Chapter 7

1. Chapter 7 Forecasting Ownership Benefits and Value: Market Research

2. Multiple Factors Affect Real Estate Demand • Needs for access (“linkages”) • “location, location, and location” • Non-locational factors • Housing (style, design, size; financing available) • Commercial (tenant mix and character; parking facilities) • Offices (style, design, floor plate size; amenities and services; electrical and communications service)

3. Market Segmentation • Market segmentation: Differences in preferences or needs among market subgroups • Implication of market segmentation: Market research must focus on relevant market segments • Corollary 1: Most real estate data irrelevant in studying any particular property • Corollary 2: Most important data for a given market study often not readily available

4. Challenges Posed byMarket Segmentation • Market segmentation is an empirical notion: • Cannot be described without investigating first • Important facts of segmentation may vary with location and property type • Research process must recognize this challenge • No simple, universal procedure

5. Real Estate Market Research as a Cycle Create Market Defining Story Competition? Product? Refine Research Collect Initial Data Customer? Customer Cares Where is Customer? No? End Research Sufficient? Evaluate Results Yes?

6. Writing a Market Story • All market research is someone’s particular story (write out underlying assumptions, especially when it is difficult) • Clues about market segments from industry literature (Urban Land Institute) • Initial collection of data • Object: Estimate critical market parameters (rental rates, sales projections, etc.)

7. Writing a Market Story (continued) • First analysis • What range of critical parameters are implied by data? • Range narrow enough to be useful? • Refinement necessary? • Refining the research • What factors affect critical parameters the most? • What information illuminates those factors?

8. Story Approach vs. ConventionalMarket Research • Story approach begins with property and its market segments, and then builds links to larger economy • Conventional approach goes from the state of the world, to the nation, the state, and then the city, to the property

9. Three Examples of PropertyMarket Research • Elysian Forest – planned unit development • Palm Grove – proposed office building • Plane Vista – proposed apartment expansion • Why look only at development projects? • No difference in market analysis questions between existing and proposed properties • Much more market information for existing properties • Therefore, critical parameters should be clearer for existing properties • Development projects demonstrate more of the challenging data issues

10. Elysian Forest: ProposedPlanned Unit Development (PUD) • PUD characteristics • Mixed density (single family to townhouses) • Smaller individual lots for single family • Common areas and recreation facilities • Elysian Forest was bold and big (for University City) • First PUD • 900 units (several times the size of typical development

11. Elysian Forest: Projected Salesand Market * Condos, townhouses, patio homes, small-lot single family

12. Typical Elysian Forest Patio Home Pair

13. “Competitive Norm” from Local Parade of Homes

14. Typical Elysian Forest Patio Home Cluster

15. Market Defining Story for Elysian Forest • What is the product? (upper income, high-density ownership residences) • Who are the customers? (top 30% of household income, but not top 8%; not traditional family with children at home) • Where are the customers? (retirement buyers; “empty nesters”; single parents, other adults (mixed sources)) • What do customers care about in Elysian Forest? (good access to work; good recreation and social facilities; distinctive, contemporary design) • What is the competition? (no other comparable projects; Parade of Homes)

16. Core Market Segmentsfor Elysian Forest All Households in University City Owner Occupant Households Rental Households 99 92 Core Market Segments 70 House Price Percentile “Traditional” Families Unrelated Individuals Single Parents Empty Nesters Other family 0 In terms of %

17. Initial Data Collection • Basic source: U.S. Census Detailed Tables • Table HCT11: Tenure by Household Income in 1999 (income intervals for the 22% of households targeted for Elysian Forest) • PCT38: Family Type by Presence of Own Children Under 18 Years of Age by Family Income in 1999 (portion of each type of household that is income eligible; portion of traditional households with children at home)

18. Initial Market Analysis • Determine income range that best approximates the target 22% • Determine owner household “market share” within each income interval for traditional families • Using result from step 2, determine percentage of owner households in our core market segments

19. Households in the Core Market Segments for Elysian Forest

20. Core Market Segments for Elysian Forest Owner Occupant Households: 48,084 10,121 99 92 Core Market Share 6,642 ÷ 48,084 = .1381 or 13.81% Core Market Segments 3,479 10,121 – 3,479 = 6,642 70 House Price Percentile “Traditional” Families Unrelated Individuals Single Parents Empty Nesters Other family 0

21. Implications of Analysis for Elysian Forest Sales

22. Actual Outcome for Elysian Forest • Built 20 speculative units • Staffed a sophisticated and expensive sales center • Never sold one unit • Project went to foreclosure • Firm went into bankruptcy

23. Case 2: Palm Grove Office Complex • Proposed Project: 2 office buildings: • Each one 40,000 sq. ft., 4 floors of 10,000 sq. ft. per floor • “Glass block” design • Located in mixed-use area (commercial, high school, car dealer, strip offices, no other large offices) • Largest “speculative” office project ever proposed in University City

24. Market Defining Story for Palm Grove Office Complex • What is the product? (general purpose offices: nospecial plumbing or equipment for medical or laboratory) • Who are the customers?: General purpose office users • Finance and insurance • Nonresidential real estate brokerage/management • Engineering and consulting • Accounting • Computer services and programming • Management consulting • Market and public opinion research

