Fundamental Market Fundamental Market AnalysisAnalysis

Hypothetical Subdivision Appraisal Hypothetical Subdivision Appraisal

Presenter:Presenter:Patrick M. LambPatrick M. Lamb

Lamb Hanson Lamb Appraisal Associates, IncLamb Hanson Lamb Appraisal Associates, Inc

Why is this topic relevant?Why is this topic relevant? Relevance for Bankers:Relevance for Bankers:

• Helps answer TIMING questionsHelps answer TIMING questions Aids in decision making process about timing of Aids in decision making process about timing of

development, (finalizing plat vs. prelim.)development, (finalizing plat vs. prelim.) Aid in cash-flow management issues.Aid in cash-flow management issues.

• Helps determine financially feasible.Helps determine financially feasible. Un-entitled vs. EntitledUn-entitled vs. Entitled

• Specific task that can be requested in the scope Specific task that can be requested in the scope of work…of work…

AgendaAgenda IntroductionIntroduction

• LHL past and futureLHL past and future What we hope to accomplish today:What we hope to accomplish today:

• Present Hypothetical SubdivisionPresent Hypothetical Subdivision• Six-step process of F.M.D.Six-step process of F.M.D.

Heber will present statistical analysisHeber will present statistical analysis Patrick will present methodology & techniquePatrick will present methodology & technique

Q & A, and other related topicsQ & A, and other related topics• Value of entitlements Then vs. NowValue of entitlements Then vs. Now

LHL OverviewLHL Overview(LambHansonLamb.com)(LambHansonLamb.com)

Four Generations- Four Generations- • 1916 (Ross J. Loranger), 1916 (Ross J. Loranger), • 1957 (Berkley A. Lamb), 1957 (Berkley A. Lamb), • 1970 (Michael B. Lamb), 1970 (Michael B. Lamb), • 2010 (Patrick M. Lamb)2010 (Patrick M. Lamb)

Currently 20 Employees (plus 2 to 4 in external network):Currently 20 Employees (plus 2 to 4 in external network):• 2 MAI/SRA or SRWA2 MAI/SRA or SRWA• 1 SRA1 SRA• 8 General Certified (3 MAI Candidates for 2010/2011)8 General Certified (3 MAI Candidates for 2010/2011)• 4 Residential Certified4 Residential Certified• 3 Trainees3 Trainees• 2 Office staff2 Office staff

Employees are Specialized by Property Type & Location:Employees are Specialized by Property Type & Location:• Development Land, Industrial, Office/retail, Multi-family, Special Use, Development Land, Industrial, Office/retail, Multi-family, Special Use,

Residential Form, FHA, USDA, Reviews, Development Projects, Residential Form, FHA, USDA, Reviews, Development Projects, Government…Locations are picked by familiarity and background.Government…Locations are picked by familiarity and background.

Product Types:Product Types:• Self-Contained, Summary, RestrictiveSelf-Contained, Summary, Restrictive• Replacement Reserve Studies for HOA/Condo Associations.Replacement Reserve Studies for HOA/Condo Associations.

Six-Step Process to F.M.D.Six-Step Process to F.M.D. Step 1: Define the subject property Step 1: Define the subject property

• (Productivity Analysis)(Productivity Analysis)

Step 2: Define the user Step 2: Define the user • (Market Delineation)(Market Delineation)

Step 3: Forecast Demand FactorsStep 3: Forecast Demand Factors

Step 4: Inventory & Forecast Competitive SupplyStep 4: Inventory & Forecast Competitive Supply

Step 5: Analyze interaction of Supply & DemandStep 5: Analyze interaction of Supply & Demand

Step 6: Forecast subject CaptureStep 6: Forecast subject Capture

These steps can be achieved by following the diagrams on the next These steps can be achieved by following the diagrams on the next two page…two page…

Step 1: Property Step 1: Property Productivity AnalysisProductivity Analysis

Subject Property OverviewSubject Property Overview

Physical CharacteristicPhysical Characteristic• 5-acre tract, 5-acre tract, ++8,000 to 10,000 sf lots, 8,000 to 10,000 sf lots,

