The planning process is the most important part of a commercial real estate development project. One key components of this process is a market analysis (or location study). At Bullpen, we like to break this analysis in three components:
- Physical Analysis
- Economic Analysis
- Location Analysis
In pre-development, physical analysis includes environmental and land characteristics that will impact the feasibility of a development. Considerations include a soil quality, topography, Phase I (environmental site assessment), climate, water access (city or well), sewer access (city or sceptic), and transportation resources. All these factors can materially impact the cost of construction and size of a new development.
Example 1: Proximity to the ocean and elevation can have a big impact on the type and cost of building foundations. Houston real estate is known to have long-term foundation problems due to its low elevation and the tides in the Gulf of Mexico.
Example 2: Access to public utilities can materially impact the size and cost of a new development. Public utilities can only handle a certain amount of flow daily and might limit the number of units in a new development. Additional units might require a developer pay for costly public utility upgrades.
We consider cash flow modeling and a demand study as part of the economic analysis. City or county permitting department will have data about planned new developments that might compete with expected market share. Key demand considerations:
- Does current market vacancy indicate over-building?
- Do demand projections support the current development pipeline and the development in consideration?
Financial models are the backbone of the planning process. As new data becomes available about building costs and market demand, a cash flow model should constantly be iterated to make sure the development remains feasible.
Some developers make the mistake of believing – “if I build it, they will come.”
The fact is that a multifamily development in a suburban office park will probably perform less well than a multifamily building near the hottest bars and restaurants.
When studying the location of a development, consider:
- The neighborhood’s life cycle – Is the neighborhood in growth, stability, decline, or renewal?
- Population trends – Are residents moving in or moving out?
- Crime – High crime areas reduce market rents.
- Target Demographic – Is your target renter interested in the location of your development?