Hotel and Motel

The key concepts, proceeding top-down, for market analysis for the hospitality industry are market segmentation, demand, and supply. Location or trade area comes into the analysis as an umbrella over these three concepts. Market niche and segmentation, demand, and supply are primary determinants to establishing the criteria for locating hospitality facilities. Whenever there have been sufficient numbers of travelers in search of food and shelter, some form of hostelry industry has arisen.1 The Code of Hammurabi (1800 B.C.E) referred to innkeeping (Winfree 1996). In the western countries, as the Romans established an extensive roadway system, taverns and inns followed at strategically spaced locations. The Roman roads were used for military travel, trade and commerce, and pilgrimage and tourism. These are the primary reasons we use roads today. The early inns were largely run by religious orders. However, in Europe, as commerce grew in the fifteenth century, lodging as a commercial activity began to replace innkeeping as a charitable activity. In the American colonial period during the seventeenth and eighteenth centuries, inns and taverns were an important part of commerce and cultural exchange. These facilities were designed after the inns and taverns of England, which were closely integrated into their communities. Inns and taverns did not intrude or disrupt the neighborhood; instead, they were thought of as being an integral part of the culture and activities of the neighborhood. Architecturally, early inns and taverns conformed to the look and feel of the surrounding neighborhood environment. Survivors of these early inns are the contemporary bed-and-breakfasts (B&Bs). The term hotel arose early in the nineteenth century and was used to distinguish a greater level of commercial activity than an inn. Hotels offered food, drink, retail shopping, and lodging. Hotels were also more intrusive in their neighborhoods. Instead of less than 10 rooms that typified many inns of the era, early hotels contained as many as 200 rooms, and rose to 6 floors in height. Many nineteenth-century hotels were the tallest buildings in town. Thus, the hospitality industry began its first cautious attempts at market segmentation and diversification. Inns remained, but hotels offered an alternative experience via amenity differentiation.

Office and Industrial

A developer needs advice on the market for commercial space, including office and industrial properties. An owner of a commercial building needs to determine how much to charge for leased space, how much to sell the property for, or how much the property can be refinanced for. A purchaser needs to determine if market conditions support purchasing commercial space, or renting, and at what price. The real estate market analyst is responsible for the creation and assembly of information to guide such decisions. A background overview of real estate market analysis for the product categories of office and industrial projects is presented. The hedonic approach hypothesizes that a variety of phenomena contribute in one way or another to determining market rent. In a hedonic model, office or industrial property rent or occupancy rate may be the dependent variable of a regression equation, as explained in chapter 4. The phenomena that are hypothesized to cause the value of the dependent variable are the independent variables of the regression equation. Some examples of independent variables that have been hypothesized and examined in hedonic models as to their contribution to determining office market rent are listed below: . . . Terms of lease (Glascock et al. 1990). Architectural design (Hough and Kratz 1983) Building characteristics (Vandell and Lane 1989) Access to white collar employment (Clapp 1980) Local property tax rates (Wheaton 1984) Status and prestige (Archer 1981; Archer et al. 1990) Agglomeration—benefits of high geographic concentrations of specialized office establishments for specific kinds of industry (Gad 1979; Kroll 1984) Spillovers from close geographic proximity (Clapp et al. 1992). . . . Hedonic models might also include dummy variables as independent variables to represent the presence of some characteristic or phenomenon. The dummy variables have an assigned the value of 1.0 to denote the occurrence of some characteristic and 0.0 to denote its absence. An expectation must be developed by the analyst on how markets and submarkets differ in their rents, vacancy rates, and absorption rates and what their trend is expected to be.

