Real Estate Market Research Tools & Techniques PDF

Investment Analysis for Real Estate Decisions, Ninth Edition Unit 4: Market Research Tools and Techniques Unit Outline This unit argues the case for extensive market research and presents a market research design. It discusses data sources, explains descriptiv...

Investment Analysis for Real Estate Decisions, Ninth Edition Unit 4: Market Research Tools and Techniques Unit Outline This unit argues the case for extensive market research and presents a market research design. It discusses data sources, explains descriptive research and surveys quantitative research techniques. A. Why Market Research Is Needed 1. Investment analysts and portfolio managers need market information at every stage in their decision-making efforts. a. They must, for example, estimate the most likely cash flow from each investment alternative under consideration. b. They need to know yields available in the marketplace, so that cash-flow estimates can be intelligently adjusted for differences in the timing of expected receipts. 2. Market information is required not only for rational acquisition decisions, but for managing the existing investment portfolio. a. Periodically, all assets in the portfolio should be re-evaluated. Managers must decide whether to continue holding properties currently owned, or to adjust the portfolio mix. b. If no divestiture is indicated, managers must nevertheless decide whether assets should be refinanced, refurbished, converted to another use, and so forth. All these decisions require extensive market intelligence. 3 Market research is also needed to facilitate operating management decisions. a. As a planning tool, market research aids in identifying opportunities and anticipating difficulties. Property managers need to know basic trends in the economic environment within which they must market and administer rental space and must estimate how these trends will affect the market for real estate services. b. Market research reveals how changing income levels, consumption patterns and work practices are likely to affect demand for rental space. Data on competitive rents, for example, aids in deciding upon the appropriate rent structure and advertising budget. c. Market research aids in identifying needed changes in investors' property portfolios and property alterations to enhance rentability. d. Information about present and potential tenants' needs and preferences reveals when existing building amenities should be phased out because they do not contribute sufficient rent-generating ability to justify maintenance costs. e. Control-oriented market research permits early identification of existing and potential management trouble spots. It provides intelligence needed to assess the quality of current building operations and to evaluate proposed changes. ©2019 Kaplan, Inc. May be reproduced for educational uses only.  Investment Analysis for Real Estate Decisions, Ninth Edition f. Comparing building rental and vacancy rates with those of comparable properties, for example, reveals how well management is marketing existing space. Comparative tenant turnover rates highlight the degree of tenant satisfaction with a building and with building management. B. The Extent of Market Research 1. The extent of market research that is justified before making an investment decision depends upon: a. The degree of market stability. In a stable market there may be little need for additional research. But when markets are undergoing change, research becomes more valuable. Generally, the greater the rate of change, the more crucial market research becomes. b. The degree of investment complexity. Generally, the more complicated the investment proposition, the greater will be the potential benefit from additional market information. 2. Maximum net benefit from research occurs when it is pursued to the point where marginal benefits equal marginal cost. This is illustrated by Figure 4.1 in the text. 3. Since benefits from research are not objectively measurable, decision makers will be challenged to identify the point where they reach maximum benefit. C. Market Research Design 1. Because problems faced by investors are not uniform, research procedures must be custom tailored. Logically therefore, the process starts with carefully formulating the nature of the problem. 2. The most widely-employed research design in real estate market analysis proceeds from the general to the specific, starting with national and international economic trends and working down through metropolitan and neighborhood trends to an analysis of a specific property. a. At the level of national (and possibly, international) analysis, such data as Federal Reserve monetary policy and governmental fiscal policy are investigated for purposes of estimating their probable impact on local economic conditions. b. At the regional and metropolitan level, analysts collect and analyze data on demographic trends that will impact the demand for real estate. They also analyze political issues that might impact business or residential location decisions through their impact on zoning and building code enforcement and property taxes. c. As the focus shifts to smaller geographic areas, data become increasingly difficult to obtain. The research objective at this level is to estimate determinants of supply and demand relationships in the immediate market area. 3. A popular research model for real estate is the four quadrant forecasting matrix [Refer to Figure 4.3 in the text]. ©2019 Kaplan, Inc. May be reproduced for educational uses only.  