Complete Guide to Efficient Real Estate Market Analysis

What is Real Estate Market Analysis?

Real estate market analysis is the process of collecting and analyzing all the relevant information needed to make informed decisions about the acquisition, sale, rental, or development of real property. 

Real estate agents often use comparative market analysis (CMA) – a form of real estate market analysis that focuses primarily on comparing a property’s attributes to those of similar units in a given area  – to determine the fair market value of private homes. Property owners and buyers can also harness CMA to determine an asking price before putting a house on the market, or to decide how high they are willing to go to snag a property in a particular neighborhood. 

In the world of commercial real estate (CRE), a more complex form of market analysis is used by professionals to create and assess investment strategies, evaluate deals, and determine the most profitable uses for land parcels. Commercial real estate market analysis seeks to gather and analyze a broad range of metrics in order answer questions like:

• Which local real estate markets are likely to grow in coming years, and which are likely to contract? 
• Which cities present the best opportunities for investing in rental properties? Where is the rental market likely to thrive, and where is likely to decline? Where are delinquency and vacancy rates likely to remain low?  
• Should a given plot of land be turned into a shopping mall, an office building, or a multifamily housing complex?
• Where are the best markets for a specific retail chain to expand? 

The Benefits of Data-Driven Real Estate Market Analysis

The first step in conducting real estate market analysis is to clearly define the specific goal at hand. Is the main purpose to build equity by investing in property likely to appreciate over time? Or is the primary aim to identify the ideal market to establish a retail presence, or develop a rental property to generate more immediate income? The concrete goal of the analysis will determine the factors to be considered and shape the relative weight given to each of them. 

But whatever the main goal, hard data is key. In this guide, we’ll discuss best practices for conducting commercial real estate market analysis and explore how brokers, owners, and buyers can leverage location intelligence to boost the accuracy and quality of real estate market analysis and improve CRE decision-making.

Key Factors in Real Estate Market Analysis

Broadly speaking, the factors that go into real estate market analysis can be divided into two main categories: market-level factors and property-level factors. 

1. Market-level Factors

As everybody knows, what really matters in real estate is location, location, location. Even before delving into the data on specific properties, real estate market analysis must account for a wealth of information on the broader geographic areas where potential properties are situated. Some of the main data points that go into market-level analysis include:

• Demographic trends and local employment patterns: Is the area growing or losing population? Are young families moving in or leaving? How does the local median household income (HHI) compare with the national average? And is the area experiencing job growth?
• Local amenities and infrastructure: Does the area boast a variety of retail centers, restaurants, parks, and other places of interest? Are local business centers lively and bustling, or do they appear to be languishing? If the property is a retail venue, how much competition is its planned usage likely to face?
• Crime levels: Are area crime levels rising or dropping? Do they present a significant investment risk?
• New and planned development and construction: What kinds of major development projects are planned for the next several years? Is residential housing demand likely to remain ahead of supply, or will there be a glut of available homes? What is the local regulatory environment like?
• Real Estate Prices and Occupancy Rates: How do local occupancy and vacancy rates compare to other similar areas? Are rents and prices going up or down?

Most of these factors should be analyzed on both a local (metropolitan area) and hyperlocal (neighborhood) level. Different areas within cities may experience varying growth trajectories and may be positioned to support very different kinds of businesses. And states and even cities that appear to be in decline may boast neighborhoods that are experiencing a localized renaissance. 

2. Property-Level Factors

In addition to market-wide factors, real estate market analysis should account for a variety of factors relating more specifically to the properties under consideration. Some of the elements that should be considered include: 

• Specific location and accessibility: How close is the property to good schools, public transportation, and other amenities? If it is a retail business, how central is the location? How many people pass by it each day? How accessible is the property by car or by public transportation? Is there sufficient parking? 
• Maintenance and improvement costs: How much does it cost to maintain the property? What kind of shape is the property in, and what improvements will be needed before it can start to generate income? On the flip side, does the property present an opportunity to add value through renovations or redevelopment?
• Tenancy and rental income: If the property includes units to be leased, how much rental income does it generate? What are its estimated occupancy and vacancy rates? Do rents tend to get paid on time, or are there high delinquency rates? 
• Foot traffic patterns: For customer-facing businesses like shopping centers and other retail establishments, physical visitation patterns are key. How many people frequent the location each day? Are visits increasing or decreasing? What is the demographic profile of the property’s visitor base? And how do visitation levels compare to similarly situated properties?
• Comparative Benchmarking: In addition to the above factors, commercial real estate analysis should account for the price of comparable properties and for how well they’ve done in recent years.

Metrics for Assessing the Profitability of Income-Generating Properties

If the main goal in purchasing a property is to achieve long-term value appreciation, analyzing the factors listed above can help assess potential real estate deals and determine whether a given property is expected to appreciate at a good rate. 

If the goal, on the other hand, is to generate rental or other more immediate income, a variety of additional metrics will be useful for comparing different opportunities and evaluating profitability. Some of the most important of these include (this is not an exhaustive list): 

• Cap Rate: A property’s cap rate (capitalization rate) is its net operating income (NOI), divided by the total purchase price – including any repairs and closing costs, but excluding the cost of financing. Cap rates help investors quantify and compare the earning potentials of different properties. 
• Gross Rent Multiplier: The gross rent multiplier divides the price of a property – or of a market average – by the expected annual rent. Gross rent multiplier can be used to compare one market to another. 
• Cash on Cash Return: This metric helps investors manage cash flow and determine how much they stand to earn at the end of the first year. Cash on cash return compares a property’s annual income to the actual annual outlay – including down payments, mortgage payments, repairs, and more.  