Introduction

This book shows how to answer questions that provide guidance to the most important decisions in real estate: Should I buy? Should I build? Will the market support the decision? Before developers or investors commit to a project, they must have answers to these questions if they are to remain profitable in the long run. No generic answers will fit all real estate decisions at all times, because the circumstances differ so much between projects. Therefore, in addition to examples of the methodology that is generally accepted in the industry, this book provides explanations for why the methodology is used. True understanding provides the versatility that is needed in ever-changing markets. May I build a residential subdivision here? May I build a class A office building there? Such questions are important, but are better dealt with by planners, zoning officials, and attorneys. Is appropriate zoning available? If not, what would be involved in changing the present zoning to accommodate the proposed development? Answering “permission” questions often involves political considerations, which reflect the taste preferences of citizens and politicians and are a byproduct of the local power structure. Therefore, real estate development involves political decisions, as well as market analysis. The market analyst addresses a different scope of issues than the permission questions address. The market analyst provides information and guidance to the investor, buyer, seller, financier, and planner (See Pyhrr et al. 1989, Vernor 1986, Fanning et al. 1995, Delisle and Sa-Aadu 1994, Brueggeman and Fisher 1996). Funding for development or purchase usually falls upon lending institutions. Lending institutions require market analysis as input for their consideration before they commit to funding. Otherwise, they are jeopardizing the financial viability of their institution. The decision to lend without appropriate market analysis is no more than gambling. Some projects may be successful, some may not. Banking regulations require due diligence in the lending decision to evaluate the exposure to risk by the lending institution. So business geographic real estate market analysis is central to the risk management of those who carry the burden of responsibility for the investment.

Mixed Use

With perhaps the exception of building a new town, mixed-use (MXD) development requires the most complex real estate market analysis. As with the structural organization of the preceding chapters on real estate products in this book, this chapter will begin with a background of the real estate product type. A background of MXDs is necessary to understand those developments that are already in place across the North American landscape. Some MXDs have been successful and others have been dismal failures. A goal of this chapter is to describe and explain the instruments hypothesized to make an MXD successful. Some MXDs are approaching their functional age of obsolescence—25 or 50 years old. They may require new real estate market analysis to guide their redevelopment and that redevelopment must be executed in the context of how they originated. The background coverage, contemporary notions of trade areas, demand, supply, and report, for MXDs are presented. What Is a Mixed-Use Development? To be defined as an MXD, the real estate project must have three components (Schwanke 1987): . . . Three or more significant revenue-producing uses (such as retail, office, residential, hotel, and/or entertainment/cultural/recreation), which in well-planned projects are mutually supporting Significant physical and functional integration of project components (and thus a relatively close-knit and intensive use of land), including uninterrupted pedestrian connections Development in conformance with a coherent plan, which frequently stipulates the type and scale of uses, permitted densities, and related items. . . . Each of the above concepts is discussed below. Three or More Significant Revenue-Producing Uses Many real estate projects have multiple uses. However, MXDs as denned and discussed here must have at least three major revenue-producing uses. These uses should be nontrivial. In other words, if retail space is one of the mixed uses, then that retail space should have a trade area beyond the mere project site. In most contemporary mixed-use projects, retail, office, residential, and/or hotel facilities are the primary revenue-producing uses. Other revenue-producing uses of MXDs might include sports arenas and convention centers, performing arts facilities, and museums.

Retail

Retail real estate analysis is the most well developed, complex and technological of any of the other real estate product categories. This chapter begins with a review of the background literature. Real estate market analysis has been performed for retail longer than for any other category. Unlike medicine, in which some practices, such as bleeding a patient, have become obsolete, no major method that has been widely adopted by the industry during the past 100 years has subsequently gone out of use. Instead, these methods have been modified and incorporated into contemporary analysis and technology. This chapter next proceeds to the macro level with a presentation of how a real estate location strategy is developed for a large, multibranch retail chain. Afterward, a brief discussion of the micro-level strategy is presented following the four steps introduced in the preceding chapters. The methods, technology, and analysis of the four steps for retail real estate have already been presented in chapter 4. Because the retail side has been such a pioneer, methods developed for retail ultimately find use, with some modification, in real estate market analysis of all the other real estate product categories; hence, the four steps were presented as part of the general methods of chapter 4. It has always been the case that certain locations for retail activities offer distinct advantages over other locations. But knowing which locations were best has not al-ways been the complex task it is today. Until the late nineteenth century, the retail location decision was quite simple: always locate at the downtown commercial node. Changes in transportation technology increased the geographic range of the individual household. Each successive transportation era brought increasing geodemographic complexity to the city. The eras of transportation can be broken down by transportation mode: . . . First, households relied primarily on walking from home to work to shopping. Second, for some of the larger cities, the trolley car and other innovations in public transit brought an increased geographic reach of the average household. Third, the personal automobile allowed many households to move beyond the limited corridors of public transit.