Legal CharacteristicsLegal Characteristics• R4 zone, 16-lot yield (20% deductions for streets, open, etc.)R4 zone, 16-lot yield (20% deductions for streets, open, etc.)• No viewsNo views• Level topographyLevel topography• Utilities in streetUtilities in street• Location:Location:• Established residential neighborhoodEstablished residential neighborhood• Special Note: SR 2 has the most traffic accidents in the State.Special Note: SR 2 has the most traffic accidents in the State.• Proximity to Pass, Everett, and Eastside Employment CentersProximity to Pass, Everett, and Eastside Employment Centers

Overall ProductivityOverall Productivity• Average, typical for areaAverage, typical for area

Subject Market OverviewSubject Market Overview Criteria for analysis:Criteria for analysis:

• Demographics:Demographics: Population Trends: Population Trends:

• Components of ChangeComponents of Change Births, Deaths, Net MigrationBirths, Deaths, Net Migration

Projected Growth over next 5 yearsProjected Growth over next 5 years• Economic Health IndicatorsEconomic Health Indicators

CPICPI Employment StatsEmployment Stats

• Commercial Property OverviewCommercial Property Overview• SFR Housing OverviewSFR Housing Overview

Population Trends: Rate of ChangePopulation Trends: Rate of ChangePopulation

Rate of Change

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

WA State 1.12% 0.94% 1.14% 1.44% 1.91% 1.76% 1.54% 1.22% 1.00%

Sno. Co. 2.08% 1.52% 1.51% 1.15% 1.71% 2.44% 2.16% 1.50% 1.11%

Monroe 3.01% 3.24% 3.34% 2.11% 2.84% 1.57% 0.74% 1.60% 0.97%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Note on Net MigrationNote on Net Migration

Net Migration: Net Migration: the majority of interstate population the majority of interstate population movements are job related. movements are job related.

When local employment turned negative, like much of the When local employment turned negative, like much of the rest of the nation, Snohomish and Monroe loses some of its rest of the nation, Snohomish and Monroe loses some of its “pulling” strength…Negative job growth offers very limited “pulling” strength…Negative job growth offers very limited opportunities for people to relocate to the area. opportunities for people to relocate to the area.

The City of Monroe has a stable employment base provided The City of Monroe has a stable employment base provided by the reformatory. As a result, Monroe tends to fair better by the reformatory. As a result, Monroe tends to fair better than the County as a whole. (Last reports states 9.3% than the County as a whole. (Last reports states 9.3% unemployment). unemployment).

Unemployment TrendsUnemployment TrendsUnemployment Trend

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Sno. Co. 4.57%5.22%7.04%7.12%5.76%5.08%4.48%4.09%5.06%9.13%10.60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Snohomish County Snohomish County Economic Health Indicators- CPIEconomic Health Indicators- CPI

CPI Trends

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Sno. Co. 4.5% 2.0% 2.0% 1.2% 2.1% 3.0% 4.0% 4.7% 1.4% 0.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Commercial Market OverviewCommercial Market Overview 2010 Emerging Trends in Real Estate report, 2010 Emerging Trends in Real Estate report,

(PricewaterhouseCoopers and the Urban Land Institute ).(PricewaterhouseCoopers and the Urban Land Institute ).

• Lackluster economic recoveryLackluster economic recovery

• Rents and occupancies will continue to fall well into Rents and occupancies will continue to fall well into 2010/20112010/2011

• Probably cannot gain much traction until late 2011 or 2012 Probably cannot gain much traction until late 2011 or 2012

• Debt-burdened consumers continue to rein in shoppingDebt-burdened consumers continue to rein in shopping

• Companies delay rehiring while looking to shave occupancy Companies delay rehiring while looking to shave occupancy costs and improve productivitycosts and improve productivity

• Slack demand pushes up vacancies, new projects can’t meet Slack demand pushes up vacancies, new projects can’t meet leasing projections or debt-service obligations.leasing projections or debt-service obligations.

