REE_CH_5_RE MARKET NALYSIS (1)

REAL ESTATE ECONOMICS (RPV6051)
CHAPTER FIVE
REAL ESTATE MARKET ANALYSIS
[PP 1-47]
By Zekarias M.
[Lecturer & PhD Candidate]
Addis Ababa, Ethiopia
07/15/2024 By Zekarias M.[Lecture & PhD Candidate] 1

CHAPTER OUTLINE
Learning outcomes
Guiding Questions
Basic Concepts
Market vs Feasibility Analysis
Components of the Study
Steps in Market Analysis
Determinants of Analysis
Keys to Market Analysis
Economic Condition
Summary
Learning Outcomes
After completing this chapter, you will be able to:
Understand definitions and basic concepts of market analysis,
Distinguish between market analysis and feasibility analysis,
Map the components of market and feasibility analysis,
Map the steps in market study and analysis,
Assess the strengths and limitations of analysis,
Identify the determinants of market analysis,
Analyze the key factors affecting market analysis,
Examine the economic conditions for effective market analysis.

Guiding Questions
What is market analysis?
Why we conduct market analysis?
What is the difference between market and feasibility analysis?
What are the process of market analysis?
What are the components of market analysis?
What are the key determinants of market analysis?
For whom market analysis is made?
How market analysis can be used effectively ?

Basic Market Analysis Concepts
Analysis is an elusive process as whether investor, appraiser, or student,
understanding the essential points to consider is difficult course.
In this chapter, we introduce the central methodology as a starting point
for deciding whether an real estate investment makes sense or not.
Therefore, we will assess the following three core questions:
Who uses market analysis?
Why market analysis is made?
How raising capital for investment is based on solid analysis?
Finally, we’ll illustrate how raising capital for investment must be
premised on a basis of solid analysis.

Basic Market Analysis Concepts…
Definition of Real Estate Market
Real estate market describes “the interaction of individuals who
exchange real property rights for other assets such as money”.
Specific real estate markets are defined on the basis of property
type, location, income-producing potential, typical investor
characteristics, typical tenant characteristics, or other attributes
recognized by those participating in the exchange of real property.

Market analysis is regarded as a broad overview of supply and demand attributes
for property, including site-specific and local factors and current as well as
emerging competition [Kahr and Thomsett,2005).
Market analysis is a process of sensible observation.
Studies that focus on the market include:
Analysis of local economies: Studies the fundamental determinants of
the demand for all real estate in the market.
Market analysis: Studies the demand for and supply of a particular
property type in the market.
Marketability analysis: inspects a specific development or property to
assess its competitive position in the market.

Studies that focus on individual decisions include [Kahr &Thomsett,2005:2)
Feasibility analysis: Appraises a specific project as to whether it is
likely to be carried out successfully if pursued under a proposed
program. May relate to developability. Often related to financial feasibility.
Investment Analysis: Evaluates a specific property as a potential
investment. Usually incorporates specific financing in the analysis, and may
evaluate alternative financing options to select most appropriate financing
or consideration of income taxes.

In market analysis, three phases are involved: collection of data, analysis, and
recommendations.
It starts with data, which may be found from source: primary & secondary
Data is mainly obtained from demand and supply side including biases.
On the demand side, the data and analyst includes:
 Population, number of households, and demographic characteristics.
Income, affordability, and purchasing power.
Employment, by industry or occupation.
Migration and commuting patterns.
Other factors.
The data collection process should be believed of as competitive intelligence.
On the supply side, the following are included:
Inventory of existing space or units
Vacancy rates and character of existing property inventory
Recent absorption of space, including types of tenants or buyers
Projects currently under construction and proposed
 Market rents/sale prices and how they differ by location and quality
Features, functions, and advantages of existing & proposed projects
Terms and concessions.
Information sources may include newspapers, Census and private databases,
tax rolls, advertisements, and maps-in other words, any source that reveals
something of interest.
Direct interviews should be included in data-gathering process
Market analysis is generated by virtually everyone in real estate:
Private Sources of Analysis
Appraisers
Brokers (leasing and sales)
Developers
Investors
Asset managers
Lenders
Public Sources of Analysis
Urban planners
Economic development consultants
Public agencies.