Housing and Residential Communities

Housing occupies about 70 percent of the land area of a typical city. That land area is not randomly distributed, but instead follows regular spatial patterns; these patterns are sectorial and radial (see Hoyt 1939; chapter 2). These geographic patterns form housing submarkets. Specific demographic groups are attracted to housing in those submarkets. As there are many kinds of demographic characteristics of households, there are also many types of housing, and many housing submarkets. Housing submarkets include downtowns, middle-burbs, suburbs; high income; middle income, and low income; new development, mixed use, older development, and mixed new infill with older development; apartments, condominiums; townhouses, high rises, and single-family dwellings. The market analyst makes recommendations on which type of development will be most successful in which submarket and on which submarket would be appropriate for a particular type of development (see Sumichrast and Seldin 1977). Few people today choose to live without the benefit of some type of housing. The choice and availability of what type of housing to live in depends on a complex interaction of many factors, including culture, the natural and built environment, technological scale of society, government, income, stage of life cycle, economics of building construction, and knowledge and imagination of those building the housing. This chapter presents a broad overview of housing market analysis. In the overview, the determinants to demand and supply of housing are presented (See also Harvey, 1992). There is a broad overview of forecasting procedures and methodologies, the methods for projecting absorption rate, housing demand, and competitive supply, and how sales prices and rental prices might be determined. In the last quarter of the nineteenth century, upper-middle-income urban households in the United States and Canada often lived in what are today commonly referred to as Victorian houses. These houses were designed for multigenerational living, including grandparents as the head of household, their children, and their grandchildren. Aunts, uncles, and cousins might have lived in the same dwelling. All the family subunits contributed to the finances of maintaining the house. This provided social security to the elder members of the household, and inexpensive yet high-quality living conditions for the other family members.

Unifying Urban Land Use and Land Value Theories

The market analysis report that is submitted to the decision maker (see chapter 4) should include a descriptive, qualitative overview of the context the real estate project has to the existing and changing urban environment. To better accomplish this task, one should have knowledge of the general theory regarding the market processes that bring about land use and urban form. This chapter presents three relevant general theories of land use and land value. Together, these general theories provide a general qualitative understanding of how the existing urban environment came to be and allows the analyst to prognosticate the trajectory of change of urban land uses and land values. The first two of the general theories presented here arose out of an attempt to explain agricultural land values and land uses. Why should a discussion of the agronomy sector be included in a book on urban real estate analysis? First, all the general theories relevant to land values and land use, and their spatial distribution within a city, are part of an intellectual heritage that dates from general theories of agricultural land values and land use. Second, much of new urban development occurs at those suburban margins. To understand development at the suburban margins, there must be an understanding of the nonurban land uses and land values at those locations. The third general theory explains spatial equilibrium and its role in shaping urban land values and land uses. Two eighteenth-century theorists, David Ricardo and Johann Heinrich von Thünen, are credited for having created a vast and sometimes opposing literature on land valuation. Ricardo’s economic theory was based upon the relative productivity of sites. In contrast, von Thünen’s geographic theory was focused on the locational component of land values and land use. The juxtaposition of these two competing giants of land theory in many respects still differentiates economists and geographers even today. After the theories of Ricardo and von Thünen are presented, an overview of the consumption theory of land rent (CTLR) is provided. The CTLR is my general theory and methodology for evaluating urban housing land use, land values, and urban form (Thrall 1980, 1987, and see 1991).

