Whether you’re a commercial real estate agent or a CRE investor, knowing why — and how — to conduct a commercial real estate market analysis for investment properties is essential. The market is fluid: economic conditions are ever-changing, and supply and demand fluctuate, as do property revenues. All of this affects a commercial property’s value.
If you’re considering an investment in commercial real estate, or you just want to know the market value of a property, learning how to perform your own CRE market analysis can help you make the most informed decision.
What Is a Commercial Real Estate Market Analysis?
A commercial real estate market analysis analyzes the value of a specific commercial property in depth. Also known as comparative market analysis, a CRE market analysis helps identify trends in the market, such as the following:
- Average rental rate
- Average vacancy rate
While taking the above into account, the analysis compares similar properties using property features, location, and type to come to a likely price range.
Defining the Property’s Market Area
The first step of CRE property market analysis looks at the market area of the property. The property’s market area is the immediate vicinity, geographically, that the property serves. This is especially important for retail stores, the hospitality sector, warehouses, and financial services.
Market areas are largely dependent on the property type and the business that will be carried out. For instance, a department store’s market area is its immediate vicinity — about a one-mile radius or so. Therefore, malls have much larger market areas and pull in customers from within a three- to seven-mile radius, sometimes even farther.
After deciding the market area, you’ll then investigate the economy and demographics data for the area. For the area in question, find out the following information:
- Average income level
- Education level
- Size of households
- Average age of residents
- Marital statuses
- Employment and unemployment rates
Sometimes, an area is in a developmental phase. Look at the number of businesses coming to the area, how much construction is occurring, and if there’s potential for increased population numbers. If the area has seen a lot of new construction but there’s no likelihood of a growing population, then the commercial property you’re considering could offer a stable return on investment, but not an exponential return.
Gathering Data for a Commercial Real Estate Investment Analysis
Every property has several sources of data. What’s important is that you get the most up-to-date data from a reliable source you trust. Government data is often reliable, such as what you can find at the local County Assessor or Clerk’s office, but other providers can offer insight into the market you’re looking at in addition to the actual data. ProspectNow, for instance, has up-to-the-minute property owner information and other helpful details about commercial properties that you’ll pay much more for elsewhere.
When evaluating commercial property area data, be sure to look into the following:
- Average interest rates
- Average household income
- Property sales and leasing numbers
- Number of schools
- Average daily traffic
The number of similar businesses already in the area is also important. A saturated market means you won’t get as much in ROI. Consider coffee shops — there’s one on every corner nowadays. Investing in a coffee shop in a market area with one or more existing coffee shops — considering their market area is about a one- to two-mile radius — won’t bring in as much revenue as an apartment complex, for instance.
All that data might seem like a lot to digest. But knowing and factoring this data into your decision is essential. For most commercial property investors, property data influences their strategies by helping identify potential properties, improving targeting, and discovering new niches.
Now that you know the data you need to uncover, let’s take a look at how to put it to use in actual analysis.
How to Conduct a Commercial Real Estate Market Analysis
Conducting a commercial real estate market analysis is a complex undertaking. Residential market analyses may just look at comparable properties, whereas commercial analyses look at income production in a specific market.
To begin, look at the current conditions of your given market and find out the answers to these questions:
- What are the current trends?
- What does the supply and demand for that kind of property look like?
- Are there currently projects under construction in that market? If so, how many are still waiting for permit approvals?
- What are the average rental, occupancy, and vacancy rates in that market sector?
- What’s the normal cap rate?
So, once you’ve uncovered that data, it’s time to begin confirming details about the property itself, such as these:
- The number of units, if it’s a multi-unit property
- The property’s square footage
- Size of the lot
- Any special zoning rules
- Other property features
Next, you’ll run a report for income and expenses. This is to determine the net operating income (NOI) of the property. If a property has a negative NOI, high vacancy rates, or is sitting idle, take a look at the average income and expenses of similar properties in the market. However, running a pro forma report shows you the potential income of a property if you were to make improvements to it.
Multiply the NOI by the market’s average cap rate for the property’s likely sales price. Most professional analyses include the market’s comparable properties as a reference, but in this case, the value of comparable property isn’t helpful in determining information about the specific property you’re looking at. What is helpful is finding the cap rate on the comparable property when it was sold.
The information you can get from ProspectNow fulfills all the above, and you can get access for much less than you’d spend with our competitors. We’ve been offering reliable commercial real estate data since 2008, helping real estate agents, brokers, and investors just like you find more leads, close more deals, and make more money. Ready to see what ProspectNow can do for you? Reach out today or start your free trial.