Valuation and Appraisal

Part 3 Market
130 intraurban transportation
streetcar (fixed -rail transit) for
the
value to be close to thenCB b~ model was formulated. ~
travel results in less ng at the time the change in urban
9, Faster curve. More trip the most profound forces bring g
bid -rent 13. One of
a lesser slope of the one by
valu~bee mostehouteholdsownd
close to the CBD more cure with he same
sope.
novelty in 19155
commuters will cause a hig cost) ( were a
e travel
(since it doesn't Chang about 1930. factories was greatly
Higher-density housing curve to be space for horizontal
leaves the slope
at a lower level
unchanged,
since it ena
but
h~T
can
ri~m°
a11ow
~ág~
the

mill cause tha

14. The demand
accelerated
for
in the 1920s by the
development of assembly-
forecasting
hig Y line production. facilities wereáá
live closer to the CBD.A more valuable, thus an increase
proximity to the CBD to be
sible before the
structures and retail
15. Modern office development of air-conditioning fluo-
+ownership Benefits
in the slope. always outbid a per-
commutes on foot will rescent lighting. place
10. A person who
son who commutes by
car for space near
commuter's cost of traveling
downtown eateruse
is faz' gr
16. The essential
activity is that
feature of a convenience good or central
households, in acquiring it, g
o to the closest and Value: Market
the pedestrian form was conceived
ll. The Burgess
in an era when
concentric model of urban
the dominant form of transpor tw
oods within 17,
source.
The location tendency of comp
arison activities is to
of convenience
cluster,
activities is Research
the principal method of moving g whereas the location tendency
railway and
factories was by elevator. to disperse.
slice" pattern in the HO
12. The radial or "pie be explained by
the dominance of
urban form probably can
LEARNING OUTLINE
OBJECTIVES Introduction
Built Environment: Market Research: Slipperiest Step in Real Estate
C. J., and A. Wilson. Reshaping the Island After reading this chapter you ~iZl be able to:
Kibert, Economics. Washington, DC: Valuation
markets oil Ecology, Ethics, and 1 Define market segmentation and give three Market Segmentation
Boon real estate ReahEstate Market Analysis.
Handbook f Press, 1999. Estate Mar- examples for real estate markets.
Clapp, John M. Prentice Ham 1987.. Business Geography and New Real Real Estate Market Research as Storytelling
Grant I. Press, 2002.
Upper Saddle River, NJ: ton. Urban Econom-
Thrall,
York: Oxford University
The Beginning Point: AMarket-Defining Story
DiPasquale, Denise, and
William C• ket Analysis. New 2 Identify the sequence of steps in the cycle Initial Collection of Data
River, NJ:Pren- systems: in many varia-
Markets. Upp Saddle geographic information
ics and Real Estate For exposure to wwWESRI•com -~
of real estate market research. First Analysis
lice Hall, 1996. and Piet the website of ESRI: Refining the Research
Miller, Jim Clayton, tions and levels, visit
Geltner, David, Norman G• Invest- provider of GIS systems). , 3 Identify five questions for writing a "market- A Reverse to Conventional Market Research
Real Estate (ESRI is a principal
Eichholz. Commercial Analysis2007 defining story." Three Examples of Market Research
Thomson South-Western,
ments. Mason,OH: Market Research Example 1: Elysian Forest; a
4 Locate data sources on the Internet for Planned Unit Development
county, MSA, and census tract level Market Research Example 2: Palm Grove Office
household demographics, detailed local Complex
employment, and the composition of Market Research Example 3: Plane Vista Apartments
Some Final Notes on the Process of Market Research
business by county.
Improving One's Capacity in Real Estate Market
5 Identify at least two applications in real Research
Market Projections and Real Estate Cycles
estate market research for geographic
Some Tools of Market Research
information systems.
Geographical Information Systems (GIS)
Psychographics
6 Explain what role psychographics can have
Survey Research
in real estate market research.

7 Identify at least two possible applications

of survey research in real estate market
research.
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 133
Part 3 Market Valuation and Appraisal
132 facilities, and services, targeting different types of customers. Office buildings have their
own set of nonlocational features that differentiate properties, including floor plate size,
amount and character of parking, provisions for electronics and communications systems,
considered the
examined cities. We determine a citya adequacy of common areas, available amenities and services, nature of existing tenants,.
In Chapter 5 we Further, we examined inet forces ht
decline or growth. and other factors.
caused their
matrix or networ ofa specifi poP~
form,. resulting in a urbane conomic m~x tosthe vlue ective
to relate the
remains; however,
about bridging that gap through real estate m~ forces at work Concept Check
This chapter is between the P trns and
construct a plausible relationship property that give value. to its
here is to flows to an individual
matrix and the cash 6.1 Líst three kinds of factorsthat affect the value of an urban property.
within the urban
menta-
owner.
difficult by
We first note a crud arket research kstmade e
peciallye
the hallen ge of m r
tion. Unfortunately, Our conclusion is that real estate market research must always be thoughiul and
because. the se ebtate market resérch
market segmentation onstant For his reason real flexible. Rather than having a fixed procedure, the research must depend on the problem,
rely on as dem-
stable. This leaves little to outline that process and
not as a form but as a process. We and adapt to unfolding discoveries as the research goes forward. In short., rather than a for-
must be understood mula, real estate market research is a process,. which we try to illuminate here.
cases.. Then 11e éestte
onstrate it through three discusshthree It lseapplicable to rt
market research. Fina y, ~° e -and survey
cycles pose for S chograpbics,
geographical information systems (GIS),. p Y Market Segmentation
market research:
research. The nuances in the preferences or needs of market subgroups are generally termed market
segmentation. The notion of market segmentation., long established in the realm of mar-
Slipperiest Step keting for beverages, cars, and most retail goods, has been slower to penetrate the analysis
Market Research: of real estate markets.
The importance of market segmentation is this: To the extent that it exists in a market,
The message
examples of real estate market "disasters:' market analysis should focus on the relevant market segments for the property involved.
numerous
Chapter 5 opened with This point has a profound corollary: Most data about most real estate are irrelevant to a
that one cannot val wellXas {
of that chapter is linkages'h discusedtin Chapter S,a given market study. A second corollary, demonstrated in the examples below,. is that the.
includes the urban effects .
This context certainly dampen or accentuate the
controls that may constrain the use of a site or most important data for a given market study often are not readily available, and must be
land use approximated by creative use of other data. It is not far off the mark to say that effective
uses vary
of economic forces. puzzle of market research. Not only do land real estate market research is largely a matter ofexcluding the irrelevant.2
the requirements as
But there is still more to but they vary by nonlocational A problem with market segmentation is that it is an empirical notion;, íts most
important to them,
by the set of linkages res~d~en~cleedepen~d significant facets are not known without actually researching the relevant markets. More-
example, the features required of a hheVdweling, teelmix of
well. For size of they over, the important facets of market segmentation may vary with market type and location.
household. The hous-
level of the target between low-income and high-income Thus, the challenge in real estate market research is to recognize market segmentation in a
factors may differ
rooms, and a host of other manageable but effective manner. This is a primary goal of the approach to market analysis
difference is not merely ~ bacter ~S demandlassmaller
ing. And the the kY n r dootheyllsmPly for elaborated below..
pool in Instead, they may look
merely demand a smaller wealthy households.
neighborhood than
country club in their social needs.
meeting their leisure and
completely different means of preference are not by ~~~~
differences in housing than Concept Check
But these qualitative have different housing. p érencesl
couples certainly
Single persons or working nces than wor ng 6.2 Before effective real estate market research can be achieved, relevant
ret~ id ho ~hahp time, prosper-
families with children, and eferences~ ppear torvary with must be examined.
households. Adding to the diffi y
householdspat will accept a th
~d-soh
context. For example, the portion of renter ion of homebuy
ity, and
apartment varies from one commeá and ommunity.
has v Wih tme become even more
insist on a three-car garage nonlocational needs among gis can Concept Check
realms,. of neighborhood SóPPng
In nonresidential analysts believe that markets
example, some
important. For character that enábles QTY ~ Sopthe 6.3 The presence of market segmentation in real estate gives rise to a
centers" have awinner-take-all
centers and "power have long-term viability. valuable guide in sorting through available market and property data,
amarket-dominating anchor tenant to advantage• ~
facilities with likely to reflect that which is
center witha "winning" anchor tenant is Hilton, or Holidaó g
value of a Marriott,
industry each of the major chains., such as designs, supp
the hotel price levels, room
lengthy menu of hotel names with differing
offers a
stores, o~ 2. This was a point frequenfly made by the brilliant real estate academic and analyst James Graaskamp.
retailers as discount
centers dominated by such "big box" (See footnote 14.)
shopping
1, "power centers" aze Home Depot.
Best Buy,Lowes, or
"category killers" such as
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 135
Appraisal
Part 3 Market Valuation and
134 3. Where are the customers?(What is the market area?)
~to~ell'na -
,,, ~~+ ~ ~~a;~~+ Research as 4. What do the customers care about?(What aspects of the product?)
cannot be simply facts. Market 5. Who are the competitors?
analyst realizes that market analysis
The thoughtful real estate decisions of all the persons
d as the sum of all the economic www.uli.orq We argue that an important beginning of any real estate market research should be
behavior, after all,is as complicate When a household
market, either directly or indirectly. to actually write a page or more story of this nature. The discipline of writing it cannot
potentially participating in a given somewhere else, or to wait a The single richest source of writ-
market. But when they elect to buy help but clarify the researcher's understanding of the market involved. Further, because
buys a home,they affect the If they could have come to ten material and other resources
to rent, they also affect the market. market research is, after all, the researcher's story of what is happening and will happen,
while, or to sell and move, ar ever account for all of the on real estate design and
indirectly affect it. No data set will it is important to the ultimate user to understand the writer's underlying assumptions. The
that market, but did not, they what is a market analy- development.
add up to market behavior. So more difficult it is to write this story, the more important it is to do it. Below, we will show
decisions of these kinds that ultimately or simplified assumprion s and
based on the analyst's "model," examples of such stories.
sis if not facts? It is opinion, story. This view of market
works. We will call this the analyst's Important help in writing amarket-defining story can come from industry literature.
logic, about how the market the most creative and challenging aspect of
makes it Clues about potential market segmentation can come from information on various types
research as creating a story arguably begins by tentatively defining
is suggested in Eachibit 6-1. It of properties and their characteristics. Aparticularly rich source is the list of publications
real estate analysis. The process relevant data to examine the
This is followed by collection of from the Urban Land Institute.3 Other good sources are listed at the end of this chapter.4
the market "story" involved. of results, or market
Then comes an initial evaluation
market and test the initial definitions. market definitions
followed by the refinement of the
assessment. Frequently this may be point, very specifically focused
relevant data. Sometimes at this
and further collection of continue through multiple
important. This iterative process may
survey research may become additional useful information . 6.5 It is recommended that the first step in evaluating any property
will yield no
rounds until further refinements is to write:

