Chapter 6: Market research

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Chapter 6 Market research

• Real Estate Principles A Value Approach
• Ling and Archer

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Outline

• The structure of market research
• A case

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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.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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Typical Elysian Forest home pair
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Competitive norm from local homes
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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).

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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.

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Forecast of sales
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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.