Market and competitive analysis is the demographic and economic analysis of variables that affect the site and the market in which it competes. The first level of this analysis is the local economic analysis (LEA) to see if the local economy is growing, stagnant or declining. Then the property market in which the subject property competes is evaluated on both the demand and the supply side of the market. In this context the site is compared to its competition and the relative effect of space users on these properties is evaluated. Finally, the analysis progresses from the LEA and the property market to an evaluation of the specific property and its intended use.
Some of the types of analysis that may be performed inside the market and competitive analysis are as follows:
- Supply and demand (gap analysis)
- Economic base analysis
- Shift-share analysis
- Real estate cycle analysis
All those who make decisions regarding real property rely upon real estate market analysis at various levels of sophistication.
- Developers must understand factors such as rent levels, absorption, construction costs, underserved trade areas (gaps), and the cost of capital in order to make intelligent decisions about when, where and the “Go/No Go” development decision.
- Investors in existing properties also need to know trends in rent levels and absorption because this will impact both future rents as leases roll over and also the speed at which any vacant space will be leased.
- Lenders will want to know that the assumptions made to estimate the loan value is supported by a market analysis. When external funding is used, decisions cannot be made on intuition. The viability of the project must be explained and unequivocally documented. Risk must be assessed and documented. Real estate market analysis provides the information required by those making the financial decisions.
- For those who lease, due diligence includes analysis of current market rents and likely future trajectory of rents. It informs how much to spend on rent and for how long they should contract. It is also location-specific. Rent projections and risk at one location may differ substantially from another location, even if nearby.
- Due diligence for real estate asset purchasers relies upon evaluation of current market values and the likely future direction of market values.
- Government officials can benefit from real estate market analysis to anticipate infrastructure needs that result from new development, and to coordinate economic development initiatives.
The basis of financial analysis hinges on the real estate market analysis; the numbers are not pulled from the air, they come from the real estate market analysis.
Real estate market analysis seeks answers to questions such as:
- Where are new projects likely to emerge, and what effect could they have on investment decisions?
- Which submarkets are most defensive from the perspective of supply and demand balance?
- Where are the best opportunities considering risk for the most profitable investment?
- Where are the opportunities within mature, emerging, or active markets for specific product types? Where are the attractive market niches?
- What specific locations and real estate asset types are likely to experience the greatest level of appreciation and/or be most resilient if the market turns?
All of these questions are answered in the context of political events and societal change. The real estate decision must satisfy conditions of market and competitive analysis, location and site analysis, political and legal analysis, and financial analysis. Evaluation of financial strategy depends upon both the data from real estate market and/or trade area, and financial data arising from markets geographically near or remote from the project site.
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