or Initial Collection of Data

market research as a form
6.4 Rather than approaching real estate The market-defining story should serve to identify the needed data in the analysis. It also
the task makes it a
formula,the conditional nature of should identify as irrelevant a vast amount of commonly available data. However,little can
be said in advance about which is which. For this reason we simply show examples of what
data are relevant in the three "stories" that follow, and what data are at hand in each case.
AMarket-Defining Story
The Beginning Point: construct a market defining
beginning point of the market research process is to
The First Analysis
answer the following quesrions:
"story." This story needs to
With initial data in hand, one makes a first attempt to draw conclusions about the market
product under consideration?
1. What is the real estate questions. Commonly the critical questions will be about market parameters, that is, key
(target market)?
2. Who are the customers numbers that characterize the current condition and trend in the mazket. For rental markets
these typically include current occupancy rate, future occupancy rates, and rental rate growth.
Research
Exhibit 6-1 The Cycle of Market
For buyer markets they include current and projected sales rates. Thus,one will ask what range
of these critical parameters appears to be consistent with the data that have been assembled.
For example, with subdivision or condominium projects, the critical question will concern
how many units will sell(at a given price)in each month,quarter, or year of the study horizon,
that is, the period covered by the study. For an operating property such as aparhnents, rental
offices, or rental retail, the critical quesrions will be about projected occupancy level and rental
' Create rate growth over the study horizon. ff the initial efforts have been successful, the analyst will
market-defining be able to identify boundaries (never a single number)for these critical parameters.
story
What is the
What is the
product? Refining the Research
competition?
Collect In some cases, the initial projections will answer the question at hand, and the analysis is
Refine
data complete. However, if the "story" is unconvincing or the range of projected parameters is
research What does the
customer care Who is the too wide to answer the question at hand, the analysis will need to be refined.
about? customer?
R. Where is the ~
End 3. More recent examples of IJLI publications include Adrienne Schmitz and Deborah L. Brett, Real Estate
customer?
1~ No? Market Analysis, (2001) and Richard Peiser and Anne B. Frej, Professional Real Estate Development.• The ULI
Guide to the Business, 2nd ed.(2003). Many older publications of LTLI aze excellent as well.
Yes? Evaluate
Research 4. In addition to descriprive information, the literature mentioned contains a voluminous amount of material
~.~. `~~`" results
sufficient? E on methods and formats for market reseazch in real estate. While we agree with the potential value of much of this
material, we simply caution that its relevance depends altogether on the nature of the case involved—hence our
focus on defining the mazket at the outset.
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 137
and Appraisal
Part 3 Market Valuation
136
rs are important to Exhibit 6-2 Characteristics of Elysian Forest and the University
analy sis, the analy st will better understand what facto
After the first dingly. However, City Housing Market
s. He or she may need to modify the research accor
the market proje ction d suggest that the
me clear that addit ional research will not help. This woul
it may also beco
very uncertain value.
property is highly risky, with Projected Sales of Elysian Forest
Year 1 2 3 4 5
entional Market Research Patio Homes,Townhouses,
A Reverse to Conv that it starts at the
t abou t our "sto ry" approach to market research is Condos, and Small-lot
An importan t poin cterize the property and
s outw ard —tha t is, our initial step is to chara Single Family 88 212 236 260 104
property and move et analysis has been to
et, wher eas the conventional approach to mark
its specific mark sis starts with national Estimated Sales in the University City Housing Market
ral to speci fic. Whil e conventional market analy
move from gene our story approach first
and work s down by steps to the property, Year 1 2 3 4 5
or world condi tions ger bridge outward
prope rty and its mark et in order to identify a stron All Sales 1,500 1,500 1,550 1,600 1,700
seeks to defin e the to be concerned about
condi tions . We know bette r what macro conditions New Units 500 600 850 900 1,100
to the macro market and the factors that
estab lishe d a clear er understanding of our target
if we have
drive it. The first two dramati-
appl y our story appr oach to three diverse cases.
Below, we tion, revealing real
signi fican ce of recognizing market segmenta
cally illustrate the could have prevented
smal l amou nt of mark et segmentation analysis local sales were at prices above the Elysian Forest minimum price, while 8 percent of
cases where a tive to convey the
estat e disas ters. The final case is cast as a narra all local sales were at prices still higher than those of Elysian Forest.)5
unmitigated real apartment feasibility
mark et rese arch proc ess. It is an application to an 3. As a planned unit development, 15 to 20 percent of the land in Elysian Forest was
quality of the seemingly standard
more stan dard exam ple. Even so, it illustrates that reserved for open space and recreation areas.
problem, and is a much more revealing 4• The site and location were very typical of the area, with no outstanding visual or
mark et analy sis can have surprising twists that lead to
real estate locational advantages.
analysis.
The Market-Deining Story. Since Elysian Forest was very different from the custom-
ary housing stock of University City at the time of its introduction, careful attention to the
Concept Check
a
research traditionally starts with
6.6 Whereas real estate market ed here begi ns with
perspective, the approach argu
Exhibit 6-3 Elysian Forest and Its Competition

ned Unit
1: Elysian Forest, a Plan
Market Research Example
Development
City, the first planned unit
in a smal l college community, University
Som e years ago developer. As discussed
introduced by a large national
development, Elysian Forest, was ential development that diffe
rs
ter 4 a plan ned unit development(PUD) is a resid for varia ble
in Chap respects. First, it allo ws
l subdivisions in several
from traditional residentia y, attached single family,town
-
ty, enco mpas sing some blend of detached singl famil
e
with out side-
densi individual lots, often
nd,it typically has smaller
houses, and apartments. Seco and recre ation facilities. Elysian
Forest
, but inclu des a varie ty of common areas units , was of
yards and with 900
bold , innov ative , and sophisticated project for the city,
was a
unprecedented scale. et and of Elysian Forest.
nsions of the local housing mark
In E~chibit 6-2 are basic dime the following:
res that disti nguis hed the houses of Elysian Forest include
Featu
typical single family lots (Elysian Forest: Ttivo cla~ster homes with common wall)
Fore st aver aged less than half the size of
1. The lots of Elys ian of the lots planned for
for Unive rsity City housing at the time, with most
prevailing and Exhibit 6-4.)
or townhouses.(See Exhibits 6-3 5. One of the most valuable types of information about local housing mazkets is the volume of sales, by
zero-lot-line cluster homes betw een the 70th and 92nd
of Elys ian Fore st were in a price range price. Unfortunately, in too many cases, neither local real estate organizations nor local governments bother to
2. The hous ing units 30 percent of all
of the Unive rsity City sales distribution. (That is, only report this data, even though they aze easily compiled from property transaction records.
percentile
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 139
Appraisal
138 Part 3 Market Valuation and
market-defining story seems important. We approach the story using the five questions
Exhibit 6-3 Continued Elysian Forest and Its Competition listed earlier:
1. What is the product? We have noted that it is mostly cluster homes and townhouses
built at relatively high density. The project is relatively "high end" since the lowest-
price unit is higher than 70 percent of the house prices transacted in the University
~ ~~ City market. The prices projected for Elysian Forest compare to about 22 percent of
~ ~ .c . the residences being sold at the time in University Ciry.
2. Who are the customers? We must ask about the buyer income range, and about the types
D ~~ \
!~~ of households likely to be interested in Elysian Forest. Remembering that the units are
relatively small, with a high cost per square foot of floor space, it becomes clear that a
•-~'_ buyer can get much more house and yard by purchasing from the more conventional
•~ _ `- - - OCJ~ —~--
.~ ~ -- stock of houses in University City, such as shown in Eibit 6-3. Further, the city is
~_.~
relatively small, with low density, and has a tradition of large private yazds and houses.
\_
As a tentative story, we assume that families with children and pets are likely to prefer
the more conventional residences where they can obtain more space and more distance
from neighbors for the money. Adopting this assumption for the moment, we conclude
that the primary market segment for Elysian Forest is an upper income range represent-
ing 22 percent of the housing market in terms of price, and is comprised of households
that are not traditional "full-nest' families.6 Thus, the market might include childless
couples,"empty nesters," retired couples, single adults, and possibly single parents.
3. Where are the customers? There are multiple possible market segments. With University
City's fairly young population, most retirement buyers are likely to come from outside
the city. In contrast, another market segment, empty nesters, is likely to come mainly
from within the city because the city is predominantly a university and medical ecorr-
omy where most persons moving into the city for employment at higher-income levels
are young faculty or medical residents rather than empty nesters. The remainder of
market segments involved could come from either outside or inside the city.
4. What do the customers care about in Elysian Forest? We adopt the story that buyers
Homes" of the time)
(The competitive standard: Two "Parade of want good access to employment, if employed, good recreation and social facilities,
and distinctive, modern design.
5. What is the competition? At the time, there was no other project in the community
comparable to Elysian Forest. The closest competition might be the homes offered by
Cluster of Elysian Forest
Exhibit 6-4 Example Patio Home local builders in the annual "Parade of Homes"(see Eibit 6-3) since many of those
homes tended to be relatively up-scale, with "state-of-the-art" special features.