Investment Analysis for Real Estate Decisions, Ninth Edition a. Start by filling in the upper left quadrant with present and historical data for the region and metropolitan area. b. Available forecasts for these same geographical units are placed in the upper right quadrant. c. Data for the lower-left quadrant are characteristics of the subject property itself: its physical characteristics, its share of local rental market, socio- economic characteristics of its tenants, and so forth. d. Using perceived relationships between data in the three filled-in quadrants, the researcher develops a forecast for the subject property. This goes into the lower-right quadrant, and relates to lower-left quadrant information in a manner similar to that observed between the upper quadrants. D. Preparing the Research Report 1. The report summarizes procedures employed and describes conclusions reached. Everything included in the report should be explained in terms of its bearing on the conclusion. If it is not a relevant factor in the analysis, it should be excluded. 2. The appropriate report format depends on the nature of the research problem and the needs of the user. E. Data Sources 1. Once a research problem is properly defined and clearly specified, researchers logically turn their attention to data collection. At this point a decision must be made to rely on primary or secondary sources for needed information. a. Primary data are statistics gathered by the researcher precisely for the problem at hand. b. Secondary data, in contrast, are those previously gathered for some other purpose. 2. A good operating rule is to rely on primary sources only if secondary data are not available. a. Wherever available, secondary data are almost certain to be less costly and less time consuming to generate than are primary data. b. A major disadvantage, and a major cause of researcher frustration, is that secondary data are almost never available in precisely the desired form. c. Secondary data are frequently available in raw form from agencies that generate it. Their data files can save many days of tedious work and save costly hours of field investigation. 3. Primary data may be gathered by communication or by observation, with choice usually dictated by the nature of the intelligence desired. Communication involves questioning respondents. Observation means checking and recording relevant facts or behavior. a. Communication is a more versatile means of gathering data than is observation. It is more amenable to the collection of a variety of factual data. ©2019 Kaplan, Inc. May be reproduced for educational uses only.  Investment Analysis for Real Estate Decisions, Ninth Edition b. When it is possible to use communication as the primary means of gathering data, this method usually proves to be faster and more cost effective than mere observation. c. Data collected by communication, however, are sometimes tainted by a lack of objectivity. Their accuracy is subject to question. Interviewees are sometimes inclined to say what they believe their interrogators want to hear. d. Data collected by observation are more likely to be objective and factual. Data that can be collected by either method are generally more reliable if secured by observation. F. Descriptive Research 1. Much of the research data needed by real estate investment analysts is descriptive in nature. Examples include: a. Describing the profile of a typical tenant. b. Estimating the proportion of people in a specific population who behave in a particular manner. c. Estimating reactions to proposed alterations in rental terms, such as length of leases or the relative degree to which rent depends upon a flat fee versus a percentage lease clause. 2. No descriptive data should be gathered until the researcher has clearly determined who is to contribute information, what information is to be collected, when the information is to be solicited, where interviews are to be conducted and how the collection is going to be accomplished. 3. Data collection should also be preceded by the preparation of a cataloging system. This aids in early identification of analytical problems that may be faced after data are collected. 4. Descriptive series may be cross-sectional or time series. a. Cross-sectional surveys, which involve one-time sampling from a population of research interest, are by far the most frequently encountered type of data collection assignment. All elements are measured at a single point in time. The cross sectional survey thus provides a snapshot of the variables under observation at the time of the survey. b. Time series, in contrast, measure changes over time. Sometimes called longitudinal studies, they involve repeated measures of the same phenomena, recording any variation through time. 5. Modern statistical techniques are a powerful addition to the analyst's repertoire of analytical tools. These techniques permit rapid and inexpensive analysis and synthesis of masses of data. 6. They also permit reliable generalizations to be drawn after examination of a limited portion of the total pool of information. 7. To apply the most commonly used statistical tools, one needs no more than a high-school level knowledge of arithmetic. What is required is an understanding ©2019 Kaplan, Inc. May be reproduced for educational uses only.  Investment Analysis for Real Estate Decisions, Ninth Edition of the statistical relationships themselves; their strengths and weaknesses, their uses and potential misuses. 8. Statistical applications divide conveniently into two broad categories. a. Descriptive statistics involve measuring characteristics that are important to a problem and bringing them together in summary form. b. Inferential statistics involve drawing conclusions from evidence contained in the data. G. Geographic Information Systems (GIS) 1. Geographical Information Systems (GIS) relate information to geographic locations. They involve a series of map overlays, so that different types of information can be spatially related either in isolation or in concert with related information. This is illustrated by Figure 4.3 in the text. 2. GIS has been employed for many years, but computerized systems have only recently achieved a level of cost effectiveness that is making them widely accepted as a tool for real estate investment analysis. ©2019 Kaplan, Inc. May be reproduced for educational uses only.