Björn Andrén 🐻
    📑

    AI2102 - Real Estate Market Analysis

    True ✅ or False ❌  - With Explanations

    ‣
    The concentric zone model is a growth model that does not allow different city centers.
    ✅
    The concentric model is developed around one Central Business District, its the oldest version of urban growth. I call it “the the old Church model” and it looks like this.
    Concentric Zone Model - The city is developed around the Central Business District (CBD)
    Concentric Zone Model - The city is developed around the Central Business District (CBD)
    ‣
    The concentric zone model is not a modification of the multiple nuclei model.
    ✅
    True  - The concentric model has one nuclei and was the first urban growth pattern of cities. The Nuclei model started to become popular when we had Cars.
    ‣
    An amenity index can only include two projects.
    ❌
    False - The Amenity index can include more than 2 projects, just add more columns to the index.
    ‣
    Leakage is competing supply restricted to two projects only
    ❌
    False - Leakage is restricted to the competing supply.
    ‣
    A Secondary Market Area (SMA) is always located in a direct connection to a primary market
    ❌
    False - A secondary market could be found on the other side of a bridge. It does not need to connect with the primary market.
    ‣
    A PMA that is sparsely populated is preferred by developers compared to a PMA that is densely populated
    ❌
    False - Low density PMA suggests this location might be bad. The PMA usually has few customers but high penetration (a lot of people buy from this market). A large PMA is good for the project.
    ‣
    The extended market area (EMA) does not include the SMA.
    ✅
    True - Each Market Area has boundries from the other ones.
    ‣
    The likelihood of finding potential buyers decrease by distance.
    ✅
    True - This is caused by human moving patterns. We are less likely to move far away from a place we have lived before, causing the penetration of extended markets to very low.
    ‣
    Sometimes we can find several PMA if the developer has two or more target groups.
    ✅
    The primary market is a geographic location, there can be many locations with the same target group that are in the vicinity of the project.
    ‣
    Highest and Best Use is a concept that is developed for residential development.
    ❌
    No, its reasonable and legal use of vacant land that is
    • Legally permissable
    • Financially Feasable
    • Physically possible

    With an outcome of maximum profit. → Independent of type of project

    ‣
    Rent theorists established the concept of Highest and Best Use in the early 1800.
    ❌
    False, I’ve no idea why this is a relevant question but its false.
    ‣
    Demand analysis include sources from supply analysis.
    ❌
    Nope, in demand analysis we try to figure out the amount of people who can afford and are willing to buy our product.
    ‣
    Macro economic factors such as GDP are not included in a forecast of demand.
    ❌
    False, we include macroeconomic factors to understand growth trends of demand or if demand will fall of a cliff, like it has in 2022
    ‣
    A penetration rate does include planned units.
    ❌
    Penetration rate is the percentage (%) of target group that will buy. 1 buyer of 10 potential buyers → Penetration rate 10%
    ‣
    1000 competing units in SMA is critical for absorption of your project in PMA.
    ❌
    This is just a wacko statement. Absorption = Market Capture Rate * Demand
    ‣
    Absorption can best be calculated using GAP analysis.
    ❌
    False, GAP analysis is the difference between supply and demand on an annual basis. GAP = Gross Annual Potential
    ‣
    The concentric zone model is a modification of the Sector Wedge model.
    ❌
    The concentric model is oldest version of urban growth. The sector wedge is a newer typ of urban growth model that has industrial areas and transport zones.
    ‣
    Leakage means that competing supply is restricted.
    ✅
    Yes, leakage is restricted to competing supply.
    ‣
    The market capture rate (or adjusted market share) is used to adjust competing supply.
    ❌
    Market Capture Rate = Fair Market Share * Amenity Index
    ‣
    A secondary market area (SMA) can not be located in direct connection to a primary market area.
    ❌
    The SMA can be located in a direct connection to the primary market area.
    ‣
    A PMA that is densely populated is preferred by developers compared to a PMA that is wide and sparsely populated.
    ✅
    High density = More potential customers with high penetration = More buyers
    ‣
    The extended market area (EMA) also includes the SMA.
    ❌
    We delineate the market areas to divide them into different markets, hence this statement is false and stupid
    ‣
    The likelihood of finding potential buyers increase by distance.
    ❌
    Keyword = Likelyhood (%) → The penetration decreases by distance = The likelyhood of finding buyers, decreases by distance from the project
    ‣
    Rent theorists established the concept of Highest and Best Use in the early 1800.
    ❌
    Idk when this concept was developed but it’s def not in the 1800. Probably was developed when began to include morals and ethical things in development eg. between 1900-today.
    ‣
    Productivity analysis is a cornerstone in Highest and Best Use.
    ✅
    The goal of the productivity analysis is to evaluate and analyze how we can use the land productively →
    ‣
    Absorption is a measure of success.
    ✅
    How well the project is absorbed by the market is one measure of success. With high absorption we have built a product people want.
    ‣
    Demand analysis include sources from supply analysis.
    ❌
    Supply is competing products, Demand is people who can afford and want to buy.
    ‣
    A penetration rate do not include planned units.
    ✅
    The penetration rate is a % of how well the project penetrates the market.