Initial "Story." What "story" does this initial tour through the market-defining questions
give us? In summary, we tentatively assume that the primary market includes ownership
households buying in the top 30 percent of the housing price range, but excluding the high-
est 8 percent. The main market segments are households other than traditional families
with children at home. Finally, other than retirement households, the market is mainly
local. Thus, we need to try to see how large the prospective market segments might be in
University City.
Exhibit 6-5 suggests our "story." Out of the entire set of households in University
City, we want to know what portion are in the Elysian Forest price range and also are in
one of the target nontraditional family household types. If we start with the entire set of
households and then exclude renters and traditional families, and finally exclude those
households outside the target price range, we will have isolated the core market segments.
We will turn to data of the U.S. Census for this purpose.

Initial Collection of Data. To estimate the size of the core market segments identi-
fied above, we need information about the composition of owner-occupant households in

~•"-.-.
6. Families with husband, wife, and children at home.
(Typical cluster plan.)
 I Chapter 6 Forecasting Ownership Benefits and Value: Market Research 141
and Appraisal
Part 3 Market Valuation
140 Exhibit 6-6 Critical Numbers for Computing Elysian Forest "Market Share"
Elysian Forest
Exhibit 6-5 Core Market Segment for

City Owner Occupant Households

All Households in University 48,084
ggin percentile
Rental Households
Owner Occupant Households
ggtn Percentile 92nd
a~
92nd c
70th
m Core arket Seg ents v
N
c
v 70th N
~ U
N N c3
0.. N á
N '~ ~
U
cc i N >
~ ~ ~ ~
á O
a~ ~ ~~ a 2
N
7 c6 ~
~
O ._
O Z d .,_
2 Q ~ ~
t 0 Percentile
~ W in O ~
Elysian Forest "Market Share" for Core Market Segments = 6,642+ 48,084 i
0 Percentile
_ .1381 or 13.81 percent

ins this, and we can access

Community Survey(ACS)conta
University City. The American go to the access page for the
ACS ~,
the U.S. Census website we 2. Determine the market share of the core market segments. We divide the result from
it through the Internet. From to acces s detai led popul ation
There we specify that we wish Step 1 by all owner households (from our census tables, once more) to get our core
just as we did in Chapter 5.~ selec t our count y.$ segment market share, 13.81 percent, as shown in Exhibit 6-6.
ty(MSA)level, and
and housing data at the coun to attem pt a first evaluation. We will do it 3. From local market information, project the total housing unit salesfor University City
we are ready ~~~~~~~~~~~~~qov
With the census data. at hand,
The source of virtually all housing marketsfor the nextfive years. For this projection we will rely on historic
in four steps: ~
nts. As is common in volumes of sales, tempered with judgment. We might obtain the data from the local
numb er of hous ehol ds in the core market segme detailed data on local household
1. Dete rmin e the questions, and we must tease real estate Multiple Listing Service (MLS), from local appraisers, or from the local
resea rch, the data do not speak directly to our demographics.
real estat e tables of the ACS Survey property talc appraiser's office.
We searc h thro ugh existing data, in our case
out answ ers. we hopefully begin to 4. For each year, estimate the sales to the core marketsegments ofElysian Forest. We sim-
ates that we think might somehow relate, and
1-Yea r Estim that no census table is ply multiply market share for our core market segments(13.81 percent)by the projected
itute for what we need. We quickly realize
const ruct a subst we can get are tables sales of all housing units for each year. This gives us the volume of homebuyers by
hous ing price s to household types. The closest
going to relat e have to do. We find a year that could be interested in Elysian Forest. T'he results appear in E~chibit 6-7.
hous ehol d inco me to household types. This will
relating owne r of owner households
l table that enabl es us to compute the number
parti cular ly usefu percentile.9 We will take
abov e the 74th percentile and below the 95th
with inco me of the households that -.
of owne r hous ehol ds as a rough approximation
this 21 perce nt owner households in
a mark et for Elysi an Fores t. However, this includes all we 6.7 The primary data source for information on household characteristics
might be families. Searching further,
inco me range , and we want to exclude traditional tradi - is the
that we can estimate the
that by incor porat ing information from another table that grou p
find Then we subtract
and in our income range.10
tional families that are owners an approximation of our core
our 21 perce nt of owne r households, and we have
from 6-6.
numbers are shown in Eibit
market segments. The resulting
Exhibit 6-7 Comparison of Target Sales for Elysian Forest with Total Potential
select Ameri- Market Segment
www.census.gov. In the left mazgin
For the U.S. Censu s Burea u, the main Web address is latest 1-year Estima tes. Finally,
7. Survey select eg t data and the
from Ameri can Commu nity ng data.
can FactFinder.Then population, economic, and housi
you find over 1,000 tables of Year 1 l 3 4 5
choose Detailed Tables. Here, of one or more urban counties,identified
area:' An MSA is comprised
8. MSA is "metr opoli tan statis tical 0. is the most com-
It Total Target Sales 88 212 236 260 104
a population of at least 50,00
single labor mazke t azea, centered azound a city with for many nongovemment data
as a
gover nment data collection and reporting,
and Total Mazket Segment Potential
of a city used for
mon definition
(Projected total market sales X 13.81%) 207 207 214 221 235
purpóses as well.
12 months. Projected Sales at Capture Rate of 20 Percent 41 41 43 44 47
Household Income in the past
9. Table B25118 Tenure by 18 Yeazs by Family Income
in the past
C1913 1 Famil y Type by Presence of Own Children Under
10. Table
12 months.
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 143
Appraisal
142 Part 3 Market Valuation and
Engineering and consulting.
ity where there
know that in a normal commun
Experienced real estate marketers existin g homes, a single prof- Accounting.
ers, builders, and sellers of Computer services and programming.
is competition among develop market segmen t. We will
than a small percentage of a given Management consulting.
ect rarely can capture more optimis tic. The resulting
, which normally would be
assume a "capture rate" of 20 percent Exhibit 6-7. Compar ing Market and public opinion research.
shown on the bottom line of
projected sales for Elysian Forest are to be far from feasible . Types of office firms unlikely to be interested in Palm Grove would include medical
we see that the project appears
the expected sales with target sales at this point. The project offices because of the distance from hospitals and the absence of special plumbing.
so low that the analysis can stop
The resulting forecast of sales is Law offices also would have little interest due to the distance from the courtrooms
simply has no hope of success. simple analysis, even (five miles away). Residential real estate firms do not concentrate their employees in
ken without the benefit of this
In fact, the project was underta speculative units, a large single office, and they want maximum street access. Social service organiza-
than a day. The company built 20
though the computations required less efforts, once the taint of tions might use the larger floor plates, but they might reduce the attractiveness of the
sophisticated and expensive marketing
but never sold any. Despite in it. Not only did the property for nonsocial service businesses, and would not pay premium rents. Thus,
development, no buyer was interested
failure became attached to the compan y went bankrupt they would be last-resort tenants in the view of the owner.
the once prominent national
project fall into financial disaster, but 3. Where are the customers? The market could possibly be among firms relocating to
as well. University City, but the flow of such firms with 25 or more employees is small and
quite uncertain. Thus, we assume that most of the prospective tenants are local.
Grove Office Complex
Market Research Example 2: Palm importance of a market-
4. What do the customers (tenants) care aboutfor Palm Grove? The general business
analysis problem illustrates the community of University City is small and local in character. Mostly, it provides
A second example of a market a developer proposed
context. Again in University City, services to households- and other small businesses. The linkages of the site appear
defining story in a nonresidential in both scale and type
an innovative project for the city satisfactory for many of these users except for the isolation of the site from any
the Palm Grove office complex, each with 40,000 square
d two four-floor "glass blocks," comparable offices. In addition, several building features, which we already have
of buildings. The project propose buildings of similar magni-
-foot floor plates. While a few alluded to, appear to be concerns for local service tenants.
feet of space, or 10,000-square and no office building of the
built by and for the users, 5. Who is the competition? For occupants needing space of, say, 4,000 square feet or less
fade existed in the city, they were basis.ll
on a speculative (those with under 25 employees), existing single-floor office buildings and "build-
scale proposed ever had been built s. It is surrounded
is on a major arterial, the site poses some concern to-suit" space is very competitive. Because of visual exposure, convenient access,
While the location offices. It is distant from
school, and a few small "strip" and parking, the competitive space appears to hold significant advantages for most of
by housing, a car dealer, a high
these firms.
any other office centers.
market-defining story as
Once again we construct our
The Market-Defining Story. Initial "Story." The outcome of our tour through the market-defining questions is this:
identified previously:
answers to the series of questions We are looking for general-purpose office tenants with 25 or more employees. We believe
space, modern, but of
structures are general-purpose office that they must already be within the city.
1. What is the product? The landsca ping, or other nota-
distinguishing architecture,
modest quality (i.e., they lack ameniti es and where the
strong positive supporting Initial Data Collection. In assessing the market potential for the building, one approach
ble features), in a location lacking The structures are
is approximately 75 yards. might be to canvass the business community in search of office-based businesses that have
average distance to employee parking or medical offices.
that might serve laboratories 25 or more employees. Lists of chamber of commerce members or lists of firms from
not designed with special facilities Grove market segment,
point in identifying the Palm a local economic development authority usually include the number of employees, and
2. Who is the customer? As a starting stock of office buildin gs
g design to the predominant would assist with this effort. A virtue of this approach to market research is that it also
it is useful to compare the buildin city reveals that, apart
any of the main arteries of the could serve to actually market the buildings since the firms identified are the most likely
in University City. A drive down offices, the typical
hospitals and some government httq://censtats.Census tenants. However, as a preliminary approach, we can examine published data on local
from some medical offices near 1,200 to 4,000 square
proposed complex—say, ,qov/c9i-bin/cbpnaic/ business patterns. Such information is instantly available over the Internet from the U.S.
office buildings are smaller than the parking , and usually
very close access to surface cb sel. I Bureau of the Census in County Business Patterns, an annual county-level survey of firms
feet, with two floors at mostwith Palm Grove where the
This stock contrasts with by industry and number of employees.
with high visibility from the street. feet from the office, and , Counry Business Patterns
is up to several hundred
floors are 10,000 square feet, parking the propos ed buildin gs ~
ride. The design suggests that ~~~ Analysis. Examination of County Business Patterns reveals the number of firms
three floors require an elevator If we suppos e that I
that require the larger floor plates. by size for detailed categories of all of the prospecrive market segment groups listed. The
are best suited to arganizations then firms with, say,
feet of space per employee, impartant result is that at the actual launch of the project in University City, the total num-
office firms typically want 150 square buildings. ~
the best candidates for the proposed office ber of firms in the office categories identified with more than 20 employees was less than
25 or more employees would be that are smaller .)
should be preferable to firms 10. In short, University City is revealed to be a city of predominantly very small office
(The prevailing style of buildings Grove, likely catego- ~I
gs such as proposed for Palm firms, and there was little prospect of finding enough tenants from a total of less than
For general-purpose office buildin
10 candidates to successfully fill the buildings.
ries of firms include the following:
and credit unions. The history of the project is that only one of the two buildings was built, and it has
depository institurions such as banks
• Finance and insurance, except management firms.
spent much of its life more than half vacant. Obviously, it was a financial disaster that
Nonresidential real estate brokerage and could have been predicted with a few minutes of thoughtful examination of the relevant
• market segments and the use of freely available government data.
for untcnown buyers or tenants.
t1. Speculative building is consrructing
 I Chapter 6 Forecasting Ownership Benefits and Ualue: Market Research 145
isal
Part 3 Market Valuation and Appra
144 Exhibit 6-8 The Location of Plane Vista Orlando, Florida 12

