This document provides an analysis of the real estate market. It discusses what real estate market analysis involves, including analyzing different real estate decisions and understanding both supply and demand factors. Key indicators for characterizing real estate markets are identified as vacancy rates, market rents, new construction starts and completions, and absorption of new space. The concept of "months supply" is explained as a useful measure that combines current vacant space and new construction with net absorption to indicate how long it will take for vacant space to be absorbed. Tips for conducting market analysis are outlined, including defining the relevant market, time period, and recognizing different analysis approaches. The document then provides forecasts for the Chicago market, noting moderate demand growth but that retail may provide better

1. Real Estate Market AnalysisReal Estate Market Analysis
The Overall Market Forcasts

2. 2
●
“Real estate market analysis” refers to analyzing a variety of
real estate decisions.
» What size or type of building to develop on a specific site?
» What type of tenants to look for in marketing a particular
building?
» What the rent and expiration term should be on a given lease?
» When to begin construction on a development project?
» How many units to build this year?
» Which cities and property types to invest in so as to allocate
capital where rents are more likely to grow?
» Where to locate new retail outlets and/or which stores should
be closed?
Market Analysis : Why do it?

3. 3
●
Real estate market analysis usually requires quantitative or
qualitative understanding (& prediction) of both the demand
side and supply side of the space usage market relevant to
some real estate decision.
» Feasibility analysis for a specific site or property
» General characterization of the supply/demand conditions in a
particular space submarket.
Broadly Speaking…

4. A few primary indicators that characterize both the supply and
demand sides of the submarket and the balance (equilibrium)
between them.
●
Vacancy rate
●
Market Rent
●
Quantity of new construction starts
●
Quantity of new construction completions
●
Absorption of new space
Variables of Interest in Market Analysis

5. 5
●
The concept of “months supply” combines several of these
variables to help us understand a market even better.
●
Months Supply is the sum of current vacant space in the
market and new construction started but not completed,
divided by 1/12th
of the annual net absorption in the market.
●
This measure tells how long it will take (in months) for all of
the vacant space in the market to be absorbed, driving the
vacancy rate to zero.
–
Analysts compare the months supply to the length of time it
takes to complete new construction to see if the market can
support a new project. If the months supply is much greater
than the average construction period, the market is
“oversupplied.” Otherwise, it might be time to start a new
project in this market.
/12
VacanctSpace ConstructionSpace
Months Supply
NetAbsorption
+
=
The Concept of “Months Supply”

6. 6
●
Define the market carefully along geographic and usage
dimensions, recognizing that most metropolitan areas form
markets that can be usefully divided into smaller submarkets.
The next slide describes how the Atlanta office market can be
“divided.”
●
Carefully consider the time period to be covered in the
analysis
–
5 – 10 years into the future is desirable
–
3 years is more feasible in most cases
●
Recognize the differences between and the benefits of a
simple trend extrapolation and a structural analysis
–
Trend extrapolation predicts the future purely based on
historical trends and patterns
Some Tips for Market Analysis

7. 7
●
In both types of analysis (extrapolation
and structural) the steps are:
» Inventory the existing supply and evaluate the
pipeline.
» Relate the demand sources to the space usage
demand.
» Forecast future demand for and supply of
Understanding a Market Analysis

8. 8
●
Imminent Demand
–
No signs of a dramatic increase in
demand on the local level (no industry
shift moving towards chicago)
–
U.S. economy may be “fragile” – oil
prices/global economic uncertainty
acting on a drag on U.S. economy
–
Demand predictions “moderate” at best
●
Supply
Chicago Forecasts

9. 9
●
Retail development is a better opportunity
–
Vacancies are lower
–
Effective rents have been increasing slightly
●
People still consuming in Chicago (both natives and tourists).
Residential areas of Chicago are still developing (south/west loop).
●
Interest rates will still likely increase – as a result, financing costs will
still rise.
Chicago Retail Forecasts

10. 10
●
Macro assessment
–
Fundamentals “solid” not “strong”
–
Oil and Inflation (has me worried)
–
Consumers and Business (going strong)
–
Government (too much debt)
–
Net Exports (of no concern to me)
–
Business investment is most stable! Lots of capacity to expand – they are
hesitant given past mistakes (late 1990s) and oil/political uncertainty.
●
Residential Property Markets
–
They will come down (either bubble burst or supply adjusts)
–
Increase in interest rates may quicken this effect
–
Re-adjustment will occur slowly (it always does)
–
Will investors adjust to/plan for a higher (normal) interest rate regime?
Other Thoughts….