A market feasibility study is conducted to validate if the target real estate market could support the development.
Before starting a new development or redevelopment project it is essential to complete a proper evaluation of the local market conditions and demand drivers. A market feasibility study can include the below sections:
- Overview of the project
- Economic Overview of the Area
- General Overview
- Gross Domestic Product
- Investment Indicators
- Population and labor
- Any other thing relevant to that location and project
- Site and Location Analysis
- Site and Location Overview
- Location Assessment and Accessibility
- The Location of the Project within the City
- SWOT Analysis of the Project Site
- Market Assessment
- Supply, Demand and Projected Absorption
- Development Concept and Market Fit Analysis
- Product Mix Overview
- Product Positioning
- Competitive Position of Project Site
- Operator Decision
- Staffing Issues
- Various Operating Model
- Maintenance Issues
- Other Operational Issues
- Financial Analysis
- Supply, Demand and Projected Absorption
- Pricing Strategy
- Estimated Required Investment (land cost, development cost, financing cost etc.)
- Unleveraged IRR or Project IRR
- Leveraged IRR and Funding Strategy
- Various Financial Performance Indicators
- Scenario Analysis
- Sensitivity Analysis
If you are new to the market feasibility study, you should have look at the process of conducting the market feasibility study.
I have also covered site analysis for market feasibility study in detail previously.
Since 2019, the real estate market in Canada has been fire despite the Covid-19 pandemic. Buoyed by the influx of immigrants, increasing employment and income, the rebound is expected to continue for a few more years. For real estate developers, this is music to the ears. Simply put, there has never been a better time for a new real estate development.
However, caution must be exercised, a proper market feasibility study must be carried out by prospective or even established real estate developers, before proceeding to invest in a new property developments or re-development.
In this post, I will be examining the following topics
- What is a market feasibility study?
- What are the factors considered in a market feasibility study?
- How to conduct a market feasibility study?
- The benefits of conducting a market feasibility study
Simply put, a market feasibility study is a study used to analyze the real estate markets in specific locations, to determine the viability of proposed property developments. Several factors may determine the profitability of real estate projects. Market feasibility study allow developers to assess these factors and how they can affect the project.
Developers can come up with any kind of development vision. And, regardless of the excellence of such vision, where the necessary factors are not considered, real estate developments tend to get wound up in a myriad of problems, ranging from marketability problems to legal issues. To help you avoid such pitfalls, I have written this article to highlight how to conduct market feasibility study for real estate developments and the factors to watch out for.
What are the Factors Considered in a Market Feasibility Study?
Below, I list and explain the categories of factors that must be considered in a market feasibility study before the sod is cut on any real estate development project. I have already covered the extensive list at the start of the article but will explain some of them in detail.
Demographic Studies/Demographic Analysis
Demographic data is a huge determinant of the profitability of any real estate development. Before you decide on what type of real estate to develop, you must study the demographics of the intended area of the build. Demographic data includes:
- Income level
- Household size
- Age of the population
Let us examine this scenario - Mr. George and Ms. Phillipa are both real estate developers based in Alberta and Yukon respectively. They both devote similar investments to building similar luxury condos and execute similar marketing strategies. However, they do not achieve a similar level of financial return. Why could that be?
Mr. George’s condos are in Alberta with a much higher population of high-income earners, compared to Yukon, and thus had not much trouble finding willing buyers. However, with a low population of high-income earners in Yukon, Ms. Phillipa’s luxury condos remained largely unsold. This is an example of how these factors affect the performance of real estate developments.
Had Ms. Phillipa conducted a market feasibility study, she would have realized that building low-cost affordable housing was better suited for her market and more economically viable than luxury condos.
The most paramount concern of every business is profitability. The economics of a project focuses on the costs and affordability of its development, the financial instruments that would be used to fund it, and the ease of assessing them. Also, the projected profit margins are examined.
Real estate developments must be economically viable. Real estate is expensive to build and maintain, economic viability ensures the continuity and completion of the project.