    AI2102 - Exam 18-01-12

    1. Definitions and concepts (10p)

    a) Highest and Best Use (2p)
    🧠
    Reasonable and legal use of vacant land that is
    • Legally permissable
    • Financially Feasable
    • Physically possible

    With an outcome of maximum profit.

    b) Fundamental real estate demand (2p)
    🧠
    Quantity of a particular and affordable real estate product that is demanded by some majority at a specific point in time.

    Key words: Quantity, affordable, real estate product, some majority, specific point in time.

    c) Headship rate (2p)
    🧠
    Defined as number of households divided by the population.

    It is a proxy for average househould size. If the headship rate is 40%, the average household size is 1/0,4 or 2,5 humans per household.

    d) Market segmentation (2p)
    🧠
    Dividing a market into meaningfull groups based on characteristics and attributes ex. demographics, legal, local, physical and political.
    e) Entitlement risk (2p)
    🧠
    Entitlement risk arises when a property developer builds a new property or converts one. These projects must involve the local government and community to mitigate entitlement risk.

    2. Productivity Analysis (10p)

    a) How is productivity analysis used in a proposed project? Explain the three types of attributes in the productivity analysis principles. (4p)

    Productivity analysis is a tool to study and determine highest and best land-use. Its based on characteristics and comparing attributes within the characteristics to evaluate.

    🧠
    Attributes and characteristics are not the same thing. Attributes tend to be more specific, while characteristics are broader. Ie. Within a characteristic there could be more characteristics but the it ends with attributes.
    ‣
    Example “Characteristic and Attribute Tree”
    ‣
    Physical
    ‣
    Man Made
    ‣
    On-Site
    • Architecture
    ‣
    Ameneties
    • Dishwasher
    • Dryer
    • Fridge
    ‣
    Natural
    ‣
    On-Site
    • Green Space
    ‣
    Off-Site
    • Sun orientation
    Characteristics
    Attribute Examples
    On-site
    Off-Site
    Legal
    Hight of building 📐
    -
    -
    Physical
    “Dishwasher from Miele” 🍴
    Green Space 🌳
    Sun orientation 🌤️
    Locational
    Distance to main road, Sea View
    -
    -
    b) What kind of mistakes can be done if the productivity analysis is not carefully carried out? (2p)
    🧠
    The amenity index serves as proxy for our projects competitiveness in the market. It indicates how competitive our project is compared to other products. We derive the market capture rate based on the amenity index. Therefore, if we are not thorough with the amenity index we increase the risk and uncertainty of the market capture rate. In real estate uncertainty is the enemy of making money.
    c) Explain this proposition: If Highest and Best Use are reached in two different projects then the projects have to contain different attributes. (2p)
    🧠
    Highest and best use, is contextually bound with each project. Exact location different for each project. Since you cannot build two different buildings at the same site, each project is unique. Some Charcteristics are allways bound to location. Therefore attractive attributes are contextually bound to the projects location.
    d) Give two examples of static and dynamic attributes off-site (one for each) (2p)
    🧠
    Dynamic off-site → Busstation under construction 🚌 Static off-site → Roads, Seaview 🐳
    On-Site 📍
    Off-site
    Dynamic (Planned)
    Planned pre-school on groundfloor
    Bridge, Road or Busstation under construction 🚌
    Static (Built or Existing)
    Topografi, Location 🗺️
    Roads, Seaview 🐳

