Chapter 6

Forecasting Ownership Benefits and Value: Market Research

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

6-2

Multiple Factors Affect Real Estate Demand Needs for access (“linkages”)

“location, location, and location”

Non-locational factors Housing (style, design, size; financing available) Commercial (tenant mix and character; parking

facilities) Offices (style, design, floor plate size; amenities and

services; electrical and communications service)

6-3

Market Segmentation

Market segmentation: Differences in preferences or needs among market subgroups

Implication of market segmentation: Market research must focus on relevant market segments

Corollary 1: Most real estate data irrelevant in studying any particular property

Corollary 2: Most important data for a particular market segment may not be readily available

6-4

Challenges Posed by Market Segmentation Market segmentation is an empirical notion:

Cannot be described without investigating first Important facts of segmentation may vary with location

and property type

Research process must recognize this challenge No simple, universal procedure

6-5

The Cycle of Market Research

6-6

Writing a Market Story

All market research is someone’s particular story (Best to write down the assumptions of the story)

Clues about market segments can come from industry literature (Urban Land Institute)

Initial collection of data should depend on the assumptions about segmentation

Object: Estimate critical market parameters (rental rates, sales projections, etc.)

6-7

Writing a Market Story (continued)

First analysis What range of critical parameters are implied by

data? Range narrow enough to be useful? Refinement necessary?

Refining the research What factors affect critical parameters the most? What information illuminates those factors?

6-8

Story Approach vs. ConventionalMarket Research

Story approach begins with property and its market segments, and then builds links to larger economy

Conventional approach goes from the state of the world, to the nation, to the state, and then to the city, and finally to the property

6-9

Three Examples of Property Market Research1. Elysian Forest – planned unit development2. Palm Grove – proposed office building3. Plane Vista – proposed apartment expansion Why look only at development projects?

No difference in market analysis questions between existing and proposed properties

Much more market information for existing properties

Therefore, critical parameters should be clearer for existing properties

Development projects demonstrate more of the challenging data issues

6-10

Elysian Forest: ProposedPlanned Unit Development (PUD) PUD characteristics

Mixed density (single family to townhouses) Smaller individual lots for single family Common areas and recreation facilities

Elysian Forest was bold and big (for University City) First PUD 900 units (several times the size of typical

development

6-11

Elysian Forest: Projected Sales and Market

Projected Sales of Elysian Forest

Year 1 2 3 4 5

All unit types* 88 212 236 260 104

* Condos, townhouses, patio homes, small-lot single family

Estimated Sales in the University City Housing Market

Year 1 2 3 4 5

All sales 1,500 1,500 1,550 1,600 1,700

New units 500 600 850 900 1,100

6-12

Typical Elysian Forest Patio Home Pair

6-13

“Competitive Norm” from Local Parade of Homes

6-14

Typical Elysian Forest Patio Home Cluster

6-15

Market Defining Story for Elysian Forest What is the product? (upper income, high-density

ownership residences) Who are the customers? (top 30% of household

income, but not top 8%; not traditional family with children at home)

Where are the customers? (retirement buyers; “empty nesters”; single parents, other adults (mixed sources))

What do customers care about in Elysian Forest? (good access to work; good recreation and social facilities; distinctive, contemporary design)

What is the competition? (no other comparable projects; Parade of Homes)

6-16

Core Market Segments for Elysian Forest

6-17

Initial Data Collection

Basic source: U.S. Census Detailed Tables Table HCT11: Tenure by Household Income in 1999

(income intervals for the 22% of households targeted for Elysian Forest)

PCT38: Family Type by Presence of Own Children Under 18 Years of Age by Family Income in 1999 (portion of each type of household that is income eligible; portion of traditional households with children at home)

6-18

Core Market Segments

0

99

Hou

se P

rice

Per

cent

i le

92

70

“Tra

ditio

nal”

Fam

ilies

Em

pty

Nes

ters

Sin

gle

Par

ents

Oth

er f

amily

Unr

elat

ed I

ndiv

idua

ls

Owner Occupant Households: 48,084

Core Market Segments for Elysian Forest

10,121

3,479 10,121 – 3,479 = 6,642

Core Market Share

6,642 ÷ 48,084

= .1381

or 13.81%

6-19

Implications of Analysis for Elysian Forest Sales

6-20

Actual Outcome for Elysian Forest

Built 20 speculative units Staffed a sophisticated and expensive sales

center Never sold one unit Project went to foreclosure Firm went into bankruptcy

6-21

Case 2: Palm Grove Office Complex Proposed Project: 2 office buildings:

Each one 40,000 sq. ft., 4 floors of 10,000 sq. ft. per floor

“Glass block” design Located in mixed-use area (commercial, high school,

car dealer, strip offices, no other large offices)

Largest “speculative” office project ever proposed in University City

6-22

Market Defining Story for Palm Grove Office Complex What is the product?

General purpose offices: no special plumbing or equipment for medical or laboratory)

Who are the customers? General purpose office users with at least 25

employees Finance and insurance Nonresidential real estate brokerage/management Engineering and consulting Accounting Computer services and programming Management consulting Market and public opinion research

6-23

A Market Defining Story (continued) Where are the customers?