• Values sink well below replacement costValues sink well below replacement cost

• Construction loans are getting extremely expensive Construction loans are getting extremely expensive

• Development doesn’t pencil out when investors can buy Development doesn’t pencil out when investors can buy existing real estate in the bargain basementexisting real estate in the bargain basement

• Metro market prospects decline from coast to coast Metro market prospects decline from coast to coast

• Cap rates in these cities rise close to or above historic Cap rates in these cities rise close to or above historic norms from unsustainably low levels.norms from unsustainably low levels.

• Buyers and Sellers in a StalemateBuyers and Sellers in a Stalemate

• Troubled Assets Remain/Growing on Bank Balance SheetsTroubled Assets Remain/Growing on Bank Balance Sheets

SFR Housing Market OverviewSFR Housing Market Overview Data sourced from NWMLS & New Data sourced from NWMLS & New

Home Trends.Home Trends.

Summary of Discussion Topics:Summary of Discussion Topics:• Review of Average Pricing Review of Average Pricing • Marketing Periods Marketing Periods • Total Unit SalesTotal Unit Sales• Snohomish vs. Monroe (Finished Homes)Snohomish vs. Monroe (Finished Homes)

Average Housing PricesAverage Housing Prices

Average Days on MarketAverage Days on Market

Total Units SoldTotal Units Sold

Step 2: Market Step 2: Market DelineationDelineation

Market Area ConceptsMarket Area Concepts Thought ProcessThought Process

Drive time, neighborhood continuity, featuresDrive time, neighborhood continuity, features

Competitive Boundaries; City of MonroeCompetitive Boundaries; City of Monroe Distinct transportation linkage/nexusDistinct transportation linkage/nexus

• SR’s 522, 2SR’s 522, 2 Distinct proximity to Everett & Greater Eastside Distinct proximity to Everett & Greater Eastside

employment centers make it uniqueemployment centers make it unique Major hub for travel through the Pass Major hub for travel through the Pass Physical Isolated from other cities Physical Isolated from other cities

• based drive timesbased drive times Unique Commercial node/town centerUnique Commercial node/town center Distinct influence of reformatoryDistinct influence of reformatory

City of Monroe- 3 Mile RadiusCity of Monroe- 3 Mile Radius

Consumer ProfileConsumer Profile

These characteristics provide evidence of the types of These characteristics provide evidence of the types of consumers who are typically of the subject market area and consumers who are typically of the subject market area and are consistent with consumers who typically desire a are consistent with consumers who typically desire a housing project like those characterized by the subject housing project like those characterized by the subject subdivision.subdivision.

Political and economic conditions impact ownership ratio:Political and economic conditions impact ownership ratio:• Housing boom, pricing, tax credits, government loan programs, Housing boom, pricing, tax credits, government loan programs,

(FHA, USDA), Interest write off’s, etc…(FHA, USDA), Interest write off’s, etc…

Step 3: Forecast Step 3: Forecast Demand FactorsDemand Factors

Criteria of Demand ForecastCriteria of Demand Forecast Sources: Sources:

• WA Office of Financial Management WA Office of Financial Management • STDB statistical trends, Census data (New census #’s coming soon).STDB statistical trends, Census data (New census #’s coming soon).

Predicted population growth over 5 years = 1,027 people Predicted population growth over 5 years = 1,027 people

Average household size= 2.91 people/HHAverage household size= 2.91 people/HH Determine single-family ownership ratio = 65.2%Determine single-family ownership ratio = 65.2% Segment Demand by:Segment Demand by:

• Affordability Index Affordability Index • What income level can afford these homes?What income level can afford these homes?

Opposite of what a broker does for home buyers…Opposite of what a broker does for home buyers… Typical lending termsTypical lending terms

• $225k to $440K homes, 90% LTV, (30-year/5.5%), 10% costs, 30% PITI (principle, interest, taxes, $225k to $440K homes, 90% LTV, (30-year/5.5%), 10% costs, 30% PITI (principle, interest, taxes, insurance).insurance).

