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 70th-92nd 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

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.