How to carry out market analysis for commercial real estate investment


The key to a successful commercial real estate investment, is thorough market analysis. Here are some tips on how to conduct market analysis for choosing a commercial real estate property

If you are considering investment in commercial real estate, obviously you would like to do thorough ‘market analysis’ for the investment and may not know how to do it. There are various kinds of data out there which may or may not be relevant to you. It will make sense to dig out the data that is relevant to you and then put some serious work in determining whether the property will be feasible and profitable to you or not. Here we look at some of the most important aspects of ‘market analysis’ for commercial property investment purposes.

 

Getting the market area right for the property under consideration

The very first step in market analysis is defining the market area for the property that you are considering to purchase. The market area is the immediate geographic area that the property will cater to. In other words, it is the geographic area the property will service. This has special relevance for retail, hospitality, warehousing and banking industries. The market area will largely be dependent on the type of property and also the business that is carried out from there. In case of a departmental store, the market area will be the immediate vicinity; let’s say a 2 kilometer radius. A mall will have a larger market area, let’s say a 5-10 kilometer radius.

Once you decide on the market area, it is important to look at the economic and demographic data available for that market area. How many people are living in the area and what is their income levels, education levels, household size, age, marital status, and employment rates, are some of the things you should look at. Sometimes, the area is developing and more and more construction is happening and the population in the market area is likely to go up. Investment in such an area may be very profitable. On the other hand, if the area has seen a lot of development and there is no likelihood of the population in the area to go up, then the investment in commercial property there can give stable returns but not exponential returns.

 

Gathering the data

There will be multiple sources of data for any given place; be sure you get the latest data and from the most reliable source. The data by the government is often reliable. However, there are various organisations, NGOs and statistical firms that can have very good data and insight into a particular market. You will have to see which of these is active in the area where you are contemplating investment. There can be firms or organisations that provide data for a fee. Depending on how big your proposed investment is, you can consider buying data from these companies. When you are buying data, go for the firm or company which has most of the following data sets:

1. Interest rates

2. Household income

3. Real estate sales and leasing figures

4. Unemployment rate

5. Number of public schools

6. Daily traffic figures

It is also important to see the number and the kind of similar businesses already present in the market area. If there is already a departmental store in the market area, then your investment in a property for a departmental store may not fetch a very high return. Similarly, if there is already a bank or a warehouse in the market area then your investment in similar properties may not be a very bright idea. However, it does not necessarily mean that you should stay away from the investment there just because there is already a competing business in the location.

 

Analysing vacancy rates and net absorption figure in the market area

Vacancy rates in the determined market area is also a very important factor to look at. If the area is suffering from high vacancy rates for commercial property, then even a demographically enticing place may not be a very good idea for investment. High vacancy rates means even your property may not be able to earn good rentals. An area with a vacancy rate of up to 5 per cent is considered safe for investment but anything above that is not considered very good. Net absorption is another aspect to take into account. Net absorption is the change in the quantum of leased space in the given market area over a given period of time. If xx amount of space is taken on rent in the given period of time and yy amount of space is vacated by tenants in the same time period, then the net absorption will be xx-yy. The net absorption can be both positive as well as negative. A negative net absorption is again a sign of lower probability of good returns from your investment. For net absorption figures, you may have to rely on a good broker of that area. If your investment is big enough, it makes sense to pay for the data.

 

Demand and supply dynamics in the market area

There are companies that have specific data related to retail sales per square foot and the average and precise rentals per square foot in any given market area. They also have historical data on demand and supply of real estate, especially commercial real estate for various areas. They can also be a source for current sales volumes and rents for competing businesses in the market. They can be tapped for better analysis.

 

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