25. A Market Defining Story (continued) • Where are the customers? • What do the customers like about Palm Grove? • Small firms: Street exposure and easy parking • Large firms: Employee commuting, proximity to office services • Tentative market defining conclusions • General purpose office users • More than 25 employees • Prospective tenants will need to already be in city

26. Initial Data Collection • Alternative 1: Canvass the business community • Advantage: Could also serve as a marketing effort • Disadvantage: Time and cost • Alternative 2: Examine data in Census Bureau, County Business Patterns • Advantages: Free and no need to leave your desk • Disadvantage: May be dated information

27. Initial Market Analysis • From County Business Patterns: Fewer that 10 firms in the office market segments have more than 25 employees • Conclusion: No chance for the project • Actual experience: • Only one building completed which has mostly been half vacant • Developer has disappeared

28. Case 3: Plane VistaApartments • Proposed project: Add 400 units to present 500 units. • Existing project: • Four years old • High quality, wide variety of floor plans • Indoor gymnasium with large weight room • Diverse mix of tenants • Location: Immediately north of Orlando airport • Weakness: Perimeter of city; no special amenities

29. Univ. ofCentral Florida CBD Plane VistaApartments Orlando International Airport Disney World Location of Plane Vista in Orlando

30. Market Defining Storyfor Plane Vista • What is the product? (standard design, broad appeal; high-quality) • Who are the customers? (assume a broad spectrum of working rental households; upper third of rental household income distribution) • Where are the customers? • Initial assumption: Persons employed throughout east, south and central Orlando • Influenced by commuting distance to work • What do customers like about Plane Vista? • Should be well known from existing project

31. Initial Data Collection • Concerned with commuter access of Plane Vista relative to competing apartment projects • Must see: locations of new, high-quality apartments and where jobs are concentrated • Obtained apartment locations from dominant apartment market research firm in Orlando • No solid information on job locations

32. Total employmentper category Ratio of spaceper worker Ratio of spaceper worker Est. no. ofworkers at property Total countyenclosed space Space ÷ ÷ = = Constructing Estimates ofJob Locations • Available data: • Property appraiser’s database on 43,000 business and government properties • Square footage of structures • Location by geographic coordinates • Classified by over 200 land use categories • U.S. Bureau of Labor Statistics website: • County employment by NAICS category • For 20 major categories of land use: • For each property:

33. Where People Work in Orlando Univ. ofCentral Florida CBD Plane VistaApartments Orlando International Airport Disney World

34. Initial Market Analysis • Distribution of new apartments shows a discrepancy between initial story and map: • Most new apartments very distant from Plane Vista • Suggests that Plane Vista isolation from larger Orlando market • Jobs map shows a similar clustering: • Jobs concentrated at airport and on the arterial leading north • Jobs scarce to south, west, and east

35. Assumption: 75% of Plane Vista occupants work on “airport island.” Future of Plane Vista market depends on“airport island” CBD “Airport Island” Revised Market DefiningStory: “Airport Island”

36. Data Collection: Round Two • Total of jobs on airport island is 25,000 • Airport is 60% of total • New firms will add 550 jobs to airport island • Conclusion: Total job growth on airport island is about 5.2% per year for next two years; Metro Orlando job growth • Other apartments on airport island • Construction permits for other apartments are zero • Competitive apartments number about 3,500 units with 90% occupancy

37. Final Market Analysis: Key Assumptions • All else equal, apartment rental rates grow at the rate of inflation • Job growth drives apartment demand on airport island • No other new apartments for two years

38. Projections of Critical Parameters for Plane Vista

39. Some Final Observations on the Plane Vista Analysis • A market analysis is always a story • No market analysis is purely numbers • Goal: Put together as much objective evidence as possible before making final judgment • Articulate the inevitable assumptions as clearly as possible (Example: Airport growth was crucial to the Plane Vista story) • Next step: How to translate these into an estimate of value

40. A Perspective onReal Estate Value • James Graaskamp: “When you buy real estate, you are buying a set of assumptions about the future” • We have set out our assumptions about Plane Vista

41. Some Points about Real EstateMarket Cycles • Real estate markets differ in cyclicality • Office demand follow business cycles, and is very cyclical • Apartments are less so since households must live somewhere • Longer construction lead time means more cyclicality • Poorer market information means more cyclicality

42. High-Tech Tools for Real EstateMarket Research • Geographic information systems (GIS), (made analysis of Plane Vista possible) • Widely used in store location research • Psychographics • Market segmentation research seeks to relate product preferences to “attitudes, interests, opinions, and values, and to demographics • Used to date in retail real estate, but may also apply to housing

43. GIS in Store Location Research:Columbia, SC

44. Survey Research • Potentially powerful tool if used carefully • Coastal Condo design: How many bedrooms? • Plane Vista: Where do current residents really work? • Risk: End up with meaningless questions or a meaningless sample • Key preventative tools: • Review and advice from experienced surveyors • Pretesting

45. End of Chapter 7