usually is from the

employers and their size
6.8 A local source for local . A national source for
county level
or
is of
data on firms and their size

http•//earth.google.com
Provides aerial photo coverage for
most areas of the Unitetl States.
ts
3: Plane Vista Apartmen
Market Research Example and the data and
e it was an actual case,
rch case is a narrative. Whil
Our third market resea us to
This enables
were actua l, we fictionalize our presentation.
sources (not the name s) market research process.
the sequ ence of disco very that is inherent in the
better capture

APPLICATION:
REAL ESTATE

The New Jol _

-- he sipped on his morn-
-leas e Trail Blaze r into the office parking lot, new
As Alex eased his off tment! Great city! Great
thou ght to himse lf, Grea t new truck! Cool apar getti ng a
ing coffee and over a year
can I get! But, then, he had worked for it, spending want ed in real
job! How lucky that he could land the kind of
job he
e mast ers degr ee so
specialty real estat Reality Hits
estate consulting. his boss,Ed, was wait-
on the job at KeyInSites,and he knew Alex was silent. Maybe he wouldn't bring ESPN into the report this time after all. His
This was his seco nd week He parked, walked
his first majo r assignment. He was excited! mind raced faster. He knew that even with such a short horizon, Sarah could give him
ing for him upsta irs with out of the elevator into
into the lobb y, and was soon stepping some good maps and graphics. He'd start out by getting a map of the current stock of
briskly across the park ing lot ed the firm recently as a
floor . Ther e were Sarah, who had join apartments and other housing and use expected employment growth for Orlando to project
his "home" on the seve nth intern. "Did you get
speci alist , and Rebe cca, the energetic college ride needed housing increases. He'd use Sarah's GIS skills to allocate the growth over Orlando
geographic info rmat ion I'll have to give you a
inqui red excit edly. "Sure did. It's awesome. he repli ed, in proportion to newly built housing and come up with some pretty unpressive looking
your truck?" they tossed. "Deal!"
abou t takin g Rebe cca and me to lunch?" Sarah results. Most importantly, this would give him an estimate of the additional apartment
later." "How office. units for the neighborhood of Plane Vista.
desk and heading for Ed's latest pictures
setting his bag down at his re fram e on his credenza with the Ed interrupted his brainstorming, "I assume you want to know about the existing
load ing the digit al pictu could
Ed was busy managed, not that anyone
Mons ters , the little league baseball team he was your apartments." Oh, yeah, Alex thought. That's right. In his studies, he had been hammered
of the Swamp Alex. How
fram e behi nd the stack s of papers. "Good morning, with the idea that real estate markets are segmented, meaning that there are different-kinds
see the picture of apartments, with different markets.
weekend?" and found out I do
Alex repli ed. "I unpacked some more stuff, "I wasjust going to ask." Alex quickly replied."Uh,tell me about them.""The owners
"Crazy, but good ," like she thinks I'd know
moth er must have slipped them in, are very experienced with apartments. They are good managers and have evolved design
have some pots and pans . My chatted enthusiastically
And then I picked up my truck!" They specifications that seem to work well in the market. I suppose you would describe Plane
what to do with them .... said, "Well, are you
abou t the virtu es of various SUVs. Finally, Ed Vista as high-quality, semi-luxury. Data from Charles Wayne Associates, the local apart-
for several minu tes
replied eagerly. has ment gurus, indicate that Plane Vista has rental rates in the top 30 percent of the market. It
ready?" "Bring it on," Alex Plane Vista It currenfly
of the airpo rt is an apartment complex called want us has an unusually wide variety of apartment sizes and layouts and the full menu of standard
"Just north units. They
owne rs are cont empl atin g an addition of 400 more a GIS amenities, so it can appeal to a wide mix of residents. It is not specialized to military, stu-
500 units, and the Alex
at this time." Ed handed dent, or retirement, and obviously, it is not specialized to low income. One feature that sets
et will support the addition and Ed stopped to
to tell them if the mark 6-8). Just then the phone rang, Plane Vista apart a bit is a really big gym.I'm told it has a full basketball court. That might
the locat ion (Exh ibit
generated map of give the place some special appeal to the basketball and volleyball crowds. I understand
answer. trained at school in using
in as he gaze d at the map. He had been the the proposed addition to Plane Vista will supply extend and refine the current formula."
Alex's mind kick ed ce to "bury"Ed and
and popul ation data, and here was his first chan graph ics "OK!I'm on it! What if I work on it today, and we meet first thing in the morning to
all kinds of hous ing maps and
He woul d get with Sarah and have her generate proje cted go over it?"
clients with numb ers. of
of existing apartments, "Good. Good luck!"
take notice. He'd have maps would want to
that could make ESPN th ...e very thin g you
about vacancy, rental grow the week,"
new ones, and tables "Wh en do they want the report?""End of
hung up Alex aske d, 12. All GIS maps were provided by KeyInSites of Orlando, Florida.
know. When Ed
replied Ed.
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 147
Appraisal
Part 3 Market Valuation and
146 pursue it. T'he only problem is, the reason you can't think of any job location data is because
there aren't any that we can get. I've heard that some researchers for the Department of
Sorting Out the Task Ed's comments had
desk and set about to tackle his first project. Transportation have had access to that kind of data, through the IRS, I think. But if they let
Alex hurri ed to his And he remembered
to be mindful of market segmentation. you see it, the price is that they have to kill you before you use it. So, unfortunately, though
him that he need ed
remi nded the need to narrow the job locations might be important for a lot of real estate analysis, we can't get that data."
gradu ate train ing in real estate market analysis stressed
that his possible. This brought A little stunned and frustrated, Alex walked slowly back to his desk. In today's world
the prob lem— to carve away as much of the irrelevant as WWW,bIs.gov
scope of the product? Who
him some quest ions that could help refine the problem: What is Source of virtually all detailed of electronic data, he wondered, how could something so useful be unavailable? Do I have
back to ? What does the cus- to create the data, or what? Suddenly, an idea began to churn in his head. He quickened his
custo mer, that is, the rente r or buyer? Where is the customer employment data for the United
is the tive answers he could step and headed toward Sarah's desk. "Sarah, I've got another GIS problem for you."
care about ? What is the compe tition? He would see what tenta States, for states, counties, and
tourer g: "Wow! Maybe I should hold you to paying for lunch," she chuckled as she handed
bing his computer, he started typin MSAs.Also the source of household
put down for the questions. Grab him a map (Exhibit 6-9)."You imished the apartment map!" Alex declared appreciatively.
sizes and designs. Well expenditure information.
general-purpose apartments. Varied
• The product: High-quality, "You are good!" "That's why they have me here. It keeps the rest of the staff humble!
large gym.
equipped with amenities. Especially from the colleges and Now,tell me about your next problem."
tourists. Not students (too far
• The customer (renter): Not e cheaper, areas).
go to more attractive, and mayb
universities). Not retirees (they can a place to live.
Mainly people with jobs who need
Not military (no bases nearby). there unless some-
c in Orlando, so you wouldn't go
(The location is not the most sceni
6.9 The location pattern ofjobs in a city can be approximated by examin-
thing "tied" you to the area.) and east Orlando (again, ing the location patterns of
Probably people working in south
• The location ofcustomers: are more lakes and
, or west part of the city, there
if you worked in the central, north
here, and easier commutes.)
trees, and less airplane noise elsew ents,the owners know
Punt on this one. From Ed's comm Alex explained the importance ofjob locations for the Plane Vista analysis, and that there
• What customers care about: will provide it as
customers care about,Plane Vista
what they are doing, and whatever were no data available. Then he proceeded to lay out an idea for a solution. "You have the
well as any place can. county data base for property parcels, structure size and detailed classification of use, right?"
the area.
new, semi-luxury apartments in
• The competition: Other fairly "Yes."
demand is from "We also can download data from the Bureau of Labor Statistics on employment for
