Chapter 6: Market research Real Estate Principles: A Value Approach

Chapter 6: Market research
Real Estate Principles: A Value Approach
Ling and Archer
Outline


The structure of market research
A case
Top-down



The major approach for real estate market
research is basically a top-down one.
That is, one needs to first understand
macro-level conditions, and then study
micro-level ones. The reason is that without
choosing a right horse, even the greatest
jockey cannot win the race.
Macro-level analyses in real estate consist
of two sets of studies: (1) urban economics,
and (2) market segmentation.
Urban economics


We learned from the previous chapter
that RE is about location, location, and
location.
The value of RE depends on its
linkages to office, school, shopping,
etc.
Market segmentation



Understand the preferences or needs of
market subgroups, i.e., market
segmentation.
In the field of marketing, this is known as
“target market.”
The main concept is that if you develop a
luxury, high-scale subdivision, the size of
the market for affordable housing is simply
irrelevant to your development.
Toll Brothers goes condo






Toll Brothers Inc. is known for building upscale
suburban homes.
It sees growth in city living because of the
increasing cost of traveling and life-style shift.
The target market: young professional buyers and
aging baby boomers.
It is going to build its first Washington-area condo:
7-story, 60 luxury condo units.
Condo sales increased 30% in 2012 with prices of
new units climbing 3.7%.
WSJ, 01/16/2013.
Relevant data?



Market segmentation makes RE
research difficult.
Most RE data are not geared to a
specific target market; they tend to
cover all segments.
For your research tasks, effective
market research is largely a matter of
excluding the irrelevant.
Product-level analysis



Micro-level analyses are about property
themselves.
Do the land use density, anchor tenant, the
size of dwelling, the mix of rooms, quality of
construction, and public facilities seem to be
attractive to our targeted households?
Question: whether we have the right product
(design).
Case: Elysian Forest




In a small college community, University
City, a large national developer introduced
the first planned unit development (PUD),
Elysian Forest.
This PUD had 900 units.
These units were mostly some blend of
attached single family and townhouses.
The lots averaged less than half of the size
of a typical single family size lots prevailing
for University City at the time.
Urban economics


University City was a small college
town with small changes in the size of
population and in urban linkages.
The estimated sales (# of houses) in
the University City housing market for
the next 5 years were: 1500, 1500,
1550, 1600, and 1700, respectively.
Market segmentation


The units were relatively high end; the
lowest-priced unit is higher than 70% of the
house prices transacted in the University
City market.
Since these units are relatively small, the
primary market segment was an upper
income range (70th-92nd income percentile)
that are not traditional full-nest families, i.e.,
families with husband, wife, and children at
home.
Typical Elysian Forest home pair
“Competitive norm” from local homes
Estimating the target market





From U.S. Census, University City had
48,084 households.
There were 10,121 households in the 70th92nd income range.
There were 3,479 households in this income
range that were traditional families.
The target market had a size of 6,642
(=10121-3479) households.
The market share of the target market was
13.81% (6642/48084).
Capture rate


In a normal community where there is
competition among developers,
builders, and sellers of existing homes,
a single project rarely can capture
more than a small percentage of a
given market segment.
Let us assume a capture rate of 20%,
which normally would be optimistic.
Forecast of sales
Year
1
2
3
4
5
All sales
1500 1500 1550 1600 1700
Segment potential 0.1381 207 207 214 221 235
Project sales
0.2
41
41
43
44
47
Target sales
88 212 236 260 104
(Total = 900)
The results



The resulting forecast of sales was so
low that the analysis could stop at this
point, and the project should be
abandoned.
The firm went on to build the first 20
speculative units, but never sold any.
Firm went into bankruptcy.