In Part I of our posts about due diligence, we discussed domains of information gathering about the asset itself from a high level. Be sure to save enough time for this stage of the property acquisition process. Any risks that could potentially affect your ability to generate cash flow from the property should be thoroughly analyzed and reviewed.
What is a Market Analysis?
In Commercial Real Estate, “market analysis” refers to the type of due diligence that analyzes trends and forecasts future cash-flow potential.
In general, you can think of a market analysis as having two main parts: a Local Market Analysis and an Industry Market Analysis.
Local Market Analysis
A local market analysis makes use of various factors–demographic, economic, and socioeconomic–within the local area to help you understand the future profitability of an asset. Statistical data such as local employment rates, retail vacancy rates, median rental prices, should be accounted for in your business plan before building or buying.
The market analysis helps reveal critical information about local supply and demand so that you can set realistic expectations about your property’s revenue-generating potential.
Remember that a local market analysis provides you with a snapshot of information at a given time. You can use the Desktop Due Diligence software available at Commercial Academy to gather all the demographic information you need to know about a local market.
However, be sure to consider how your new acquisition or build will affect the market data. As an investor, you will need to analyze the data to understand what is actually happening in that particular market.
For example, if you choose to build a massive retail property in the middle of a zone with low retail vacancies, your new property will drive the vacancy rate up and the demand down. In this case, let’s say the existing market vacancy is 4%, and your new property increases the market vacancy to 10%. This will in turn reduce the market price for leases, at least temporarily until your new property is “absorbed” into the local market.
Knowing that the standard underwriting guideline for financing is market vacancy, not property vacancy, will equip you with more accurate forecasting information when it comes to your investment.
Factors like this are not complicated to understand—they simply need to be accounted for when forecasting the revenue yield of your property. All of this begins with your local market analysis.
Industry Market Analysis
Related to the local market analysis is the “Industry Market Analysis.” Whereas the local market analysis examines the immediate context of a specific property, the industry analysis analyzes trends within the broader economic picture. This could involve national or even international trends.
Returning to our retail development example, the market vacancy rate will help you understand the valuation of your new property build, but the industry analysis would help you understand that consumers are trending away from big-box department stores toward more personalized, experiential purchasing experiences.
Regardless of what industry you are targeting with your purchase—be it commercial office space, industrial, multi-family living–you should investigate all industry trends that could affect the future valuation and desirability of your asset.
Desktop Due Diligence Solutions
At CommercialAcademy.com, we’ve developed a multi-function due diligence tool that allows you to project your annual property operating finances based on different scenarios revealed during your due diligence period.
Our CommercialHub Software Suite creates forward-looking projections up to 100 years in the future to help you forecast and predict timelines, progress, and profits from acquisition to exit. You can calculate projections based on different scenarios to determine the impact of potential market changes on your assets.
Our software platform will allow you to track every deal that your pursuing and manage the cashflows in your portfolio. It will show you the effects of reducing your vacancy rates, increasing rents, and investing in capital improvements so you can get a good understanding of what your property valuation could look like.
It even contains a Commercial Real Estate data feed aggregated from all the major associations in office, retail, apartments, warehouse, industrial, storage facilities to show you what’s going on currently in the market.
There are so many more features included in the software suite. It is the perfect tool to manage opportunities and build cumulative knowledge on multiple assets, and it’s an ideal solution for doing your due diligence during this quarantine period.
To learn more about all the tools, upcoming LIVE Events, and online courses available to help YOU become a successful Commercial Real Estate investor, visit CommercialAcademy.com today.