progress. In short, he thought, the
Alex felt like he had made some who still want to rent or the county by detailed industry, right?"
who have pretty solid jobs but
singles, couples, and roommates My compe tition is other "Yes"
jobs are in south or east Orlando.
can't yet afford to buy. And,their pipel ine, he concluded.
are relatively new, or are in the
quality apartment complexes that
Exhibit 6-9 Locations of Recently Built Apartments 13
The Beginning
e a map from the Charles
, he would ask Sarah to creat
OK, he thought, now what? First apart ments (last 10 years).
the location of recently built
Wayne Associates data showing asked , "Sarah, can you
to her desk, he show ed her the map Ed gave him, and
Stepping using the Charles
apartments built in the last 10 years
generate something like this with
Wayne data?" replied Sarah. "I'll
yon buying as well as driving?"
`If I get it to you before lunch are sport , but I won't hold you
Than ks!" said Alex. Sarah retor ted,"You're a good
go for that!
of hours."
to buying. Pll have it in a couple occurred to him, he
e maki ng progr ess, Alex thoug ht. Now what? Suddenly it
We'r rs" for Plane Vista
decid ed a few minut es ago that the main source of "custome
had just Orlando. But how?
happening to jobs in south and east
was jobs. He should look at what is locat ion of jobs within a
reme mber any stand ard data source showing the
He could not office, he mused
to run this one by Ed, he decided. As he walked to Ed's
city. Pd be smart idea of market
react ion about what he was going to do. Recognizing the
over his first ht him a long
and then attem pting mark et refinement seems to have broug
segmentati on for Plane Vista
he is looki ng at one very specific factor as the driver
way fast. Sudde nly, extrapolate demand
jobs. This seem ed a lot more productive than simply trying to
demand,
ments are being built.
by looking only at where apart questions about
on the door fram e, "Do you have time for a few more
Alex knoc ked had decided that job
e! Come in," replied Ed. Alex explained how he
Plane Vista ?" "Sur for Plane Vista.
south and east Orla ndo was the dominating factor in demand
growth in in Orlando?"
where can I find data on job locations
And then raised his question,"But Vista , though you must
," Ed repli ed. "I like your theory about demand for Plane should 13. All Orlando apartment data used here are courtesy of Charles Wayne Consulting Inc., Orlando, Florida.
"Well ct. Still, you
reme mber that no theor y so simple is going to be entirely corre
always
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 149
Valuation and Appraisal
Part 3 Market "Incredible! Thanks!" He was immediately engrossed in the map. Now the apartment
148 with the property
employment industry categories clusters began to make some sense because jobs were tremendously concentratedjust as the
«Well,.if we can pretty well match the
jobsare concentrated propo~a~ apartments were. One apartment cluster seemed to be just northwest of downtown, appar-
classifications, and if we assume that n of where„jbs
use
same category, can't we construct an app norance. ently serving the downtown employment. Another corresponded exactly with the apparent
the
of building space of concentrations ofjobs in south Orlando, and the third clustered around the exploding, and
are located? It wo~ like and print out the
n bh t Let me sep what the data sets look already huge University of Centrral Florida (UCF). But another amazing result was the
"Now you ar buy~ ri g1 thq> after
If you can ing~ I've isolation of the Plane Vista area. It was a job cluster of its own, set well away from south
two classification lists
involved. 1 s in the ueue,but
can look at it with y ou. I'vee gtot other thing WeI~ve
map Orlando, from downtown, and from UCR Obviously the dominatïng employment was at
back from a nice lunch,
I Meanwhile,look over the
fle~cíbility, and you clearly need help, mister! the airport, the 14th busiest in the United States, and one of the fastest growing in recent
got some to me." years. Instead of Plane Vista being part of a uniform Orlando landscape, it was part of an
looks kind of interesting
just made for you. It employment cluster quite set apart from most of the city, apparently driven by the airport.
It was almost on an "airport island," Alex thought. As he looked further at aerial photos
A Hidden Island? of the area, he realized that a combination of lakes, older residential areas,. and industrial
much. I'm really impl~sh ped.SaWhats this?ahe ex1
med out warehouse areas isolated the Plane Vista neighborhood from the employment centers to
"Hey! Thanks very glanced a > dsto
As he the west, single-family residential areas largely separated the area from other job centers
with the apartment map. apartments in Oel
new ta.SIt was to the north, the airport itself was a barrier on the south, and the land was undeveloped
loud."whY ~e all the d sant from PlanetVi
there only three clusters, th, yWere°all very to the east. Plane Vista was on an island! This means, he mused, that Plane Vista and its
Not only were
íts own little classfhcation listsill Than1~s a
llow neighboring apartments may be in a pretty weak position to compete for renters work-
like Plane Vista was in property an emsPloyment
world
appeared with the ing elsewhere in Orlando If the Orlando apartment market ever goes soft, without strong
map,Sarah
going someplace nice?" employment at the airport, they could get killed!
about 11:30 if we are
Rebecca."
"Sounds good. P11 tell attention fo
apartments, Alex fumed his
Baffled by the map of recent reviewing aerial photoof
the two classification lists and then As Goes the Airport ...
morning to cross -matching
the Plane Vista area to
look fo~ cfr~emaá° ~Ceh enltd the help of T'he next morning, when Alex arrived at Ed's office, he had organized his maps and his
lunchtean Aext Sarah following
About 1:00 they return use classifications, thoughts to tell his "airport island'' story. Ed seemed appreciative. "So, where do you "go
reconcile. the employment data with the pr~á and Rebecca had from here?" he asked Alex.
Rebecca to ~ternoon she
iven her just before lunch. By p onding industry "I think the main thing is that the future of the apartment market at Plane Vista is
notes that Alex had g paxcels in the comes
htt ://www.orlandoair ment across property
allocated the county employ driven by employment on the `island,' which means, primarily, employment at the air-
o~ rtS net industry's to Sarah
using the percent of the lando Exhibt16~10) port. So, I need to focus on what apartments are being built on the `island,' and.what the
approximating ~heredl Peopeawork in Orp
Orlando International Airport. able. to create a map ought to be worth dinner."
employment growth looks like for the airport."
map in hand."This "Good work! See where it takes you. The client will have to be impressed with your
walked up to Alex with the
analysis, however it comes out."
Orlando Encouraged, Alex hastened back to his desk to begin the next round. Now he had to
People Work in
Euhibit 6-10 Where project the market situation on "airpart island." For starters, he thought,. he ought.to find
out more about the role and future.of the airport. Is airport employment really as dominant
..._......~~+.~ of
as it looks? Are there any other important components ofjobs in the area? What changes
are taking place? He suddenly realized he could get an appro~nation of the overall "air-
port island" employment.the same way they had come up with the total Orlando jobs
* pattern. He would ask Sarah for one more GIS map of "airport island" jobs, and have
her system give him a count. At the same time he would get on the telephone, contacting
sources of information about employment and employment change on "airport island."
But first to Sarah. Alex stepped over to her desk."OK, Ms Spectacular,. am I good for
~~ another map?" She looked up with a mischievous smile."You know, before I think about
that, I've got to get my new printer stand set up""I can fix that!'' said Alex."And I can get
you another map!" replied Sarah.."Cool. Thanks. Here's what I need." And he showed her
his plan.
Back at his desk, Alex began his phone calls. First, he attacked the question of air-
port employment. After several calls and referrals he ended up in an intriguing conversa-
tion with the director of airport personnel, who said that the airport currently had 15,000
badges issued to all on-site workers. As the conversation moved on, Alex learned that the
total had increased 2,000 in the last three years, and that the airport had fully recovered
from a slump five years ago. In fact, it was again one of the fastest growing airports in
the warld, with almost a 10 percent increase in traffic in the last year. He also learned that
steady expansion of the facilities was continuing. It seemed safe to conclude that employ-
ment will continue to grow at least as strongly as the last three years.
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 151
Appraisal
Part 3 Market Valuation and
150

