1. Fundamentals of Real Estate Lecture 13 Spring, 2002 Copyright © Joseph A. Petry www.cba.uiuc.edu/jpetry/Fin_264_sp02

2. 2 Types of Feasibility and Market Studies 1. Feasibility Study 2. General Market Study 3. Site-specific Market Study Market & Feasibility Analysis—Ch. 10

3. 3 Feasibility Study – Typically used when considering development projects. – An overview of whether a particular project will meet the objectives of the principles. – Includes all aspects of the project, from conception, construction through eventual sale; from market analysis and sensitivity analysis to financing issues. – Market analysis is therefore a part of the feasibility study. Market & Feasibility Analysis—Ch. 10

4. 4 General Market Study – Frequently conducted for or on behalf of local governments to understand the needs of the community. – Considers demographic trends, real estate uses and needs (types of residences, in what parts of town; commercial, retail trends and needs), infrastructure related issues to support this pace and type of development. Market & Feasibility Analysis—Ch. 10

5. 5 Site-Specific Market Study – Highest and best study Determines the most profitable use for a specific piece of property – as though vacant – as improved – Predetermined use study Determines whether market conditions support a particular use of a site – Marketability study Determines how to best market a project and over what time period. Market & Feasibility Analysis—Ch. 10

6. 6

7. 7

8. 8

9. 9 Market Study Contents—answer the following: 1. Constraints on the development of the project? – (reasons not to proceed: zoning, environmental, access, parking... ) 2. Market size? – How large now, in the future, absorption rate? 3. What prices are appropriate to charge? 4. What types of units are in demand? 5. What sizes should the units be? 6. What amenities or special features should be included? Market & Feasibility Analysis—Ch. 10

10. 10 Market Study Timing: Market & Feasibility Analysis—Ch. 10

11. 11 Market Study Process—step by step approach: 1. Define the problem – What is the scope of the market study, and how will it be accomplished 2. Identify and evaluate project constraints – Zoning, utilities, parking, community issues, access, environmental, topographical 3. Delineate the market area or areas 4. Estimate demand for the project – Most critical and perhaps difficult step – Estimate future population, employment, income – Primary, secondary data (Geographic Information Systems; census; chamber of commerce) – Generally accepted analysis techniques then applied (e.g. LQ, EBA) Market & Feasibility Analysis—Ch. 10

12. 12 Market Study Process—step by step approach: – Economic Base Analysis (EBA) – A means of forecasting future employment. – Divide employment into basic employment (see LQ below) and non-basic employment. Forecast changes in basic employment, then use multiplier to obtain overall employment change, then ratio of employed to overall population to get change in population. – South Research Park goal is to create 5,000 new jobs. If ratio of basic employment to overall employment is.95, then total jobs created would be 5,000 + 5.000*.95=9,750. If employed to total population is 1:3, then total population change is 29,250. You could then apply to need for housing: 2.5 per housing unit=11,700 additional dwellings. Then to rental vs. purchase, etc. Market & Feasibility Analysis—Ch. 10

13. 13 Market Study Process—step by step approach: – Location Quotient (LQ) – We used basic industries to forecast changes in employment. To find out which industries are basic, we could use LQ. – LQ=% of employment in industry X in community/% of employment in industry X for US overall. – If LQ>1, then basic industry, if LQ 1 as identifying your areas “export industries”. – LQ for Seattle industry=16.65%/14.20%=1.17 Market & Feasibility Analysis—Ch. 10

14. 14 Market Study Process—step by step approach: Market & Feasibility Analysis—Ch. 10

15. 15 Market Study Process—step by step approach: 5. Establish supply conditions in the market – Building permits data, professional associations, web-sites 6. Correlate supply and demand and make recommendations. – How will this project do versus the competition (competitive market survey)? – How will this project compete (location, price, amenities.. )? – What capture rate do you assume, is that reasonable? Market & Feasibility Analysis—Ch. 10