Retail Market analysis

Jumping Through Hoops

These steps evaluate retail property through market and feasibility analysis.

For most real estate analysts, the beginning perspective for retail real estate market analysis is often a site in search of a user, according to “A Rational Approach to Feasibility Analysis” in The Appraisal Journal. This is consistent with the theory that a user can pay the most to occupy a site since the user can place it into productive use immediately. An astute investor or developer values the property based on what the user can afford to pay to occupy the space. 

The Graaskamp Legacy reiterated the Graaskamp courses of action that exist in real estate feasibility, which include the site in search of user, site selection, and an investor looking for an investment property. 

This perspective animates the CCIM Institute Real Estate Market Analysis and Feasibility Model. [Figure 1] Market analysis represents the broader aspects of analysis that might identify several potential uses. Feasibility analysis provides the basis for determining which of a variety of alternative uses meets the investment requirements of a specific investor, according to Analyzing Real Estate Opportunities: Market and Feasibility Studies.

In simple terms, real estate is space for people to live in (residential); work in (office); shop in (retail); and store things in (industrial). Thus demand for real estate is a function of people and, of course, jobs and money, usually based on income.

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Macro to Micro Perspectives

The analysis process begins with defining the subject property’s location, typically in a macro to micro framework. The macro perspective begins with a regional perspective at the metropolitan statistical area level and is illustrated by a map, depending on the population level and perhaps two or more MSAs. The goal is to inform an individual who may not be familiar with the local city, county, and regional setting associated with the property.

The next step is a map of the county and should include identification of the key cities. The map should also recognize the hierarchy of roads: Interstate highways and limited access turnpikes and parkways; state roads; county roads; and streets.

Traffic counts are typically consistent with this hierarchy. This is usually shown by an aerial view, which would include the location of the subject property, roads with traffic counts, and the location of Walmart and the dominant grocery store.

If possible it would be good to capture the location of two Walmart stores or regional grocery stores. This provides a good graphic map illustration of the market area. In the example, the subject is located on SR 540, which has traffic counts averaging 30,000 cars per day that clearly shows of enough activity for retail uses. Further, this segment of SR 540 is six miles between U.S. Hwy 17 and U.S. Hwy 27, which is a good definition of the market area for the property.

The next step is to identify the trade area, which is usually defined as a sub-set of the market area. In retail, the trade area is the surrounding functional geography containing the customers who would typically frequent the subject location.

When a specific line of trade is identified as the target user, the analyst may rework the trade area taking into account the competing points of supply relating to the targeted user. In this case, a specific user has not yet been identified. For general analysis, the frequency of known attractions such as Walmart and the grocery store are relevant to the analysis.

This market area contains two Walmart stores and two Publix grocery stores, which indicates there are two trade areas. Additionally, the trade area for the subject property is approximately three miles. Finally, it is helpful to create an aerial view showing the location of other key retail outlets near to the property under discussion to help further confirm the correct perimeters of the trade area and also it is good to include traffic signals.

Distinctive Characteristics

At this point, it is appropriate to examine general demand for the market area and the trade area. The analyst might use the Benchmark Demographics report, which compares several functional geographies within a one-, two-, and three-mile radius as well as five- and 10-minute drive time with increasingly larger units of formal geography, such as county, MSA, state, and U.S. [Figure 2]

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In this case, the Lakeland-Winter Haven, Fla., MSA is a single county. As a result, the analyst could delete the column for the MSA data. The Benchmark Demographics report allows the analyst to make some general observations about the trade area.

For example, an older demographic of 48 median age compared to 41.9 for the state of Florida and 38 for U.S. and slightly more affluent population as compared to the county would show demand for eating and drinking establishments and healthcare facilities. Later in the market analysis process, an examination through specific demand, line of trade, and competing supply is necessary.

Now that location characteristics of market and trade areas have been defined, the next step in the market analysis process is an examination of the site and building characteristics. Site characteristics are observed by an aerial view of the neighborhood, as well as an aerial view of the site and site plan.

The key attributes of visibility and access are evaluated, as well as the positioning of the building, if there are improvements on the site, and parking is articulated. Is full access available, which is, right-in/right-out and left-in/left out? Or is access limited? Also, is a traffic signal associated with the site? Is there adequate parking? Next the analyst examines the building characteristics, which is typically shown by a floor plan that includes the dimensions of the space.