What Else Is Out There? the "island." At Ed's

went after informa tion about other employment on
Next, Alex agency. Frank Tapping the Master Sources of Employment Data
called Frank at the metropolitan economic development
suggestion, he happy to respond to
exchan ged informa tion and tips with Ed, and seemed 1. Go to the U.S. Bureau of Labor Statistics (www.bls.gov).
regularly two firms plan-
about new jobs in the airport area. Frank knew of
Alex's questio ns firm, serving a ~ ...,...,..~,,.,,.,,~., r--J
into the neighbo rhood. One was a medical equipment ó~~~.
~_~ • Once there, select the tab Databases &Tables.
ning to relocate local, and expected
market, and expecte d to employ 450. The other was more • Next,from the top headings, select Employment.
national .~R., ,. a~,.~:~e,,.„,W..,.,~ .. _-r ,, • Then from Monthly, select Employment, Hours, and
m,:..,..,. ~ _ __ -M ~JJ
to employ 100. 6-11). With it was _

Sarah already had appeare d with the new map (Exhibit »~ Earnings-State and Metro Area and select the icon for one-
Meanwhile, a total of 25,000 jobs. Alex s ,.~~.~N „,.~,,.,, screen data search.
estimated "airport island" to have
a note that her GIS system least 750 new jobs per year, • From the sequence of menus, select a state and city(MSA)of
the airport will generate at
thought to himself, it looks like That's over 5
moving are adding 550 jobs to the area, for a total of 1,300. interest to you.
and new firms in general?
base. But would this continue if Orlando is not growing ~~ b~ • Select Total Nonfarm Employment; then click on Get Data.
percent of the 25,000 website, and found a growth
the city planning department • What is the latest annual count? How much has it changed
At Ed's suggestion, he turned to employment growth for from the previous year?
for the area. It projecte d over 3.5 percent annual
projections report "airport island" would not be • How far back does the data series go?
reassurance that the growth of
the next five years. This gave
economy.
undermined by a stagnate citywide 2. Now return to the list of databases under Employment.
• Read down the menu under Quarterly to State and County Employment...
The Meaning for Apartments? apartment unit demand? He • Again select the icon for one-screen data search.
he translate job growth into
So, Alex wondered, how should knew that interest rates had • For a county within your MSA of interest, find the employment in residential property management
of Orlando as a whole. He
decided to look at the experience number of renter households to nonresidential property management (North American Industry Classification System, or NAICS;c~
prompting an unprecedented
been low for several years, was growing more slowly 531311 and 531312)
this mean that apartment demand
elect home ownership. Could projections and found that • Find the employment in two other industry categories that interest you.
to the planning office growth
than job growth? He returned few years. But, from the
around 2.5 percent for the last
Orlando job growth had been apartments had been at
found that absorption of new
Charles Wayne apartment data, he looked like he didn't need to
rate of 4.5 percent per year over the same time period. It
a But how big was the "airport island" market for quality apartments? From the
ion being less than job growth!
worry about apartment absorpt Charles Wayne data, again, Alex could find the apartment properties on the "island" that
were in the quality and age range of Plane Vista. He found 3,500 units, including Plane
Exhibit 6-11 "Airport Island" Job Locations Vista's 500.
It was coming together in Alex's mind. Ifjob growth on the "island" is at 5 percent over
the next few years, and if apartment absorption is equal or almost double the job growth,
CBD then,from a base of 3,500 units, he could reasonably project apartment absorprion of 150 to
300 units per year, and feel very safe. He would go with that.

Competitors?
Now to the question of competitors. From his training, Alex knew to contact the local
building and planning authority to get information on any projects in the pipeline. He
reached Herold, who was an experienced staff member of the permitting office. After
a short, cordial conversation, Alex came away convinced that there were no significant
apartment projects on the horizon for "airport island." That made his work simpler.
The final problem was to project rental rates. He decided to chat with Ed about this
one since it is a complex judgment call. Their discussion led him to the conclusion that if
occupancy rates are below 90 percent, rental rates would not increase. Between 90 and
95 percent occupancy they would move toward increasing at the rate of inflation. Above
that, they would increase faster than the rate of inflation. He would go with this rule.

The Bottom Line?

