Forecasting Ownership Benefits and Value: Market Research
Introduction to Forecasting Ownership Benefits and Value
The process of forecasting ownership benefits and value in real estate involves market research and other analytical methodologies to account for various factors that influence real estate values.
Multiple Factors Affecting Real Estate Values
Real estate values are influenced by both locational and non-locational factors:
Needs for Access (Linkages): The critical importance of location, summarized in the phrase "location, location, and location".
Non-locational Factors: These factors vary by property type:
Housing: Characteristics such as style, floorplan, size, and financing options available.
Retail: Aspects including tenant mix, parking facilities, visibility, and dimensions such as bay depth.
Offices: Factors like visibility, design, floor plate size, available amenities and services, and electrical and communication services.
Market Segmentation
Definition: Market segmentation refers to the identification of differences in preferences or needs among various subgroups within a market.
Implications for Market Analysis: Market analysis must concentrate on the relevant market segments to avoid irrelevant data:
Corollary 1: Most standard real estate data may be irrelevant when analyzing a specific market segment.
Corollary 2: The most critical data for analyzing a market segment may not always be available readily.
Challenges Posed by Market Segmentation
Market segmentation is based on empirical research and the grouping of previously collected data.
Important segmentation factors can differ depending on:
Location: Variability in regional characteristics can affect segmentation.
Property Type: Distinct property types may necessitate different analytical approaches.
Available Information: Lag in obtaining relevant data can challenge market analysis.
Implication: No straightforward, universal procedure exists for market segmentation analysis due to the diverse factors involved.
Cycle of Market Research
The research cycle involves several steps to define the market effectively:
Identify competition.
Assess what the customer cares about.
Evaluate research outputs.
Collect necessary data.
Refine research based on findings.
Develop a market-defining story.
Writing a Market Story
Objective: Craft a detailed account of critical market parameters (e.g., future rental rates, sales projections).
Key Components:
Understanding segmentation and data necessity.
Acknowledging simplifying assumptions that exist in any analysis.
Collecting relevant data based on industry literature (e.g., Urban Land Institute).
First Analysis Steps
Determine:
Necessary critical parameters.
The range of critical parameters suggested by data.
Whether the range is narrow enough to be actionable.
If further research is required or worthwhile.
Refining the Research
Identify which factors most significantly influence critical parameters and which information can clarify these factors.
Story Approach vs. Conventional Market Research
Story Approach: Begins at the property level and the relevant market segments, then connects these to the broader economy.
Conventional Approach: Starts from a macro perspective (e.g., global, national, state) and drills down to the property level.
Techniques for Market Analysis
Excluding the Irrelevant
Example: Housing Units
People purchase specific dwellings in respected neighborhoods, not just arbitrary housing units.
Strategy: Collaborate with local real estate stakeholders to derive the pertinent data.
Finding Proxy Variables
Example: Student Apartments
Traditionally classified demand differs vastly between students and non-students, leading to data representation issues.
Strategy: Focus on apartments that contract with individual occupants; such data can act as a proxy for general student apartments.
Using Analogy
Example: Non-student Apartments in Student Areas
The lack of existing non-student apartments requires looking at similar communities.
Strategy: Research other student-centric communities to derive insights into potential demand for non-student apartments.
Three Examples of Property Market Research
Elysian Forest – Planned Unit Development (PUD).
Palm Grove – Proposed office building.
Plane Vista – Proposed apartment expansion.
Reason for Focusing on Development Projects: Similar market analysis questions impact both existing and proposed properties; development investigations often reveal more data complexity challenges.
Elysian Forest Overview
Proposed Characteristics
A mixed-density model featuring:
Various types from single-family homes to townhouses.
Smaller lot sizes for single-family houses.
Common areas and recreational facilities.
Significance: Marks the first PUD in University City with 900 units, illustrating the scale compared to typical developments.
Projected Sales of Elysian Forest
Yearly Sales Forecast
Year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
All unit types | 88 | 212 | 236 | 260 | 104 |
Sales types include condos, townhouses, patio homes, and small-lot single-family homes.
Estimated Sales in University City Housing Market
Yearly Overview:
Year
1
2
3
4
5
Total sales
1,500
1,500
1,550
1,600
1,700
New units
500
600
850
900
1,100
Market Defining Story for Elysian Forest
Product Description: Upper-income, high-density ownership residences.
Customer Profile: Targeting the top 30% of household income, excluding the top 8%, and non-traditional family setups (empty nesters, single parents).
Customer Needs: Important features include good access to work, recreation facilities, and contemporary design.
Competition: No comparable projects present in the market; reference to a local Parade of Homes for competitive analysis.
Data Collection and Analysis for Elysian Forest
Initial Data Sources: Utilize data like the U.S. Census and American Community Survey (ACS).
Table B25118: Tenure by household income.
Table B19131: Family type based on presence of children and income.
Core Market Segments Analysis
Owners' house price percentiles are significant for market segment identification:
Total owner-occupant households: 48,084
Traditional Families, Empty Nesters, and others included as core market segments.
Implications of Analysis for Sales Factors
Sales Projections by Year with a capture rate of 20%:
Year
1
2
3
4
5
Total Target Sales
88
212
236
260
104
Projected Sales at Capture Rate
41
41
43
44
47
Actual Outcome: The project faced challenges, including only building 20 speculative units, which led to non-sales and eventual foreclosure and bankruptcy.
Case 2: Palm Grove Office Complex
Proposed Project Details
Two office buildings each comprising 40,000 sq. ft., designed with a four-floor layout of 10,000 sq. ft. per floor.
Notable design includes a 'glass block' façade located in a mixed-use area consisting of retail, educational facilities, and office structures.
Marked as the largest speculative office project proposed in University City.
Market Defining Story for Palm Grove
Product Features: General-purpose offices without specialized plumbing or medical requirements.
Customer Types: Targeting general-purpose office users with at least 25 employees across various sectors (finance, management, engineering, etc.).
Customer Location: Anticipated tenants are already established within University City, emphasizing a need for local amenities and support services.
Market Analysis Results
Initial canvassing of the business community as a method for data collection. This has advantages but involves challenges concerning time and costs.
Evaluation of U.S. Census data from County Business Patterns indicated few general purpose firms with the required number of employees, leading to project viability questions.
The project faced obstacles, with low demand corroborated by the existence of only one completed building remaining vacant.
Case 3: Plane Vista Apartments
Proposed Expansion Project
The initiative seeks to expand existing facilities from 500 units to 900.
Current project characteristics include varied floor plans and an indoor gym, located near Orlando airport but with noted weaknesses in location and amenities.
Market Defining Story for Plane Vista
Product Description: Standard design intended for broad appeal targeting market-rate apartments.
Customer Profile: Aimed at the top third of the rental income distribution.
Key Market Demand Drivers: Commuting distances to employment hubs characterized the demand for tenants.
Initial Data Collection Parameters
A thorough comparison against other apartment projects concerning job commuting is necessary.
Mapping apartment locations against job concentration areas, identifying any gaps in recent apartment developments.
Conclusion
The cyclical nature of market research is imperative for obtaining reliable real estate insights and forecasts. This necessitates specific methodologies and techniques spanning story construction, market segmentation analysis, as well as scrutinizing market frames to ensure data relevance and project viability.