Real Estate Market AnalysisReal Estate Market Analysis

The Overall Market Forcasts

2

● “Real estate market analysis” refers to analyzing a variety of real estate decisions.

» What size or type of building to develop on a specific site?» What type of tenants to look for in marketing a particular building?» What the rent and expiration term should be on a given lease?» When to begin construction on a development project?» How many units to build this year?» Which cities and property types to invest in so as to allocate

capital where rents are more likely to grow?» Where to locate new retail outlets and/or which stores should be

closed?

Market Analysis : Why do it?

3

● Real estate market analysis usually requires quantitative or qualitative understanding (& prediction) of both the demand side and supply side of the space usage market relevant to some real estate decision.

» Feasibility analysis for a specific site or property

» General characterization of the supply/demand conditions in a particular space submarket.

Broadly Speaking…

A few primary indicators that characterize both the supply and demand sides of the submarket and the balance (equilibrium) between them.

● Vacancy rate

● Market Rent

● Quantity of new construction starts

● Quantity of new construction completions

● Absorption of new space

Variables of Interest in Market Analysis

5

● The concept of “months supply” combines several of these variables to help us understand a market even better.

● Months Supply is the sum of current vacant space in the market and new construction started but not completed, divided by 1/12th of the annual net absorption in the market.

● This measure tells how long it will take (in months) for all of the vacant space in the market to be absorbed, driving the vacancy rate to zero.

– Analysts compare the months supply to the length of time it takes to complete new construction to see if the market can support a new project. If the months supply is much greater than the average construction period, the market is “oversupplied.” Otherwise, it might be time to start a new project in this market.

– Meaningless measure if net absorption is negative

/12VacanctSpace ConstructionSpaceMonths Supply

NetAbsorption

The Concept of “Months Supply”

6

● Define the market carefully along geographic and usage dimensions, recognizing that most metropolitan areas form markets that can be usefully divided into smaller submarkets. The next slide describes how the Atlanta office market can be “divided.”

● Carefully consider the time period to be covered in the analysis– 5 – 10 years into the future is desirable– 3 years is more feasible in most cases

● Recognize the differences between and the benefits of a simple trend extrapolation and a structural analysis

– Trend extrapolation predicts the future purely based on historical trends and patterns– Structural analysis attempts to predict the future by identifying and quantifying the

underlying determinants of market trends.

Some Tips for Market Analysis

7

● In both types of analysis (extrapolation and structural) the steps are:» Inventory the existing supply and evaluate the pipeline.

»Relate the demand sources to the space usage demand.

»Forecast future demand for and supply of space.»Compare the forecasted demand for space with the forecasted supply of space to see

if the market will be “over” or “under” supplied in the future.

● In tight markets (under supplied, landlord market), we expect to see higher rents and lower vacancy rates.

● In loose markets (over supplied, tenant market), we expect to see lower rents and higher vacancy rates.

Understanding a Market Analysis

8

● Imminent Demand– No signs of a dramatic increase in demand on the local level (no industry shift moving towards chicago)– U.S. economy may be “fragile” – oil prices/global economic uncertainty acting on a drag on U.S.

economy – Demand predictions “moderate” at best

● Supply – Lots of slack in the office market (vacancies high and construction continuing)– Rents will not pick up for awhile (good for tenants).– Still profitable to build (new construction is filling up quickly – however rents in new construction still low).

● I would not develop office space in chicago at this time! Interest rates likely to rise (to fight inflation) – decreases returns to owning (along with low rents and high vacancies).

● I would not develop office properties in Chicago at this time! Interest rates likely to rise (to fight

inflation) – decreases returns to owning (along with low rents and high vacancies).

Chicago Forecasts

9

● Retail development is a better opportunity

– Vacancies are lower

– Effective rents have been increasing slightly

● People still consuming in Chicago (both natives and tourists). Residential areas of Chicago are still developing (south/west loop).

● Interest rates will still likely increase – as a result, financing costs will still rise.

Chicago Retail Forecasts

10

● Macro assessment

– Fundamentals “solid” not “strong”– Oil and Inflation (has me worried)– Consumers and Business (going strong)– Government (too much debt)– Net Exports (of no concern to me)

– Business investment is most stable! Lots of capacity to expand – they are hesitant given past mistakes (late 1990s) and oil/political uncertainty.

● Residential Property Markets

– They will come down (either bubble burst or supply adjusts)– Increase in interest rates may quicken this effect– Re-adjustment will occur slowly (it always does)– Will investors adjust to/plan for a higher (normal) interest rate regime?

Other Thoughts….