Now Alex could put it all together! He boiled all his research down to a simple three-row
table showing,for the next live years, the total number of units at Plane Vista, the occupancy
rate, and the rental rate growth(Eibit 6-12).
 Chapter 6 Forecasting Ownership Benefits and Value: Market
Appraisal Research 153
Part 3 Market Valuation and
<~2~
for Plane
Rate Growth and Occupancy
Exhibit 6-12 ~i
tacPhases Randy By the approach that. we advocate for market research the
format, organization, and
content of the presentation will always be somewhat unique. (There
still may be many
~~~
common elements.) Further, the same. assignment will be executed
(Projection Date: J~uar3'~ 2004) by different analysts. This. will occur, in part, because different
somewhat differently
2006* 2007 2008 analysts will form differ-
2004 2005 ent market-defining stories. Is one analysis the correct one? In
900 short—not that we will
500 900 900 ever know. There will always be more than one answer to
500 questions as complex as those
Total units 90-93% 91-95% 9~~%°~$t involved in market research. Some answers will be more compelling
90% 91-93% than others, but no
Occupancy 2-3% 2-4% human will know the."correct' one. It is always in the nature of
0% 1-2% business and markets that
Rental rate growth decision makers are dealing with uncertainty, Successful market
research is a dialogue
between researcher and client that serves to articulate and reduce this
uncertainty but.never
to eliminate it.
`Initial Year of Phase II an initial base demand of 3,5
projections assume that demand growth is 150 to 300 units per year, with
tOccupancy
units in the relevant market segments. employment will bring a new supply of
apartments into the market, limiting Improving One's Capacity in Real Estate Market Research
continued strong growth of
$It is assumed that Real estate market research is a blend of knowledge, skill, and
inspiration. There are
further occupancy and rental rate gains. ways to increase one's effectiveness in the task. First, an
effective real estate analyst
needs to study real estate firsthand. There probably is no
substitute for the habit of
observing real estate persistently. This includes looking for what is
time after time in successful,. and ask-
over his results, a word that had been thrown at him ~~ ing why, but perhaps more importantly it includes finding the
As he looked his were, ultimatelu~ unsuccessful ventures,
knew that. any estimates like and asking why. Discussing both extremes with "experts" or other
school came to mind: risk. He one of his professors quoting a g y named thoughtful observers
the future. He thought of can be revealing about the actual properties as well as how views
assumptions about ("stories") can differ
among experts.
Graalkamp that when you buy rye vulnerabiltpeon this set of
assumptions can wron ySo whab were the Another means of improving real estate market analysis is careful
future. And all g on airport island observation of a
the idea that renters on "airport island" mostly work subject property. One very successful real estate expert suggested the
assumptions? Well, following. exercise
mused that the client could in studying any urban property: Go to the property of interest in
was pretty crucial here. He tesPtlth~e Vstás management
work. In fact,
prob- time for the morning
residents about where they commuting hour and find a place on or near it where you can remain for
survey of their Another crucial assWh some time.
information from their own records. Wight Then observe the traffic coming to the property and to surrounding
ably could glean that the airport gr properties for perhaps.
employment growth. More careful assessment about 30 minutes to an hour. Ask yourself whether any surrounding
properties interact, ar should
about airport. risks later.
he would get back to the interact, with the subject property. Finally, peruse the neighborhood
be a wise investment. But Rebecca's be rernatkable what insights you can take away from that effort
around the site. It can
and
Alex felt great! With Sarah's soncluionsp roPobably 10
t concerning the market
just needed to write up how he g o his
helpot context of the property. A closely related suggestion in evaluating a
and a half. Now he occu- property is to stand at
convert the rental rate and
guessed—and he was ready to the site and look away from it in all directions. Consider what clues
15 pages, plus tables, he that perspective. yields
projections for the new units. about what the property can (and cannot) be used for.:
pancy projections into cash flow flown! Noon was approaching.
Suddenly an
his watch. Wow! Time had
He glanced at estate analysis: Inspect the prop-
adhered to the first rule of real
idea hit him. He hadn't yet day, and he thought he had
noticed a Friday's
}
``truck," it was a beautiful market Projections and R ^I Est„~#,#P C~/clas
erly. But he had his plans?"
Rebecca!" he called."Got lunch
near Plane Vista ...."Sarah! http•//www grubbelliS A major challenge in farecasting real estate market parameters, and
therefore in predicting
•~o~^' value,. is the presence of real estate cycles. For example, Exhibit
6-13 portrays apartment
See research—Quarterly Trentl vacancy rates for the Orlando MSA and for the United States. In the national
vacancy pattern
Reports for nonresidential cycles. since 1970, note the peaks in 1974, 1988, and 2003. Notice that
Orlando vacancy patterns
have tended to follow movements of the national vacancy level, but
with far greater ampli-
tude. Agraph of vacancy cycles for office, retail, and hoteUmotel
A Perspective on the Plane V12a assertd that when properties would show that
as in E~chibit 6 The late 7ames1Gpaaskamp ofen they are even more extreme.
projections such ~J~www.ebre.Com/
one is b If real estate markets were perfectly correcting, cycles would not
one buys real estate, what translatd into cash occur. Indeed, an
6-12 are an áYmngelof
ex p such asumptiononWl~en ~~ incentive for self-correction exists. Builders and developers watch real
estate values,
projections in Eibit CB Richard Ellis office and industrial
determineotha estimates and when the market value of their product exceeds its
flow projections they will proécrions and
construction cost, it is profit-
assumptions about the future Y into cash flow
prolPertte through marketvacancy reports. able for them to build. The resulting increase in supply eventually
causes occupancy
turning subject continues
developed in detail beginning with Chapter 8. The levels to decline,. therefore causing real rental rates to decline, lowering
market values.
of value is Thus, the market value of the product eventually falls below
book.
much of the remainder of the construction cost, causing
further building to become unprofitable, so builders cease to build.
With supply thus
acclaimed i curtailed, the market value of the product will begin to rise once more,
University of Wisconsin and an and the cycle
a revered teacher at the continues.
14. Professor Graalkamp was analysis.
insightful observation on real estate
guru. Few have offered more

CAREER.
ost real estate development
projects and many real estate
appraisal assignments require
supporting market research.
Development
economic
projects usually also require an
This type
and financial feasibility analysis.
of research may be offered by a variety of
firms, including sophis-
.~ ticated appraisal
i~~ firms, accounting/
a,
~~ consulting firms,
Market and ~ or firms devoted are tend to be compensated in the same
~ exclusively
Feasibility Anatysis 9
for Real Estate
Chapter 6 Forecasting Ownership Benefits and Value: Market Research 155
basis
market consult- manner. They will be paid on a fee
to market research and rather than a commission. Real estate
~ng, While the type of firm can vary, the with
researchers may need to be familiar 6.y0 The amplitude or volatility of the real estate cycle tends to be greater
qualifications of the researchers will be tools, includ-
degree several kinds of quantitative for a property type, as its is
similar. They usually will have a computers,
economics, or a ing ageneral knowledge of
in economic geography, geographical information systems (GIS),
closely related field. Often they
will have
and data-
multivariate statistical analysis,
an MBA or master's degree in
econom- estate
With the base management. Like all real The sobering implication of real estate cycles is that effective market forecasts must
ics, real estate, or geography. consulting and advisory services,
the typi-
practices of account for them. Unfortunately, it is not easy to do so. Generally, the best that can be
exception of the real estate out of the
firms providing cal market researcher works done is to monitor good information about the business outlook and be well informed
large accounting firms, the office a substantial portion of the
time,
about the construction "pipeline." Knowing about all relevant building permits issued
analysis
market research and feasibility of the real
appraisal firms in contact with other persons reveals the maximum amount of building that can occur during the immediate construction
structured similarly to
estate industry. "gestation" period (some permits will not be used). But it does not reveal what additional
and permits will be issued in the days ahead. Thus, the investigation of the construction pipe-
line ideally goes beyond existing permits to judgments about probable additional projects
seeking permits.
An important aspect of assessing a real estate project is how vulnerable it will be
to future cycles. For example,. anall-too-common pattern with new apartments is that
the project built at the "end of the line" in commuting distance is the most vulnerable to
vacancy in a down cycle.

but it
there would be no cycles,
natural correction process were instantaneous,
If this -. -
httq:/_ ~~~~~~~
is not. Develapmen 13 that he local Orlando
Cushmanwakefield e~of twolVears oramoreNoteon ExhiUi 6
can have a lead tim Y atwo-year interval. Thus, w at 6.77 A key indicator in attempting to evaluate where a property is in the real
.com frequently has changed radically within quite
vacancy rate commits to build may turn out estate cycle is to carefully assess
Cushman Wakefield office and to be a favorable market when the builder the same time.
appears same decision at
industrial market reports, under numerous builders make the
differently, particularly if the greater the amplitude of real
estate
"Knowledge Center." general, the longer the construction lead time,
In
contributor t~
cycles. But there is another c1esRTheeeconomylhaaslever been
for the presence of business cY
tually fade out, except and therefore in demand
and downs in employment and in business income, Numerous skills, data, and technologies can be useful in real estate market research.
without ups
Geographical information systems technology (GIS) is becoming increasingly rec-
for real estate.
ognized for its. extreme power to process and display spatial (location-specific) data.
Another tool of value in real estate is psychographics, a high-tech approach to analysis
Vacancy Rates of market segmentation. Finally, a tool that can be very valuable in many contexts is
Exhibit 6-13 Apartment
survey research.

http://www.gsd.harvard
14 .edu/~ bcote/GIS/ Geographical Information Systems (GIS)
12 ~~~ National web resources.html Geographical information systems (GIS) are computer software systems that enable
,F, ...Orlando ~ ~~ Q A Harvard University compilation one to manipulate and "map" information with great flexibility and speed. GIS offers ben-
1~ i ~ ~~ ~ Y of GIS websites. efits at several levels in real estate research. Most obviously, it can produce quality maps
and displays with unprecedented efficiency. But more importantly, it can make feasible
o, ~ ~o~•.~~~ ~~//www gisportal new avenues of real estate market research. Note that without GIS tools, our analysis of
á 6 .com/ the market for Plane Vista would have been impossible. Our effort to approximate job
A commercial site with vast, locations required us to identify and obtain data from more than 43,000 specific parcels
á 4 well-organized links to the of land in central Orlando from a total of several hundred thousand parcels in Orange
2 world of GIS. County, Florida.
GIS can be a powerful facilitator in identifying market opportunities. If research-
1990 1995 2000 ers can translate market segmentation features to a geographically coded database, then
1975 1980 1985
1970 they can use GIS to quickly determine the locational patterns of that market segment, and
compare.them with the locational patterns of competitors. Thus,they can conducta sophis-
Census, Charles Wayne ticated form of "gap" analysis, searching for untapped market opportunities. This is far
Survey/Housing Vacancy Survey, Series H-111, U.S. Bureau of the
Sources: Currenf Population more difficult,: if not infeasible, using conventional tables and charts.
Consulting, Inc., Orlando.

154

inin~ ~~TRY ISSUES
~~
more than operating costs,
he Home Depot Inc, boasts
900 stores throughout the
United
and For it to work as a retail location,
States, Canada, and Puerto Rico,
even has a location in South America. Now
of establishing