    3. Urban Growth - Models, Patterns and Location quotient (10p)

    a) Explain at least three Urban Growth models in terms of land use and growth patterns of one of them. (6p)

    Concentric Zone Model

    Concentric Zone Model - The city is developed around the Central Business District (CBD)
    Concentric Zone Model - The city is developed around the Central Business District (CBD)

    Concentric Model Zones

    Zone 1. Central Business District (CBD

    Zone 2. “Zone of Transition

    Zone 3. Housing for workers

    Zone 4. Housing middle-high income households

    Zone 5. Commuter Zone

    🧠
    “Looks like an old church Village → Land use expands concentric (in a circle) and overflow occurrs when increasing the radius → Transportation costs and time value, topography are not a part of the model

    Sector ( Wedge) Model

    The Sector Wedge Model - Homer Hoyt
    The Sector Wedge Model - Homer Hoyt

    Sector Zoning

    Zone 1. Central Business District (CBD

    Zone 2. Wholesale and Manufacturing

    Zone 3. Low-income Residential

    Zone 4. Housing middle income

    Zone 5. High-Income

    🧠
    “Looks Like Lidingö” → Efficiency of corridors are introduced → Topography has a large impact on patterns of development

    Multiple Nuclei Model

    Multiple Nuclei Pattern of Land Use - Harris & Ullman 1945
    Multiple Nuclei Pattern of Land Use - Harris & Ullman 1945

    Sector Zoning

    Zone 1. Central Business District (CBD

    Zone 2. Wholesale and Manufacturing

    Zone 3-5 Low, middle and high income Residential

    Zone 6. Heavy Manufacturing

    Zone 7. Outlying Business District

    Zone 8. Residential Suburb

    Zone 9. Industrial Suburb

    Zone 10. Commuter Zone

    🧠
    “Looks Like Texas” → Several focal points with impactful activities - Cultural, Shopping, industrial Districts → Use of land highly specialised and each center serves a economic purpose.

    Axial Model (Radial Corridor) Pattern

    Axial (Radial Corridor) Pattern
    Axial (Radial Corridor) Pattern

    General Notes

    • Key Roads are corridors towards CBD
    • Expansion of land use occurs through corridors
    • Topografi & Water are boundries for development
    🧠
    “Looks Like Stockholm” → Distance and time spent commuting to CBD determines the value of the land. → Use of land highly specialised and each center serves a economic purpose.
    b) What is the relationship between urban growth patterns and real estate demand?
    🧠
    Real estate demand of land correlates with the urban growth pattern. For the Axial or sector wedge model its somwhat dictated by the growth pattern. If there is high friction to access or commute to the CBD from a specific property, the demand for that property could be close to zero. Therefore, not taking into account the urban growth pattern into a demand analysis will misrepresent the percieved value and demand for a specific property.
    c) Location quotient is method used to explain urban growth due to employment increase of certain sectors. Explain how sectors are defined based on LQ estimation. (2p)
    🧠
    Location quotient Is method used to explain if an area exports or imports labour or goods. Beeing a exporter basically means this area provides more value than it consumes within a sector. Exports are pre-requisite for growth, hence exports are good.

