Why Is Market Analysis So Important in Real Estate?

The first section defines the area under consideration. Defining the area is more than just finding the lot boundaries but involves defining the size of the target market most likely to generate income. Accurately defining the target market and neighborhood allows the investor to identify competition and the current supply to meet current demand in that area.

The second section contains a thorough analysis of the physical and environmental factors impacting the real estate. Physical factors include things like location, natural resources, topography, soil conditions, climate, water availability, and transportation patterns. At first glance, some of these factors may not seem terribly important to analyzing the profitability of a real estate investment. In some cases, however, the community’s location next to an ocean or pleasant climate could be an integral part of the community’s economy, industry, and desirability. It would be impossible to fully understand the community dynamics without an appreciation of these physical characteristics.

In addition to these physical factors, the market analysis may also include more information about the neighborhood features. Often, this includes detailed information about the neighborhood’s access to public goods and services. The access to and quality of public utilities can be extremely important to commercial real estate development. Real estate developers must consider whether or not a particular parcel of land has sufficient access to utilities as well as whether those utilities are capable of meeting the additional servicing demands of the new development. If not, the developer must convince the local government to invest in upgraded utility services to the area. So, the availability of adequate utility services and construction costs should not be overlooked since they can ultimately determine the feasibility of any real estate project.

Broader economic trends in the region as well as at the national level should also be addressed in the market analysis. Although all real estate is local, larger, macroeconomic forces have ripples throughout all local markets. As a result, interest rates, current and proposed changes to tax policies, inflation, GDP growth, and unemployment rates need to be analyzed in a market analysis. All of these factors play an important role in the growth or decline of the economic base surrounding the subject property.