Already within University City (Few large offices move to the city)

What do the customers want from Palm Grove? Small firms: Street exposure and easy parking Large firms: Employee commuting, proximity to office

support services

Tentative market defining conclusions General purpose office users More than 25 employees Prospective tenants will need to already be in city

6-24

Initial Data Collection

Alternative 1: Canvass the business community Advantage: Could also serve as a marketing effort Disadvantage: Time and cost

Alternative 2: Examine data in Census Bureau, County Business Patterns Advantages: Free and no need to leave your desk Disadvantage: May be dated information

6-25

Initial Market Analysis

From County Business Patterns: Fewer that 10 firms in the office market segments have more than 25 employees

Conclusion: No chance for the project Actual experience:

Only one building completed which has mostly been half vacant

Developer has disappeared

6-26

Case 3: Plane Vista Apartments

Proposed project: Add 400 units to present 500 units.

Existing project: Four years old High quality, wide variety of floor plans Indoor gymnasium with large weight room Diverse mix of tenants Location: Immediately north of Orlando airport Weakness: Perimeter of city; no special amenities

6-27

Location of Plane Vista in Orlando

Disney World

CBD

Orlando International

Airport

Plane VistaApartments

Univ. ofCentral Florida

6-28

Market Defining Story for Plane Vista What is the product?

Standard design, broad appeal; high-quality apartments

Who are the customers? Assume a broad spectrum of working rental

households; upper third of rental household income distribution

6-29

Market Defining Story for Plane Vista continued Where are the customers?

Initial assumption: Persons employed throughout east, south and central Orlando

Influenced by commuting distance to work

What do customers like about Plane Vista? Should be well known from existing project

6-30

Initial Data Collection

Concerned with commuter access of Plane Vista relative to competing apartment projects

Must see: locations of new, high-quality apartments and where jobs are concentrated Obtained apartment locations from dominant

apartment market research firm in Orlando No solid information on job locations

6-31

Constructing Estimates of Job Locations

Available job related data: Property appraiser’s database on 43,000 business

and government properties Square footage of structures Location by geographic coordinates Classified by over 200 land use categories

U.S. Bureau of Labor Statistics website: County employment by NAICS category

6-32

Constructing Estimates of Job Locationscontinued For 20 major categories of land use compute:

Total county employmentper category

Total countybuilding space

÷ =Ratio of space

per worker

For each property compute:

Space ÷Ratio of space

per worker=

Est. no. ofworkers at property

6-33

Where People Work in Orlando

Disney World

CBD

Orlando International

Airport

Plane VistaApartments

Univ. ofCentral Florida

6-34

Initial Market Analysis

Distribution of new apartments shows a discrepancy between initial story and map: Most new apartments are very distant from Plane

Vista Suggests that Plane Vista is isolation from larger

Orlando market

Jobs map shows a similar clustering: Jobs concentrated at airport and on the arterial

leading north Jobs scarce to south, west, and east

6-35

Revised Market Defining Story: “Airport Island” Assumption: 75% of

Plane Vista occupants work on “airport island.”

Future of Plane Vista market depends on“airport island”

“Airport Island”

CBD

6-36

Data Collection: Round Two

Total of jobs on airport island is 25,000 Airport is 60% of total New firms will add 550 jobs to airport island Conclusion: Total job growth on airport island

is about 5.2% per year for next two years; Metro Orlando job growth at 2.5%

Other apartments on airport island Construction permits for other apartments are zero Competitive apartments number about 3,500 units

with 90% occupancy

6-37

Final Market Analysis: Key Assumptions

All else equal, apartment rental rates grow at the rate of inflation

Job growth drives apartment demand on airport island

No other new apartments for two years

6-38

Projections of Critical Parameters for Plane Vista

6-39

Questions about the Plane Vista Analysis Which of the key assumptions seems most

vulnerable to error? What could be done to reduce it’s riskiness? Does the projection of job growth on “Airport

Island” seem safe?

6-40

Some Final Observations on the Plane Vista Analysis

A market analysis is always a story No market analysis is purely numbers Goal: Put together as much objective evidence as

possible before making final judgments Articulate the key assumptions as clearly as possible

(Example: Airport growth was crucial to the Plane Vista story)

Next step: How to translate these into an estimate of value

6-41

A Perspective on Real Estate Value

James Graaskamp: “When you buy real estate, you are buying a set of assumptions about the future”

We have set out our assumptions about Plane Vista

6-42

Some Points about Real Estate Market Cycles

Real estate markets differ in cyclicality Office demand follow business cycles, and is very

cyclical Apartments are less so since households must live

somewhere

Longer construction lead time means more cyclicality

Poorer market information means more cyclicality

6-43

Example of Market Cycles: Apartment Vacancy Rates

6-44

High-Tech Tools for Real Estate Market Research Geographic information systems (GIS)

Made analysis of Plane Vista possible Widely used in store location research

Psychographics Market segmentation research seeks to relate product

preferences to “attitudes, interests, opinions, and values, and to demographics

Used to date in retail real estate, but may also apply to housing

6-45

GIS in Store Location Research:Columbia, SC

6-46

Survey Research

Potentially powerful tool if used carefully Example applications

Coastal Condo design: How many bedrooms do prospective buyers want?

Plane Vista: Where do current residents really work?

Risk: Ending up with meaningless questions or a meaningless sample

Key preventative tools: Obtain review and advice from experienced survey

researchers Pretest

End of Chapter 6