    Location quotient

    Nurses 🧑‍⚕️
    Labor 💼
    Local 🏡
    Ln
    L
    National 🏘️
    Nn
    N

    LQ = (Ln/L) / (Nn/N)

    If there is a higher density of nurses in the local area than in nationally market.

    LQ will be > 1.

    → The Local area exports nurse labour to other regions.

    4. Market Area (10p) Concept, Levels & Delineating Techniques

    a) Explain the concept of market area. Why do we need to determine the market area for a given development? (4p)
    🧠
    Market area is a trade and geographic area, where the majority of customers and competitors exist. The main reason to determine a market area is to close to scope and set boundries within the total market. This is done by differentiating characteristics and attributes.
    b) Describe the three levels of the market areas. (3p)
    🧠
    PMA- Primary Market Area People who all ready live within the area and have the means and needs to buy the product. Customer base with consisting of few humans, but with high penetration.

    SMA - Secondary Market Area Located outside of the primary market. Larger amount of people, semi high penetration.

    EMA - Extended Market Area Everything outside of the secondary market. Huge amount of people, but very low penetration.

    c) Describe the three general techniques for delineating market areas. (3p)
    🧠
    General Delineating Techniques for Market Areas
    1. Location of customers
    2. Specify & Compare analogues to our property
    3. Market Delineation by Substitutes properties → Keywords = Location customer base, Specify & Compare analogues, Substitutes

    5. Demand and competitive supply (10p)

    a) As Real Estate Professionals it is important to be able to identify major exogenous determinants (exogenous means factors outside of the model or system) that drive demand and supply of different asset types. At least mention three of the exogenous determinants of new residential construction. (3p)
    🧠

    Exogenous Factors → Factors outside of our control

    Macrodeterminantes 🏦

    • Effective rate set by the FED or Riksbank (Some call this the interest rate)
    • Quantitative easing, the FED buying loans or assets.

    Other Exogenous Factors 🇪🇺

    • Regulations of market rent
    • Taxes
    • Market expectations
    • War breaking out in Europe
    b)  Explain two kinds of desirable vacant space and two kinds of undesirable vacant space. Which undesirable vacant space should be considered competitive with subject property? (5p)

    Desirable Vacant space 👍

    Frictional Vacancy 🖕

    • The space is saved for future tenants

    Lag Vacancy ⏳

    • Can’t be leased because it’s under construction

    Undesirable Vacant space 👎

    Cyclic Vacancy 📉

    • A competitive product that can’t be leased out in a economic downturn

    Structural Vacancy 🏚️

    • Not a compelling and product that meets the required needs of the market.
    c)  Briefly explain the Pipeline effect and its relevance to the Real Estate Market, and discuss why the number of approved plans is not the best measure of new supply. (2p)
    🧠
    If the goal is to build more houses, the “definition of done” is when people move into their new homes. Not when the plan for the homes are approved. A better measure would be the amount of started projects. “Spaden i backen” (Could include a scheme of the planning process, cause it’s a long pipeline)

    6. Amenity Index calculation (10p)

    Complete the following table and provide explanations of your answers:

    Attributes
    Subject
    Project 1
    Project 2
    School Expenditure / Pupil
    4000
    3700
    3500
    Security
    105
    107
    100
    Neigbourhood Incomes
    37500
    37500
    3500
    Crime Rate
    6
    7
    4
    Index
    Subject
    Project 1
    Project 2
    School Expenditure / Pupil
    ?
    ?
    ?
    Security
    105
    ?
    100
    Neigbourhood Incomes
    ?
    107
    100
    Crime Rate
    ?
    ?
    143
    Unweighted Amenity Indicies
    ?
    ?
    ?
    Subject Competetive Postion
    ?
    ?
    ?
    Complete the following table and provide explanations of your answers:
    🧠
    In the amenity index, High Numbers means good. Choose appropriate low or high number given by the first table as the bench mark. Then calculate the score by dividing the benchmark with the projects number. Ex. Crime Rate Benchmark = 7 Project 2 Crimate rate Score: 143 → 7/4
    ‣
    Answer ✅
    Index
    Subject
    Project 1
    Project 2
    School Expenditure / Pupil
    =4000/ 3500
    =3700/3500
    100
    Security
    105
    107
    100
    Neigbourhood Incomes
    37500/3500
    107
    100
    Crime Rate
    =7/6
    100
    143
    Unweighted Amenity Indicies
    Subject Competitive Index Postion
    🧠
    Unweighted Amenity Indicies = Amenity score subject / (Average of the competitors)
    🧠
    Subject Competitive Index Postion = Index Score / (Total amenity score)

