The purpose of strategic analysis is to determine whether there is an adequate current supply of real estate of a particular type in a particular place to meet demand, and if not, whether there might be a profit opportunity for those who wish to add supply.
Strategic analysis is the overall process of determining whether the market will support a particular use at a particular site so that it is profitable. The difficulty with defining the Strategic analysis process is that it is not a step-by-step linear process. Rather, it is an iterative process that moves back and forth among several different steps to hone the analysis to the point where a decision can be made.
The strategic analysis process can start with any of the following activities:
▪ Determine the perspective
▪ Determine buyer, developer, user, broker, or other
▪ Determine the property type: retail, office, apartment, industrial, or other
▪ Examine the geographic study area
▪ Inspect the subject property and evaluate its attribute
Regardless of the perspective (user, investor, lessor or lessee) or the property type, all real estate decisions must meet four feasibility tests to ensure a positive outcome. Sound real estate decisions require assessing market and competitive analysis, location and site analysis, political and legal analysis and financial analysis. The strategic analysis process is an iterative process among the four components. The process continues until a “Go/No Go” decision is reached.
Each type of analysis asks the real estate decision maker to answer a central question:
- Market and Competitive Analysis: Does the forecasted supply and demand relationship for that property type in that location indicate success?
- Location and Site Analysis: Will the existing or proposed design of the improvements along with the attributes of the site demand the maximum market income available?
- Political and Legal Analysis: Are the political climate and the legal ramifications conducive to a successful project over the foreseeable future?
- Financial Analysis: Does the projected financial picture indicate sufficient profit or return commensurate with the risk to satisfy the future wealth expectations of the owner or user?
In market and competitive analysis, if projected demand for a particular type of real estate within the relevant geography exceeds total supply, the positive gap is identified and a profit opportunity for investors may exist. In other words, the analysis might indicate support for the proposed development or acquisition. However, political considerations and/or site limitations may increase the risk of achieving a successful development, and the risk must be internalized into the financial analysis.
Financial analysis depends upon the magnitude of profit opportunity. Here the site specific analysis becomes integrated with national and international financial markets. National and international financial markets are affected by political events and societal change. Also, the profit opportunity is accompanied by a level of risk which must commensurate with the expected return. Investors must be convinced that the return they expect to get is sufficient to compensate them for the risk that they will incur. Of course their actual return may be more or less than expected-that is the risk. Hence, the financial analysis component and the other three components of the model are necessarily interdependent, each feeding back on the other, and each necessary for the business decision. The site specific development or acquisition decision is therefore inseparably linked to capital markets.
Because the business decision is integrated into the political and societal fabric, that fabric can give rise to gaps between supply and demand and can also eradicate gaps. Political considerations and societal issues are so pervasive that no strategy can be evaluated, and no decisions be made, outside the context of political and societal issues.
Because the business decision is also geographically site and use specific, the supporting analysis must have a geospatial component to it. Geospatial, also known as geospatial data or geographic information, is the data or information that identifies the geographic location of features and boundaries on Earth, such as natural or constructed features, oceans and more. Spatial data is usually stored as coordinates and topology, and is data that can be mapped. Spatial data is often accessed, manipulated or analyzed through geographic information systems (GIS).
Since “location, location, location” is essential to the evaluation of a real estate asset, then geospatial is a necessary part of real estate analysis and asset management.
When the market and competitive, location and site, political and legal, and financial analyses have been performed, the information from these analyses is integrated and evaluated in the strategic analysis. The goals and objectives of the owner/investor/user enter the analysis. Alternative opportunities are investigated and evaluated, and relevant decision criteria are specified and considered. The end result of this strategic analysis is a “go or no go” decision about the use on the property and/or the property itself and/or the market in which the property would compete.
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