• Income Distribution TableIncome Distribution Table

Affordability AnalysisAffordability Analysis

Consolidated DemandConsolidated Demand

5-year Forecast Demand5-year Forecast Demand

Step 4: Inventory & Step 4: Inventory & Forecast Competitive Forecast Competitive

SupplySupply

SupplySupply Summary of Discussion Topics:Summary of Discussion Topics:

• Resale Market (Existing, vacant homes)Resale Market (Existing, vacant homes)• New Homes for saleNew Homes for sale• Current Lot SupplyCurrent Lot Supply• Unrecorded Lot SupplyUnrecorded Lot Supply

Resale & New Home MarketResale & New Home Market Within the 3-mile radius of the City of Within the 3-mile radius of the City of

Monroe, according to NWMLS…Monroe, according to NWMLS…

35 active listings of existing, vacant, older 35 active listings of existing, vacant, older homes.homes.

2 active listings of new construction 2 active listings of new construction homes.homes.

All are within the $225,000 to $440,000 All are within the $225,000 to $440,000 range of value.range of value.

Currently Selling PlatsCurrently Selling Plats

Unrecorded PlatsUnrecorded Plats

Consolidated SupplyConsolidated Supply

Step 5: Interaction of Step 5: Interaction of Demand and SupplyDemand and Supply

Current supply chain,Current supply chain,if no new plat go to market...if no new plat go to market...

Step 6: Subject Capture Step 6: Subject Capture & Absorption Analysis& Absorption Analysis

Methods of Absorption/CaptureMethods of Absorption/Capture Inferred analysisInferred analysis

• Compare performance of most comparable Compare performance of most comparable competition.competition.

• Compare average performance of competitive Compare average performance of competitive subdivision.subdivision.

• Base it on current subject activity.Base it on current subject activity. Inferred method is subjective, most intuitive, and Inferred method is subjective, most intuitive, and

most commonly used by market participants…yet will most commonly used by market participants…yet will be less reliable in current (turbulent) market.be less reliable in current (turbulent) market.

Equal-Share methodEqual-Share method• Statistical based…can be influenced by Statistical based…can be influenced by

productivity.productivity.

Absorption Comparable- InferredAbsorption Comparable- Inferred

Equal Share CaptureEqual Share Capture There is currently an over supply in the market. Existing There is currently an over supply in the market. Existing

competition should capture 100% of demand for at least 2 competition should capture 100% of demand for at least 2 to 3 years before it is prudent to develop new lots.to 3 years before it is prudent to develop new lots.

Once conditions are right to build, using the equal-share Once conditions are right to build, using the equal-share method for estimating capture, the subject property should method for estimating capture, the subject property should anticipate selling 26% of the units demanded in year 3; anticipate selling 26% of the units demanded in year 3; 16% in year 4; and 12% in year 5…(3 lots will remain to be 16% in year 4; and 12% in year 5…(3 lots will remain to be sold in year 6).sold in year 6).

This indicates a subject absorption of roughly 4 years, This indicates a subject absorption of roughly 4 years, following a 2-year holding period, (6 years total).following a 2-year holding period, (6 years total).

Application to DCFApplication to DCF

Why is this topic relevant?Why is this topic relevant? Relevance for Bankers:Relevance for Bankers:

• Helps answer TIMING questionsHelps answer TIMING questions Aids in decision making process about timing of Aids in decision making process about timing of

development, (finalizing plat vs. prelim.)development, (finalizing plat vs. prelim.) Aid is cash-flow management issues.Aid is cash-flow management issues.

• Helps determine financially feasible.Helps determine financially feasible. Un-entitled vs. EntitledUn-entitled vs. Entitled

• Specific task that can be requested in the scope Specific task that can be requested in the scope of work…of work…

Lamb Hanson Lamb Appraisal Lamb Hanson Lamb Appraisal Associates, IncAssociates, Inc

Patrick M. LambPatrick M. Lamb• (206) 838-1216(206) 838-1216• plamb@lambhansonlamb.complamb@lambhansonlamb.com

Heber Kennedy IIIHeber Kennedy III• (206) 838-1242(206) 838-1242• hkennedy@lambhansonlamb.comhkennedy@lambhansonlamb.com