Different Perspectives in Commercial Real Estate Property Market Analysis

congress bridge downtown AustinCommercial real estate market analysis is important to anyone involved in property markets: developers, users, investors, brokers, financial analysts, and government officials. Each has their own perspective and it’s important that you understand who the players are and what’s important to them. If you want to get deals done you have to listen to everyone’s needs and accommodate them the best you can, especially when buying or leasing commercial real estate in Austin, Texas!

Developers must understand factors such as rent levels, construction costs, absorption, underserved markets, and the cost of capital to be able to make good decisions about where, when, how, and whether to develop. Users who plan to rent commercial real estate space need to know current quoted market rents as well as future rent increases, size space needed, and for how long they want to rent. Purchasers, both investors and users want to make sure they don’t spend more money than needed. Commercial real estate agents need instant access to market information if they want to be credible at representing tenants or landlords. Financial analysts need to be able use market data to determine risk vs return for their investors. Government officials depend on commercial market analysis to plan and forecast for future human resources and infrastructure. 

It’s important to analyze the market from different perspectives. Below are examples of each.

Developer Perspective

A developer needs to know that there will be demand for a building when it’s ready to occupy. Because development periods can last as long as 2 years or longer they need to know the demand for commercial real estate when they start construction and forecast demand at the time they complete construction. They must determine whether there is a shortage of supply of a certain kind of commercial real estate and whether there will be enough absorption at a rental rate needed to make a profit.

User Perspective

Users of commercial real estate whether leasing or buying want to make sure they are getting space at the lowest possible cost. They must make decisions about whether to purchase, rent, or build, which means they must know market conditions such as land costs, construction costs, purchase prices, and rental rates. Users also need to determine whether lease terms in a particular market are flexible to meet changing space needs, the share of expenses that commercial tenants typically pay in a certain market, and how much rent they will have to pay if they want access to certain markets.

Commercial Real Estate Agent Perspective

Brokers need to stay updated on the market to be credible with their clients and prospects. A tenant representative who pay a higher rental rate than they have to will not survive long; nor will a landlord representative who leases space to tenants at below market rates.

The best commercial agents keep a pulse on the market 24/7 and know what is available now and in the future.

Investor Perspective

Market analysis is important to investors because they need to info to calculate the feasibility model. For new construction, information on rents and expenses comes from market analysis. For existing properties, assumptions about rents vacancies, lease expiration dates, etc come from market analysis. Investors also need market data to calculate their return on investments (ROI’s), the weighted average cost of capital, and capitalization rates (aka CAP rates). All the ingredients in discounted cash flow models come from market analysis.

Financial Analyst Perspective

Financial analysts must understand the risk characteristics of a certain market to evaluate debt and equity investments. Markets supported by weak companies or by undiversified economies face more risk then markets that are more diverse with strong companies. Consequently the required rate of return must be higher in riskier markets than in less risky markets

Government Perspective

Government officials need to forecast and estimate future macroeconomic conditions in order to forecast and plan for future infrastructure and staffing. 

On a microeconomic basis, government officials often want something in exchange for granting development entitlements. If they have knowledge of market conditions they can make demands of developers. For example, if they know a developer has a great location and wants to build something they may decide to require off site improvements from the developer. Developers must also use market analysis to educate government officials about market conditions. If a government official is concerned about a lack of affordable housing and a developer can demonstrate a large gap between demand for and supply of housing, the official might be persuaded to approve a large new residential subdivision.

Conclusion

As you can see each player in real estate has a different perspective and it’s important that you understand not only your needs but their needs. If you want to make deals happen in your market you have to know all the players and the impact that your project will have on them.

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