Political and Legal Factors

Following the examination of location characteristics and site and building characteristics, the analyst progresses to political and legal characteristics. Political characteristics identifies the land use and zoning associated with the property.

The analyst will review the zoning map from the jurisdiction, as well as the requirements and limitation associated the land use designation. Details are typically available through Municode. Legal characteristics examine use limitations associated with deed restrictions, and easement and access agreements and leases. Public records and title reports often provide deed restrictions, and easement and access agreements. Exclusive use and other such restrictions require review of these documents.

The next step in the market analysis process evaluates general retail supply. The analyst should review and document retail properties in the trade area associated with the property. Typically, this is a combination of researching commercial listing information services through programs such as CoStar, LoopNet, or Xceligent, as well as local sources in combination with the primary research of personally surveying the competing properties in the trade area.

The information is summarized, compared to the subject, and a conclusion should be reached as to stabilized or market rent levels in the trade area and recommendations for the property. For example, what is the rent level at which occupancy and vacancy are in balance?

Since the objective of this market analysis project was to find users for the subject property, it would be good to review the process for securing specific users. There are three steps in the process:  aggregation; gap; and trading places.

Aggregation means identifying adjacent and/or contiguous users who might benefit from combining the site with their current site. Simply stated, the tenant next door might want to expand and could put the subject space into productive use. If the subject property is a vacant site, contiguous property owners might benefit by combining their current property with the subject property through changes, such as improving access and visibility, providing additional parking, or expansion opportunities.

Gap analysis seeks to identify unmet demand. Effectively, it is an analysis of “who is missing” from the trade area. For example, some prospective users may have been identified through general observations related to the Benchmark Demographics report. One effective tool is the Esri Retail MarketPlace Profile report, which shows demand, as well as supply and retail gap by retail line of trade.

For this analysis, based on primary research of the commercial corridor, the trade area was identified as a 2.2-mile radius. The Retail Market Place Profile report is shown in Figure 3.

 

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Methodology for Technology

Esri provides an explanation of the methodology for this report. Based on reviewing the report, an analyst who is familiar with the local market may be anecdotally aware of specific users within the identified lines of trade with a positive retail gap. It is also possible to use the Esri Business Analyst “Business and Facilities Search” function to help identify users who are in a larger geography, such as the county, but are not represented in the defined trade area.

In this case, restaurants are the starting point, which have an identified positive gap, and the resulting report shows more than 500 restaurants in the county. Next, export the information to Excel, group and sort by business names and then eliminate any names that have a location within same zip code as the subject property. In some circumstances, it may be appropriate to filter by more than just the zip code of the subject property.

Since that the highest potential target users, which are restaurants, already have multiple locations in Polk County, commercial real estate professionals prioritize the list by the number of locations and focus on those with multiple existing locations. And then repeat the process for the other lines of trade with a positive retail gap.

Trading Places focuses on users who are in the same trade area and have the same locational characteristics as the subject property. The strategy is to demonstrate how the subject property offers better site characteristics than the target user current enjoys better access, visibility, parking spaces and overall better positioning compared to other tenants.

The subject property may offer enhanced building characteristics when compared with the target user’s current situation. The user may need more space or less space, space with more frontage or less depth, and better mechanical or other conditions. Finally, the principle applies that “you can outperform the market as to occupancy, but you cannot outperform the market as to rent.” So the subject space may provide superior financial characteristics when compared to the target user’s rent providing lower occupancy cost.

The final component of the Market and Feasibility Analysis model is financial analysis. Real estate is a capital intensive asset, so consideration is given to the return-on-capital provided to the owner and investor. How much capital must be deployed to own the property? And what is the return to the owner and investor? How does such compare to alternative investment opportunities with comparable risk characteristics?

Retail real estate market analysis is the key to understanding retail real estate value. The site in search of user process can be used for identification and subsequent leasing or sale to a user.

It is also important to consider the potential second or next users, who serve as the alternatives to the current target user for now or in the future. Finally, this is a realization for the rental market to further the understanding of who is the target user and what the user can afford to pay to occupy the space. These analyses are the true source of real estate value, according to “A Rational Approach to Feasibility Analysis” in The Appraisal Journal.

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Gary M. Ralston, CCIM, SIOR

Gary M. Ralston, CCIM, CPM, SIOR, is a partner at Coldwell Banker Commercial Saunders Ralston Dantzler Realty in  Lakeland, Fla. Contact him at gary@srdcommercial.com

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