Data & hence information sources used in market intelligence are many.
Market analysts may use various data sources, broadly identified as:
Primary data sources
Secondary data sources
Other specific sources include:
Newspapers,
Census and private databases,
Advertisements,
Tax rolls[records],
Real estate service,
Demand-Supply trends
Maps that reveals some business interest.
Who uses market intelligence?
One effective method for identifying market analysis is by taking
note of which group or groups use the analysis.
These may include: developers/builders, investors and lenders, designers,
marketing managers, local governments, appraisers, assessors, tenants and
occupants, sellers, purchasers, landowners, and property managers.
Within the context of identifying the end-user, it is important to note that the
market analysis data feeds into the process of feasibility analysis.
The two phases: market and feasibility are directly affected by the analyst’s
conclusions about market area.
After data collection, defining location and physical space make up the area.

Having gathered data, the next step is to analyze data.
For instance, residential zoning and commercial clusters may more accurately
define the trade area.
In performing set of analytical tasks, real estate valuation is the more
concentrated analysis of local economics.
The study of supply and demand is viewed as specific region or city.
While market analysis is associated with economic conditions affecting valuation
of a particular property, analysis of local economics applies to all real Estates.

Market Versus Marketability Analysis
There is distinction between market analysis and marketability analysis.
Marketability analysis studies the relative competitive position of a project
within the existing market & anticipated market trends in the near future.
These studies: market analysis, local economics, & marketability are broad-
views of market studies, two more types of analyses are specific to a
project.
The first is the feasibility analysis and the 2nd being investment analysis

Market Versus Research Analysis
Market analysis and research are not isolated functions occurring
only at initial stages of projects but are best utilized throughout:
“Market analysis is a key part of the initial feasibility study for areal
estate project, but it does not end there. Market research continuously
play an important role in shaping the project throughout its dev’t &
mag’t phases. Market analysts are commonly consulted for
repositioning strategies after a project up & running & the developer
realizes that absorption does not meet projections. As many types of
market analysis exist as variations in development projects, stages of
development, and interest being served” [Kahr and Thomsett, 2005:6].

Market Study and Feasibility Study
Market study is always begin by answering specific questions that may be
raised by lenders or equity partners, or by investors themselves.
Such survey is obligatory in defining market area itself. That area definition
phase should be the first step.
Real estate researchers suggest that “all market analysis should focus on
three basic areas of evaluation:
the site or market area
the demand for the product, and
the supply of comparable products”

The issues of site plus supply and demand analysis lead us to a
series of critical questions:
1. Is there a market demand for such improvements and how readily will
the development be sold on the market? [Mkt availability].
2. Is there adequate demand for the improvements existing or proposed
so that assumed vacancies will be low? [Mkt adequacy]
3. How will the dev’t be paid for and what is the source of funds? [Mkt
investment ]… implying Market supply.
4. What competitive developments exist and how should this project be
designed, planned, and marketed to effectively compete?
5. What relevant factors affect our determination of the market?

The 1st three questions shortly deals with respectively about the existence of demand,
adequacy of demand, and supply conditions.
Demand adequacy studies about population demographics, income, employment, and
growth forecasts.
Additional market analysis beyond supply and demand analysis may include price
segmentation and coordination with marketability.
For example, development concept in the context of the market, current available sites
versus what end-users want & market absorption analysis.
We recognize these three forms of supply and demand, involving tenants, real estate
acquisition/sale, and financing.
The last two market study will also include the following questions, concerned with
marketability rather than with the conditions of the market.

These five questions: involving questions of supply and demand—are at
the heart of the market study.
In comparison, a feasibility study focuses on financial aspects of a
proposed development or acquisition.
While the financial aspects of market analysis and valuation may be
viewed as coldly factual, several room for interpretation is likely.
Expressing this in market terms, “three possible courses of action exist in
real estate feasibility:
i. a site in search of a use,
ii. a use in search of a site, and
iii. an investor looking for a means of participation.”

