A real estate market analysis focuses on market potential and competitiveness from the viewpoint of supply and demand. Supply and demand is the most important component of all economics. Whenever you have oversupply and low demand, place prices are always going to drop. Whenever you have a lack of supply in high demand, prices are going to increase.
Every market study assesses the demand for the asset you are evaluating, seeking to guarantee that there will be people who will want to buy or lease the proposed asset. The level of demand for your particular asset will determine the rental rate you can command for the duration of your tenant’s lease.
Whether you are buying a mobile home park, a storage facility, a shopping center, a parking lot, an apartment complex, or a retail facility, you have to determine the market demand based on the rental rate you project in order to predict how likely you will be able to lease your asset.
The following are 5 things to think about when you are assessing the market in the pre-acquisition phase of your due diligence.
- Adapting a Property
How could the property be modified or planned to make it more competitive in the marketplace? If, for example, you are evaluating a shopping center built in 1950, back when the tenant spaces were 10 feet wide and 120 feet deep, consider whether you can adapt the space to make it more desirable in the market. If purchasing a 60 year-old apartment complex, do the interior spaces need reconfiguring or updating? Often, these old apartments still had dining rooms. Could that space be better utilized in another way?
Regardless of the type of investment being examined, your pre-acquisition analysis should look at comparable properties to determine the most up-to-date expectations of potential tenants in your market. You may be able to adapt a property to make it very desirable.
- Population Demographics
How many people live in your target market? Determine how many households exist in your market, and then breakdown the demographic characteristics of the people that live there. You have to understand the people you’re looking to serve in order to be successful.
One major factor is median income. You want your asset and products to be at the correct affordability level for your market. If your property is in a low or middle-low income demographic, a luxury spa facility charging $200/hour would certainly fail. On the other hand, a tenant offering services at $50/hour could potentially work. Similarly, luxury apartments in a low income area often remain vacant. All of these factors should contribute to your designs and plans for your new asset.
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- Historical Efforts
When purchasing an existing asset, what efforts have been attempted on the property in the past? If it’s suffering or not leasing properly, determine which factors affecting the low demand. Have there been recent shifts in needs for the marketplace? Has the demographic profile of the population in the area changed? Has the median income increased or decreased?
Sometimes older properties built for the tastes of a different time simply need to be updated. In other cases, the median income level of an area has decreased and the city is having difficulty maintaining its tax base.
Other political trends could be affecting the market as well. Many urban centers have been investing heavily in gentrification over the past fifteen years to incentivize growth at the city’s core. Cleveland, Pittsburgh, and Indianapolis are massively successful examples of renewed cities that were previously “left for dead.”
However, the Covid-19 pandemic combined with widespread civil unrest in many urban centers is causing hundreds of billions of dollars in new investment to struggle. Families and businesses have stopped moving back into downtown areas, and many projects that broke ground in 2018 and 2019 are now struggling.
Consider how these historical trends could affect your portfolio. Luxury downtown units will have to lower their rates to compete aggressively against existing projects in the suburbs. Be cautious with what you invest and make sure you do a complete market rental survey to identify the most current trends.
- Supply Analysis
Supply analysis focuses on competition among the existing inventory of units in the marketplace. Every community knows how many square feet of office space are occupied, and how many are vacant. Every community knows how many square feet of retail are occupied, and how many are vacant. They’ll also how all each different property size is performing: how many 5000 square foot and below properties are rented? How many five to ten thousand square foot properties? 40,000 to 50,000 square foot properties? 100,000+ square foot properties?
You will know how many of those are vacant merely by pulling a report or checking with your Chamber of Commerce. They will give you the information that you need so that you’re not basing your investment decisions on a “best guess” or getting all of your data from a single source.
At CommercialAcademy.com, we aggregate our data for you, so when you pull a list from one of our desktop applications, the aggregated data comes from dozens and dozens of sources so that it’s verified against other opportunities. With the click of a button, you’ll know whether the vacancy rates are climbing and what the vacant inventory looks like. Our software gives you incredible insights into any potential market. All you need to do is drop a pin on the map, and our software provides you with all the current and historical analytics you need for that area.
Remember, always better to serve demand than to create it.
- In Person Visit
The Virtual Visit we provide our members online is extremely helpful in completing your due diligence modeling your financial scenarios for a property. But ultimately, you should visit the property at least once before acquiring it. There is no substitute for driving around a neighborhood and visiting a property before investing millions of dollars. It is worth a day of your time to get it right.
Pay attention to the neighborhoods, the houses, the offices, the retail shops. How do the people in your market live? Will your space and your tenants provide a service that they need? The consumer expenditure trends provided by our software will show exactly how much people in these communities are spending for all goods and services, how much they’re spending on food at restaurants, car, car repairs, tires, and so on. Think about these consumer trends while you survey the areas around your potential acquisition.