Understanding Real Estate Markets and Submarkets

This chapter explains the workings and characteristics of real estate submarkets and the interaction of the submarkets with the larger local market. Market analysts have often defined a real estate market by political divisions such as a county, city, or metropolitan area (e.g., Palm Beach County, the City of Los Angeles, Baltimore- Washington, DC metropolitan area). Market trends are compared and contrasted between real estate markets, such as the growth of Baltimore-Washington, DC versus the decline of Buffalo-Niagara Falls metro areas. Such comparisons at a large geographic scale are valuable because they can identify potential opportunities and potential investment failures. However, as discussed in the previous chapter, the real estate decision is a site-specific decision. Analysis at the appropriate scale and for the appropriate submarket is required to support the real estate decision. Submarkets are areas within the larger market area that stand out in some important way (see Thrall and Amos 1999; Thrall and McMullin, 2000b). For example, . . . Sites within the submarket are at the same stage of a cycle with one another, while perhaps being countercyclical with sites in the larger market or other submarkets. Land use within the submarket is homogeneous and differs from land use in other adjacent submarkets (e.g., a submarket of office buildings or retail). A submarket might be composed of households of similar demographic characteristics (lifestyle segmentation profiles), and have housing in a similar price range. . . . The city is an aggregate of submarkets. Each submarket is affected by the whole city; each submarket affects, and in turn is affected by, other nearby submarkets. In other words, submarkets are interdependent with one another and each is interdependent with the whole. Nearby submarkets generally have greater interdependency with one another than they have with submarkets that are more remote. However, some submarkets may be highly interdependent, even though they are distant from one another, such as submarkets of office buildings or industrial park land uses. An urban area will have few office building submarkets that depend on the same geographically large urban market to sustain them; overdevelopment of one office building submarket can have a price effect on another office building submarket.

Getting Started

The business geographer performing market analysis for real estate should become skilled in the advances of geographic technology, as well as geographic and real estate analysis and procedures. And the client should become skilled in judging the analyst's work. In this context, the eighteenth-century poetic essay by Alexander Pope (1688-1744) is appropriate (see box 10.1). The left column is particularly relevant to the analyst practitioner, while the right column is particularly relevant to the client who is making his or her judgmental decision. The client, whether an investor, financier, or developer, should know enough about business geography and real estate market analysis to correctly understand the evaluation and report, know which questions to ask of the analyst, and know how to translate the report into correct judgment. The client making the judgmental decision should not have his or her vision clouded by details of the choice made for which data source to use for population projections, nor should the judgmental decision be steered off course by the choice between which desktop GIS software to use. Instead, the client has other considerations, such as How do I select and work with a business geographer performing market analysis for real estate projects? and When and how should a business geographer consultant be used? This chapter gets the reader started in these tasks. Financiers, investors, developers hire business geographers to provide a variety of services, including choosing the appropriate data, software, and methods to use, and rely on their professional skills of execution and ability to complete and present the report in a manner that will improve their judgment. The business geographer brings objectivity, professionalism, and both broad and specialized experience with similar projects. How should a business geographer be chosen? First, the prospective client should decide what project(s) the analyst is to evaluate. The type of projects a business geographer might be engaged to work on include; . . . Determining the highest and best-use for a given site Selecting the location and evaluating the viability at that location for a specific type of development Constructing an expansion strategy and location strategy for individual outlets of a new or existing chain of retail stores. . . . The client should decide whether outside expertise should be sought or whether the real estate market analyst functions should instead be performed in house.

Conducting Real Estate Market Analysis

This chapter establishes a general framework for conducting market analysis for all types of real estate. The subsequent chapters show how, with appropriate modifications, this general framework applies to specific real estate product types. The following chapters also include examples of the general approach introduced here. Four general steps must be included in all real estate market analysis. This chapter will progress through each of the four steps. First, a trade area, also known as a market area, must be established from which to draw the data for the real estate market analysis. Explanation is provided on how to delineate a trade area for the project, including how large the trade area is and the geographic delineation of its boundaries. Second, to evaluate the competitive position of the project, competing supply is estimated. Competing supply includes both current and projected supply within the trade area derived in the first step. To identify competitive projects, the market analyst must also determine what segment the real estate project is to compete in. Third, demand must be measured. Demand estimation includes the assembly and use of projections of economic, geographic, and social indicators that together influence the demand for a specific real estate project. Occasionally, data readily available from commercial data vendors are inadequate for specific types of real estate projects. In these circumstances, demand is estimated using primary research, including surveys and focus groups, as well as assembly of primary data. The fourth step is compiling the report and presenting the analysis to client. The report must reconcile the results of the foregoing three steps with the goals and needs of the client. The client may be an investor, a developer, a redevelopment agency, and so on. The objectives of the client might influence how the fundamental first three steps are interpreted. The market analysis report generally concludes with recommendations, as well as a description of the overall project within the wide context of the economic, geographic, and social forces that are shaping the urban built environment. The analyst draws conclusions, including projecting absorption rates and pricing recommendations.