Market Impact Analysis
Another particularly important component of the real estate market feasibility study is the market impact analysis. Here, the potential impact of the project on the local market of the location of the proposed development is studied.
This analysis is especially crucial for legal reasons. Different municipalities have different laws for preserving their neighborhoods. Conducting market impact analysis will help you to identify whether your project falls short of the laws in place. With this information, you may decide to alter the project to fit in or to pivot completely.
Market forecasting is another vital component of a market feasibility study. Often, markets change, and variables shift. However, these situations can be mitigated by a thoughtful real estate developer.
Market forecasting is especially vital because it helps you to determine whether the project will remain viable in the future. To do this, you must study varying factors; geographical, political, legal factors, to determine the future of the market.
For example, developing a gentrifying area is bound to bring you much profit whereas properties built in areas prone to the adverse effects of climate change are bound to lose value along the line.
Market Profiling/Competitive Assessment
This aspect entails analyzing the existing market and your would-be competitors. You must comprehensively analyze the current position of the market and the developments of your competitors to determine what sub-segments of the market may be saturated or maybe under-served. Also, market profiling will help you identify what types of real estate are in high demand in the area.
Consider the following scenario. Mr. Jack intends to build apartment complexes in Ontario. Ordinarily, apartment complexes usually get quickly sold out, because of their affordability and practicability for people living alone and small, lower-middle-class families. So, it is a no-brainer, right?
Well, not so much. Conducting market profiling and competitive assessment will show him that the customers in Ontario are beginning to want more square footage and privacy consistent with stand-alone houses or terrace apartments. And competitive assessment will show him that the apartment complex market is saturated, and the terrace apartment market is underserved.
Armed with this information, he may now decide to plan an entirely new development or move to a new location where he will be more likely to earn profits from the development.
Evaluation of The Local Market Conditions and Demand Drivers
The final component of the market feasibility study is the evaluation of the local market conditions and the factors that drive demand. Most importantly, you want to find out the average rent and average property sale prices and, how much people are willing to spend on the real estate.
However, market conditions are not strictly economic, you may also want to research the cultural and political factors that may dictate the preferred sub-locations.
How to Conduct a Market Feasibility Study
Now that we have robustly outlined all the components of a market feasibility study, how do you conduct it? Well, all you need to do is follow the three steps outlined below.
- Define your development vision
- Gather and analyze the facts
- Re-evaluate your project
Define Your Development Vision
The first thing you want to do is to define your development vision.
- What do you want to build?
- Why do you want to build it?
- Who are your projected buyers and/or renters?
When you have a clear vision of your project, you can easily understand how the factors you will be considering may affect the development.
Gather and Analyze the Facts
We have outlined all the important factors above and why they matter. Gather all the facts related to your project. You may do this either by carrying out surveys, interviews, or researching public records.
Then, analyze the information and find out how they all affect your development, whether positively or negatively.
Re-evaluate Your Project
Finally, re-evaluate your project. You might have to make a few minor changes, make a complete pivot, or even bring the project to a full stop altogether.
The Benefits of Conducting a Market Feasibility Study
Conducting a feasibility study is not just another mundane or routine procedure associated with starting a real estate project. It presents several benefits, all of which contribute to helping you to make the right decisions, for profitability and viability. Some of these benefits are listed below.
- Conducting a market feasibility study helps you to test your development vision for viability. It is not enough to have the financial and human resources to execute a project, it first must be workable. Market feasibility study is a straightforward way to evaluate workability.
- It helps to improve the team’s confidence and focus. It is easy to get disenchanted with ambitious development projects. However, a market feasibility study may help to bolster confidence by proving the project’s viability.
- It helps you to accurately assess the project needs. Real estate requires a lot of resources, ranging from financial resources to human resources and technical know-how. Conducting a market feasibility study helps you to fully assess the specific resources required by the project.
Conducting a market feasibility study is not for show, but for results. Real estate developments are only lucrative when the clients are willing and able to splash the cash on your project.
Everyone makes mistake and a real estate development analyst is no exception. We should always follow the best practices of creating a real estate market feasibility study model and should avoid these top 10 mistakes at all costs.
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