    There are a few more steps, but I think this type of question is a waste of time and waste your human capital. I usually skip them or do the super easy parts.

    7. Retail Analysis (10p)

    Retail analysis differs from analysis of housing projects in many ways. For example there are different methods to estimate the market area of a retail property. a) Gravity modelling is one method suggested by Fanning. Define the equation of the gravity model and explain how it is used as clearly as possible. For example, define a target retail center and use two competing retail centers to clarify your point. (6p)
    🧠
    Where Size “Retail Site A” > “Retail Site B” Breaking point from B to A:
    Breaking point B to A = (Driving Time from A to B) / 1 + Sqrt( Retail Site A / Retail Site B)

    ”Den som är i täljaren ska vara störst och man åker från den i nämnaren till den i täljaren” - Ulf Nilsson

    b) In what way is this model similar or different from estimating the market area for a housing project? (4p)
    🧠
    The land use for retail and housing is totally different. Furthermore, this gravity model was created in the late 1930;s in the US. Driving and Cars were a part of their lifestyle. Before e-commerce consumers went and bought their products, this is when this theorem was usefull. ”Den som är i täljaren ska vara störst och man åker från den i nämnaren till den i täljaren” - Ulf Nilsson Today the quality of the site matters more than the driving distance and size of it. Is the shopping mall / retail location remarkable? If yes, then driving distance will

    Supply, Competitive Supply & Fair market share

    🧠
    Fair market share = Our Projects share of total market supply → Our supply divided by (Our supply + Competitive Supply ) = Total Market Supply
    Supply =
    Existing Supply + New Supply + Demolished Supply - Uncompetitive Supply
    Competitive Supply =
    Existing Supply + New Supply
    Fair Market Share =
    = Our supply / (Our supply + Competitive Supply )

    Six steps of Real Estate market analysis

    The six-step process
    Key Result of each step
    What we try to figure out
    1. Property productivity analysis
    Define the product
    Which attributes of the subject property that can be attractive for the market?
    Define attractive attributes
    2. Delineate the market
    Define the market area and potential target groups
    Who and where are the most likely users of these attributes?
    Divide the market and look for customers
    3. Demand analysis
    Investigate and forecast demand factors
    What is the demand for this type of property? Is this property use needed?
    How many people want this?
    4. Supply analysis
    Investigate and forecast competitive supply
    What is the competition?
    Are they supplied?
    5. Market Condition Analysis
    Analyse the interaction of demand and supply
    What is the condition of the market?
    What’s the condition?
    6. Subject Marketability analysis
    Forecast market share and absorption
    How much of this market can the subject property capture?
    Can we capture customers?
    ‣
    How to remember the names of the steps for the exam:
    1. Productivity → Define attractive attributes
    2. Delete the market → Divide the market and look for customers
    3. Supply Demand → How many people want this?
    4. But in reverse order → Are they supplied?
    5. Market Condtioner → What’s the condition?
    6. Subject mability → Can we capture customers?
    ‣