Feasibility Study
A business consultant explained this aspect of feasibility:
“The first goal of a feasibility study or business plan should be to determine whether
or not the potential entrepreneur should actually take the drop . . . the default
conclusion should be that the [project] will not succeed. Thus, the plan must
convince potential investors [and] lenders . . . that the [project] will succeed.”[P,9]
Feasibility study deals with the matching between various elements of supply and
demand, expressed in terms of cost and benefit.
It is broader in scope as various elements are complex; but, the primary areas include:
i. What is the target market for the proposed development?
ii. What comparable properties are on market & how will competition affect pricing?
iii. What is the performance level and market demand of the competition?
iv. What level of financial performance is projected?
v. What risks are faced in investing in this project (for equity partners) or in lending money to finance
this project (for lenders)?
Components of Market & Feasibility Analysis
While there is no fixed format for the study document, the typical market
analysis will contain the following items:
i. Letter of transmittal
ii. Table of contents
iii. Nature of the assignment
iv. Economic background
v. Description of the property and proposed development
vi. Competitive developments
vii. Market potential
viii. Conclusion of marketability
ix. Addendum
x. Exhibits
However, this format only provides a guideline. Actual format should be
dictated by materials needed to make the particular case.
Feasibility Analysis
Are feasibility studies accurate?
Not necessarily b/se markets are highly dynamic and unforeseen
changes can have devastating effect on future operational performance.
With all these interrelated factors (positive and negative) occurring in a highly
random pattern, predicting the future income and expense of a hotel is like
determining the Dow Jones average three years from now.

Step in the Market Analysis
There are a series of processes in market analysis. The cited ones are:
Step 1:Determine market area
Among others, four aspects of the market analysis are designed to ask critical questions, i.e.
the market area, location, demand, and supply elements favor proceeding, then they’d
make sense to others.
This task requires tools like GIS, its application and analytical skills.
Additional market analyses may also be required beyond the geographic location of a
perceived market. Some guidelines:
Identify the region not only in geographical terms, but also where the market exists,
The market area for tenants may be drawn from the immediate area & from other areas,
Any project’s analysis should include concern for how the new project will affect existing projects,
Be aware of the d/ces between artificial boundaries and built boundaries like freeways that cut through
neighbors, thus defining or restricting a market area
Be aware of historical patterns of development based on ethnic or cultural ties,
Be cautious in making undocumented assumptions concerning the appropriate size of a development or
the size of an existing market area. By Zekarias M.[Lecture & PhD Candidate]
07/15/2024 24
Step in the Market Analysis
Step 2:Evaluate the market site[area]
Studying the market area provides only broad view of a region can’t
capture varying features from one site to another site on the same area.
A site evaluation include comparative analysis-site to site of physical
properties such as topography, shape of the land, surrounding
uses, and proximity to important features[ e.g. transformation, land use]
Example: zoning and design urban planning wrt. best land use .

Step in the Market Study[Analysis]
Step 3:Determine Market Demand
Market demand includes user related internal and external factors.
The practicality of real estate depends on demand for the property.
Demand is a factor of purchasing power, price, preference, quality, size of land,
site, zone, and access to social services.
 Thus, it may go beyond the common definition of market demand
Thematically, this analysis may include the economic, social, political,
environmental[locational], and institutional factors.
Temporally, both the current demand and future demand analysis shall be
projected so as to adjust the investment. In this case, we’ve monthly, quarterly,
semiannual and annual periods.
Steps in the Market Study[Analysis]
Step 4: Determine Market Supply
Complementarily, supply exists only when demand exists.
Producers/ investors/firms enter in to real estate market if and only if there is
adequate demand for the property.
Real estate market supply may include the conventional market supply factors
plus other factors.
There are three specific kinds of real estate supply: already built, under
construction, and proposed. Each of these has a different level of reliability, and
the variables should be discounted by the analyst.
Generally, given the demand, the producers capacity, the quantity and quality of
all required inputs, the political, legal, and institutional factors influence the
supply of real estate.