Real Estate Market Analysis in Practice: The Role of Location Intelligence

Many of the data points that go into conducting commercial real estate market analysis rely on foot traffic data and other forms of location intelligence. In this section we’ll explore a couple of examples of industries that utilize real estate market analysis, to illustrate the potential for location intelligence to enhance the quality of potential insights.

1. Real Estate Market Analysis for Multifamily Rental Properties

Imagine you manage a real estate firm that invests in multifamily rental properties. You are evaluating opportunities in several different cities and need to decide which, if any, are worth pursuing. 

Using up-to-date foot traffic analytics, you can analyze population movements on both a macro (state- or CBSA-wide) and micro (zip code) level, to understand local domestic migration patterns. And by layering demographic and psychographic datasets on top of this analysis, you can gain insight into the specific characteristics of the populations moving to and from each area. By accounting for metrics like the ages, median household incomes (HHIs), and household compositions of inbound relocators relative to the local population, you can assess whether the area attracts young families or whether it is more popular among retirees.

Location analytics can also be harnessed to assess the vitality and quality of the surrounding area. Neighborhood foot traffic trends and visitation to local retailers and business centers can provide a sense of how the area is doing overall. This data can then be integrated with information on local crime rates, development plans, and more granular property-level factors to create a complete picture of the potential risks and benefits of the opportunities under consideration. 

2. Real Estate Market Analysis for Retail Properties: Stores and Shopping Centers 

Foot traffic analytics can also be key for conducting a robust real estate market analysis in the world of retail CRE. 

Say you are a CRE broker tasked with selling a shopping center. By leveraging foot traffic data, you can assess the center’s overall health and benchmark it against comparable properties. You can also analyze customer visitation to the center to evaluate relative demand for its different offerings and determine peak visitation times. And by combining visitation data with demographic and psychographic data sets, you can examine the behavior and characteristics of the census block groups (CBGs) feeding visitors to the center and compare them to those feeding visitors to other nearby shopping centers. All of these insights can then be harnessed to determine pricing, predict return on investment, and present potential buyers with hard data demonstrating profitability. 

Imagine, on the other hand, that you are seeking to lease a vacant store. Foot traffic patterns in the vicinity of the venue can inform your assessment of the property’s desirability and of likely demand – impacting pricing strategies, competitive benchmarking, and more. Determining peak visitation times can also help position the property to prospective tenants. If visitation is highest on the weekends or evenings, for example, this may indicate the property’s particular value for dining or entertainment establishments.

Placer.ai Solutions For Real Estate Market Analysis

Location intelligence leader Placer.ai provides customers with a variety of tools that make conducting data-driven real estate market analysis easier than ever before. By integrating highly accurate and up-to-date foot traffic data with a broad range of demographic and psychographic datasets, Placer provides users with unmatched visibility into consumer visitation patterns in the physical world. As part of its privacy-by-design approach, Placer only obtains data after it has been stripped of personal identifiers like names and MAIDs – and only provides customers with aggregated, statistical information about visitation patterns. In addition, Placer doesn't show visits for locations with fewer than 50 unique devices.

Some of Placer’s key features that can be harnessed for real estate market analysis include:

• Chain and property reports: Placer’s foot traffic platform provides customers with in-depth visitation data for chains and commercial properties nationwide. Customers can analyze a broad range of metrics, including visit numbers and trends, hourly and daily visit breakdowns, customer loyalty and frequency data, and visitor journey information. 

The property dashboard also includes an area analysis feature which provides customers with in-depth information on countless properties’ immediate areas, including things like vehicle traffic volume, planned development, area crime data, and local events. Users can also define geographic areas as POIs, or point of interest, and subject them to in-depth property analyses to get visitation insights and trade area intelligence for unique geofenced locations.

• Demographics Report: Placer provides customers with a myriad of demographic and psychographic datasets, allowing CRE professionals to better understand both the population and visitor demographics within their trade areas. This data offers insights into visitor traits, preferences, behaviors, and lifestyles.

• Migration Dashboard: Placer utilizes foot traffic data to let customers analyze domestic migration and demographic trends on a state, county, and zip-code level. The data lets users determine the estimated number of people and share of population that left or moved to an area over a specified period of time. It also provides insight into demographic trends, like an area’s HHI ratio (the relationship between the median HHI of an area’s existing population and that of inbound migrants), median age, and more. 

Real Estate Market Analysis in 2023

As the real estate market continues to evolve, it’s critical for CRE brokers, investors, and others to keep pace with evolving best practices for conducting real estate market analysis. The rise of accessible location intelligence tools in particular offers professionals an unprecedented capacity to analyze the behavior of markets and sub-markets, and to evaluate the performance and revenue-generating potential of specific properties. By leveraging these tools, CRE professionals and stakeholders can generate more accurate and informed market analysis and stay ahead of the curve.