    REMA model Notes

    image
    1. Study effective demand from migration into Sollentuna by
      1. Investigateing population growth within 35-44 years old group in order to define net change in population.
      2. Calculating household formation in age group 35-44 years in Sollentuna municipality (with known readiness to form a household).
      3. Calculating the disposable income for target group.
      4. Calculating number of households 35-44 years old in the market area with appropriate disposable income.
      5. Calculating number of households with indicator of their choice to have small house.
    2. To study effective demand from households housed in Sollentuna.
    3. To calculate total demand
    4. To study competing supply in Sollentuna
      1. To calculate competing supply from new houses production
      2. To calculate competing supply from sales in the stock of small houses in Sollentuna
      3. To calculate total competing supply
    5. Productivity analysis
      1. Amenity index
    6. Gap analysis
      1. Supply – demand difference
    7. Absorption calculation
      1. Market share calculation
      2. Market capture calculation
      3. Absorption calculation
    8. Rate of return calculation
      1. GAP quota
      2. Changing timing of sale to se outcome
      3. Selling time calculation → Time untill product is sold when built.

    Levels of market analysis (A-D)

    criteria for choosing appropriate level of analysis
    🧠
    A & B → When we optimize for speed and trying to figure out if something is worth it C & D → When we optimize for calculations being accurate ie. when we decide to proceed with a project. Lastly, what analysis to use is circumstantial and depends on the customer, the market, the project etc.
    Inferred Demand Studies (Stable Market)
    Fundamental Demand Studies (Unstable Market)
    Analysis A & B
    Analysis C & D
    Based on:
    Based on:
    - Instinctive Knowledge
    - Quantifiable data
    - Trend Analysis of historical data and selected comparebles.
    - Forecast specific subject data
    Inferred Subject Attributes
    Quantified Subject Attributes
    Inferred locational determinants of use and marketability by macro analysis
    Quantified and graphic analysis of location determinants of use and marketability by macro and micro analysis
    Inferred demand from general economic base analysis implemented by others
    Inferred demand derived by original economic base analysis
    Inferred demand by selected comparables and demographic data
    Forecast demand by subject-specific market segment
    Inferred supply by selected comparables
    Quantified supply by inventorying existing and forecasting planned competition
    Inferred market equilibrium, highest and best use, capture conclusions
    Quantified market equilibrium, highest and best use, timing quantified capture forecast
    ‣
    Inferred analysis, Level-A
    • general and descriptive analysis
    • not subject specific analysis
    • relies on historical data
    • uses data updated annually
    • uses data from broad-based market surveys
    ‣
    Inferred analysis, Level-B
    • more subject specific than A level
    • oriented on specific type of real estate
    • relies on historical data
    • uses data updated quarterly or semiannually
    • uses results of market survey performed by private companies and public agencies for some market area
    • area of analysis still covers large parts of the city
    ‣
    Fundamental analysis, Level-C
    • Provides detailed submarket data
    • Always object specific
    • Extensive use of primary data generated by appraisers themselves during direct surveys
    • Projecting growth of population, income and employment
    • Forecasting demand and supply conditions in a specific submarket as residential housing or retail.
    • A quantifiable rating of the subject in comparison to competitive projects (productivity analysis)
    • Absorbtion calculation
    ‣
    Fundamental analysis, Level-D
    • Includes a Level-C study but adds more subject specific analysis.
    • Forecast of demand is based on the employment projections segmented in greater detail
    • Forecast could be made for specific sub-segments (jewelry stores, sporting goods stores).
    • Could contain attitude studies and statistical analysis directed to a specific target group
    • The content of a Level-D analysis depends on the specific task
    • Additional analysis of
      • urban planning and land policy
      • public and private fiscal capabilities
      • risk rating

    GAP, Market Capture Rate, Absorption

    image
    🧠
    Gap → Difference between supply and demand. Could say the gap between demand and supply, but the market gap on yearly basis could also be said to be the gross annual potential. (GAP)
    🧠
    Market Capture Rate = Fair Market Share * Amenity Index
    🧠
    Absorption = Market Capture Rate * Demand

    Effective Demand

    We spend 30-45% of our income to have a place to exist. - Björn Andrén

    Disposable Income = Housing Costs / (0,3)