Steps in…. Step 4: Determine Supply
In residential developments, antigrowth conflict is often associated with
questions of supply.
Antigrowth forces may argue that there is an adequate supply of housing and it
is not necessary to construct more.
For commercial developments, the question of supply is equally complex. A market study
would review buying trends, traffic patterns, logistics, and site-specific questions in order to
convince the reader of the study that a mall, for example, would succeed at a specific site.
Demand for either residential or commercial developments also needs to include a study of
the trend in net absorption or, in the case of single family homes, real estate sales trends in
recent months.

Steps in…. Step 4: Determine Supply
Net absorption can be expressed as the square footage of available
space over time, modified by vacancy levels.
 More specifically:
Net absorption= space occupied – space vacated + space
demolished – construction of new space

The Value of The Feasibility Study
The market study is intended to examine conditions of the local market and
to demonstrate, by way of compelling supply and demand factors, that the
development proposal is justified.
While a feasibility study questions the financial aspects of the proposed
development: tax features, cash flow, and likely profit or loss—in order to
show potential lenders [equity partners] that the numbers will work.

Market Analysis Users & Their Objectives

Using Analysis Effectively
We may analyze markets using theories alone; however, we make
these analyses powerful tools for decision-making only when we
are able to express our findings in practical terms.
 This chapter provides an overview of the analytical process.
It explains how analysis becomes an integral part of your business plan
and its underlying assumptions; how the scientific method is applied to
the study of real estate markets; and how to employ facts in the context
of three distinct versions of real estate supply and demand.

Factors Affecting Market analysis[P 30]
Local market variables
Site-specific attributes
Fill the remaining factors?

Market Analysis and Business Planning
In some respects, the combined market and feasibility studies serve the
same purpose as the more generalized business plan.
But, there are important differences, when real estate is involved.
A. The market is well-understood:
The business plan usually is aimed at moving product or service to a well-
understood market. A food manufacturer sells to grocery store chains and
identifies the shopper as its primary market.
Financial service firms target families needing investment and insurance advice.

B. The product itself may also be a variable:
If we begin with a project concept, its very feasibility will be
determined by the market study, followed by a test of the financial
assumptions.

C. Market factors, either economic or demographic, may change:
 In the business plan, a starting point often grows from a well-
understood, unchanging economic and demographic data set.

The Keys to Market Analysis: Supply And Demand
At the heart of the business plan are budgets, goals, and market definitions.
This is a well-understood concept, and the process of preparing and finalizing a
business plan may invigorate management and employees.
At the heart of market analysis is the dominant economic consideration: supply
and demand .
While the premise of supply and demand in a free economy is well known as a
basic premise, the application of these forces in real estate market analysis is
more complex.

The Keys to Market Analysis
In fact, market analysis needs to consider three different forms of
supply and demand: These are in relation to ;
the obvious market form (supply and demand for real estate);
the associated rental SS & DD (tenant demand versus rental supply); and
capital (financing & associated interest rates or equity capital from
investors).
Supply & demand in real estate-to the extent that inv’t value is affected-
must be reviewed not on any national average basis, but on a local basis.

The Nature Of Economic Conditions
In any review of the real estate market—and remembering the three distinct
forms of supply and demand—we need to remind ourselves that economic
conditions are continually changing-i.e. dynamic nature.
 This is easily overlooked.
The market is in a continual cycle of change,
Today’s condition is never unmoving,
We must keep the three supply and demand variations in mind,
No one knows for certain the current cyclical direction or timing of the market,
No investment decisions should ever be made under pressure,
In listening to advice or opinion, we should always consider the source .

Sustainability Analysis[REMS]
Social Equity Institutional Effectiveness
[Inclusion, Equity] [result-based]
REMS
Economic Feasibility Environmental

[Efficiency, productivity] sustainability[ green, viable]

References
Kahr, J., and Thomsett, M. C. (2005). Real Estate market Valuation
and Analysis; John Wiley & Sons, Inc., Hoboken, New Jersey.

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