the real estate market, such as rents and
vacancy.
The vacancy cycle tends to slightly lead the rent cycle
(vacancy peaks before rent bottoms).
New construction completions tend to peak when
vacancy peaks.
In the preceding model, were
any of the market participants
forward-looking?
What features of the above
results do you think are due to
myopia or purely adaptive
behavior on the part of the
market participants?
In the real world, what factors
or elements in the real estate
system will tend to be forwardlooking?
In the real world, will it be
possible to perfectly forecast
the future? Will some market
participants likely be
somewhat myopic or adaptive
in their behavior?