the company is on the verge
itself in a new frontier: Manhattan.
Home Depot's manage-
ment sees tremendous
untapped potential
in Manhattan.
"They're an
overlooked
Urban Frontje!
market," says
of Retail a Home Depot
spokesman.
Overlooked, at
least so far, by
other home improve-
ment chains. The Home
ahalf-dozen
Depot already has about
Boston,
stores in inner-city locations in
Manhattan
Pittsburgh, and Chicago. The
departure for the
site, however,is a major
land values and
chain. With skyrocketing
For
(with a grocery store and
a GIS map
Exhibit 6-14 Population
156
Manhattan is the most
densely settled urban locale ín the
country.
compa-
Depot, that
nies must be creative. For Home
abandoned factory
means tearing down an
Harlem. In its
building ín low-income East
Home
place will rise an urban two-story
layout. Its
Depot, with a uniquely tailored
meet the
product line will be customized to
land-
needs of apartment dwellers,their
to look
lords, and contractors."You have
gets carried
at the bridges and see what
in —lumber and grout," says the spokes-
with a lot
man."There's old housing stock
of care"
of character that needs a lot
Densely populated urban sites are look-
national retailers,
ing better and better to
a
according to one retail specialist. "It's
while, but it's
trend that's been in play for a
down-
accelerated recently," he says. As
towndistricts revitalize, national chains
following
hoping for continuing growth are
Higher
their customers to Main Street.
square foot
costs are offset by sales per
considering a site for a shopping
example, supp ose a ma J or grocery chain is
South Carolina. Exhibit
other retail uses)in Columbia,
of the metropolitan area with the selected site,
Columbia,
Density and Grocery Stores:
~r. ~ -..~ ~~;..~~-r z --
~. _;. _. ,
—simply from t(Ronald Reagan) Washington west wall of the concourse, 23 retail shops
that can triple the average National Airport, Westfield fine-
shopping centers as well. "People don't
open toward the glass wall, Fifteen retail
foot traffic. Hence, Home Depot's
new Man- go to airports to shop," a Westfield official
Depot, so have tuned the new business of airport shops, kiosks, and carts run along the east
hattan focus. As goes Home retail management. "This kind of airport
says. "They go to travel. So we were look-
already gone a number of chain
stores— side of the concourse and into the piers ... íngfor retailers offering impulse merchan-
retail is a business that didn't exist a few
Westfield brought a number of retail firsts díse rather than destination purchases:'
with more following fast. years ago," says the president of the Los
What retailers should look for in
a to National Hall. Shops developed by high- What does that mean? "People just don't
Angeles—based Westfield Corp. Inc., which
not only profile organizations exclusively for the
site, says one expert, is one take off their pants in an air-
demographics, but good developed and now manages National Air- facility include National Zoo, Smithsonian, port," says the official.
with good port's 31,200 square feet of retail space ..
"psychographics"—the shopping style and National Geographic. In addition, six "So the type of
,:.-
cities, psy- "it's a whole new world." national retailers—Waldenbooks, Brook-
or mentality of the people. In apparel we have
chographics may not measure the
same At National Airport, it's a spectacular stone,Victoria's Secret, Gymboree, Easy here doesn't
new world. The one-million-square-foot _ ` ps cho ra hi
people as demographics do. For
example, Spirit, and Travel 2000—have touched need to be Y g P C i
National Hall runs north and south, with
cities welcome huge numbers
of tour- down at National with their first airport tr~ea on. Mast ~ Research Comes
own local three boarding piers jutting east. Along the stores. Managing an airport mall is chal-
ists, but they also have their of it is outer-
to Real Estate
"destination" shopping spots, which
vary lengíng, Airport wear. "West-
according to each category or
subcategory demographics,for field provides
who's example, reverse
of shopper."You need to know specialized cus-
shopping in Santa Monica on a Saturday the classic tomerservice train-
out. 60-to-40 percent
and on a Monday," he points ingfor employees. One of
women-to-men the key training points is speed of service,
Joan Aron, ratio of a mall the official says. "In a shopping center, you
Source: Excerpts from Laurie
Shopping," market, and the train people to show a lot of options," she
"Downtown Goes
Location Strategies, June 12,
2002 airport shop- explains. "Here, we train people to askalot
~ pers have higher of questions fast, narrow the choices, and
(Reed Business Information)
income. The present one or two options"
~{~ psychographícs of
't ~ ~ airport retail pros- Source: Excerpts from Michael Fickes,"High
center
__ pects differ from Flying Retail," Retail TraKic, October 1, 1997.
6-]4 shows
Dentsville Square Shopping
South Carolina httpé//clusterl claritas Center. The map depicts highways, population density by census
tract, and existing gro-
.cor~~Aclaritas/Default isq cery stores in the Columbia area. By selecting any given grocery
store, detailed data can be
~mu~ii~=3&Sub~IlBnu=Seq available about its size, owner, and volume of business. Additionally,
the GIS can be used
&S~'_; ~ ~t=Se )1'izm#1 to calculate detailed information for a market area(such as a
two-mile or five-mile radius)
Layers A particularly transparent example around Dentsville Square. This information might include the
number of persons, number
❑ Counties of "psychographic" market of households, median household income, estimated annual
retail expenditures, daily traf-
Interstate segmentation.The Claritas PRIZM fic counts, and the total and vacant square footage of other retail
properties. Thus, by hav-
— Highway system describes 62 household ing a GIS program and the appropriate data, an analyst can
quickly and easily determine
Grocery store market segments. whether the site meets basic criteria and should be investigated
further.
Q Dentsville Square
Psychogra~hics
Psychographics is a tool for sophisticated determination of market
segmentation. One
description of psychographics is that it "seeks to describe the human
characteristics of
Persons/Sq. Mi. consumers that may have bearing on their response to products,
packaging, advertising,
0 to 499 and public relations efforts. Such variables may span a
spectrum from self-concept and
500 to 1,599
1,600 to 3,299
3,300 and over
• -s
6.12 GIS is a uniquely powerFul tool for assisting retailers or
service providers
in the task of
~: ,157
 Chapter 6 Forecasting Ownership Benefits and Value: Market Research 159
Appraisal
Part 3 Market Valuation and
158 attributes."ls
interest s, and opinion s, as well as perceptions of product
lifestyle to attitudes, activities, interests, opinions,
and
Real estate market research seeks to relate the cash flow prospects of a property to the
is to relate a consumer's
The idea of psychographics consume r's demogra phics.
relate to product choices—to a economic and social forces of its urban context. It must account for the effects of the urban
values—especially as they iate statistic al analysis , an analyst seeks to economic matrix, but also the effect of land use controls. It must recognize both locational
complex multivar
Through the application of demographics, (e.g., as in the and nonlocational market segmentation.
ns that can use observable
develop one or more equatio market segments. Firms provid- Because of market segmentation and the variation in property context, little can be
) to distinguish various
census data used in this chapter market segments for consumer said, in general, about the form of effective real estate market research. It is a process
researc h claim to identify several dozen
ing this kind of primarily to retailing and rather than a formula. We have presented it as a process of constructing, verifying, and
psychographics has been applied
behavior. In real estate, chapter demonstrate settings quantifying a story. The process begins with constructing the market-defining story. This is
y Issues features of this
consumer services. Both Industr followed by initial data collection and then initial analysis or evaluation. From that point,
where psychographics apply. one determines whether a conclusion can be reached or whether the research should be
relined. The goal of the research is to determine a plausible range for critical cash flow
parameters for the subject property. For rental property these parameters are projected
rental rate growth and vacancy rates. For a subdivision or condominium project the critical
market parameters are sales rates.
potential interest to real estate
6.73 Psychographics are of cation and use of A market analysis never will explain its conclusions completely. The number of
researchers to refine the identifi variables involved in determining the projection of occupancy and rental rate growth param-
eters is beyond any formal analysis. Thus, at some point the analyst makes a judgment leap
to the final projections. The objective of market analysis is to make that leap as controlled
and understandable as is reasonably possible. It should be spelled out to the point that other
Survey Research reasonably knowledgeable analysts know whether they agree or disagree with the final leap
at many levels. Perhaps one
applied to real estate markets ofjudgment.
Survey research has been , a development team for
useful is at the project design level. For example ew
of the most staff to contact and intervi
coastal condom inium arranged for some of their sales they liked and
a what
in the target area concerning
owners of existing condominiums the develop ers were able to identify
these interviews,
disliked about their units. From distinctly more successful
enabled them to create a project Geographical information systems Market segmentation 133 Psychographics 157
some design features that of restaura nt prefere nces
the authors conducted a survey (GIS) 155 Metropolitan statistical area
than others in the area. One of promising chain of restaura nts
ed in identifying a very Market parameters 135 (MSA) 140
among students, which succeed entered the commun ity suc-
area. The chain subsequently
not represented in the local questio nnaires to obtain helpful clues in
interviews or
cessfully. Builders often use those rejecting a builder's
this purpose, the opinions of
designing for a local market. For of survey research
informative. Another potential use
product are frequently the most assessment. In the case of Plane Answer the following multiple choice problems: c. Nature of other tenants.
target markets for advertising and market
is to identify help confirm our assump- 1. Factors that affect housing mazket segmentation include all d. Provision for electronics and communication systems.
example , a survey of where residents work could e. All of the above.
Vista, for from, and it also could help except:
concern ing where the demand for Plane Vista comes a. Household income. 5. A strong assertion about the large amount of data seemingly
tions
ng channels. available for real estate market research is that most of it is:
identify effective project marketi survey research is not
b. Household age.
regardi ng survey research: While simple c. Household size. a. Inaccurate.
A word of caution to prepare carefully and to
abortive errors. Thus, it is wise d. Household unemployment status. b. Too costly.
difficult, it can be fraught with guidance of an experi-
one time. If possible, obtain the e. Household lifestyle. c. Irrelevant to a given analysis.
pretest any questionnaire at least designing a questionnaire
advice in formulating questions, 2. The process of creating amarket-defining story includes all d. Too detailed.
enced survey researcher. A little survey can reduce time and e. Too old.
method, and administering the of these questions except:
format, selecting a sampling of getting uninterpretable 6. The approach to real estate market research advocated in
enormou sly, and can avoid the all-to-common misfortune a• What is the product?
cost b• Who is the customer? this chapter starts with the:
results. ~• Where is the customer? a. National economy.
d. What is the price? b. Local economy.
e• What is the competition? c. Relevant industry mazket.
- 3. The cycle of real estate market research starts with: d. Region.
Concept Check
a. Creating amarket-defining story. e. Nature of the property.
project
especial ly valuable in real estate during b• Assessing the national market. 1. A powerful tool for managing, manipulating, and displaying
6.14 Survey research can be
~• Collecting market data. location-specific data is:
~~ á• Posing preliminary conclusions. a. Statistical regression analysis.
e• Testing the current market condition. b. Development cash flow software.
4• Features of an office building that may be important to one c. Psychographics.
(New York: market segment or another include: d. Geographical information systems.
A. Farnham, Consumer Profiles: An Introduction to Psychographics.
15. B. Gunter and a• Floor plate size. e. Database management software.
Routledge, 1992). b• Character and amount of parking.