1.

REAL ESTATE MARKET

ANALYSIS
1.2 THE NATURE OF REAL ESTATE MARKETS
 REAL ESTATE BUSINESS is affected unpredictably by foreign, national or regional
events and by changes in local economic, government policy and social
pressures.
 However, real estate failures mostly result from a misunderstanding of real estate
markets and failure to undertake an analysis of the market.
 While real estate market analysis do not guarantee a successful decision, it serves
as useful information in real estate highest and best use study and, therefore,
minimizes risk in real estate investment.

Knowledge of real estate economics is obviously essential in undertaking market

analysis.

In a real estate context, the principle of supply and demand states that
o the price of real property varies inversely, but not necessarily
proportionately, with demand, and directly, but not necessarily
proportionately, with supply. The interaction of suppliers and demanders,
or sellers and buyers, constitutes a market.
In real estate, supply is the amount of a type of real estate available for sale or lease
 at various prices
 in a given market
 at given period of time,
 assuring production costs remain constant.

Typically, more of an item will be supplied at a higher price at a particular time,

at a particular place indicate that item’s relative scarcity.

In real estate, demand is the amount of a type of real estate desired

 for purchase or rent at various prices
 in a given market for a given period of time,
 other factors such as
 population,
 income,
 future prices, and
 consumer preferences remaining constant.

Demand that is supported by purchasing power results in effective demand, which

is the type demand considered by the market.
Relate the following characteristics of an efficient market to the Real estate markets are not efficient This focus
characteristics of real estate market: underscores the need for objective real estate analysis
in a free market economy and the responsibility of
1. Prices are relatively uniform and stable, often the primary consultants to the community and clientele they serve.
consideration in purchase or sale decisions because quality Characteristics of real estate markets Real estate
tends to be uniform at a set price. markets have the following certain unique
2. Self-regulating. Open and free competition is subject to few characteristics that may cause market distortions:
restrictions.
3. Supply and demand are never out of balance because the 1. Real estate is durable and fixed in location.
market tends to move toward balance through the effects of 2. Legal restrictions prevent orderly market
competition. adjustments.
4. Buyers and sellers are knowledgeable and fully informed 3. The project gestation period (the time between
about market conditions, the behavior of others, past market project planning and project completion) makes
activity, product quality and substitutability. Any information real estate markets sluggish and slow to
needed on bids, offers, is readily available. respond to changing markets resulting in a
5. Buyers and sellers are brought together by an organized varying rates of land absorption.
mechanism, such as the PSE, and it is relatively easy for sellers 4. Real estate markets are highly localized.
to enter or to exit from the market in response to market 5. Supply and demand are slow to adjust to new
demand. market conditions.
6. Goods are readily consumed, quickly supplied, and easily 6. Credit availability and its cost affect supply and
transported. demand.
 Factors That Create Demand
 High demand means top rents, low vacancies, and good resale prospects.
 Poor demand means rent reductions, high vacancies, and a property that’s difficult to sell.

The following are key terms that produce demand for real estate:

1. Economic growth. New jobs and residents increase the need for developed properties. Rising income means
better rents and better prices, as well as more retail sales (see Local Economy)
2. Good quality. The property should have all the standard features expected in the market, plus something extra
that the competition doesn’t have. Appearance, features, size, and services are valued in today’s market.
3. Good location. Location can make a poor quality property profitable while good property can suffer if it in the
wrong place.
4. Competitive price. If the property is less than ideal, it may still be able to competent on price. It is important to
know what segment of the market the project is intended to serve and price it accordingly.
5. Cost of alternatives. Apartments are more popular when house prices are high. House sells better when
interest rates are low.
6. Room for more of that type of property in the market. The demand for a specific property is determined by
looking at how it compares to other similar properties in features, location and price.
 Analyzing the Housing Market
 The natural housing market being affected by numerous factors or variables, is highly segmented.
 Segmentation results from market imperfections, public policy, and more important, it is local market classified by types of
occupancy (rental or owner), type of design and structure, location and neighborhood age.

Elements of the National Housing Market

A decline in individual and family income
The forces of supply and demand are
 postpones household formation,
 partly economic,
 results in more families sharing space,
 partly sociological, and
 more single persons living with parents and
 partly related to government housing policies.
 more married persons living with in-laws.
Factors of housing demand. Most authorities relate
In periods of increasing income,
housing demand to a set of five variables:
 more individuals demand separate households.
1. Migration of households
The demand for new housing increases
2. Net household formation
• with the increase in the number of single retirees,
3. Family income
• separated persons and unmarried singles.
4. Housing demolitions
• While the rate of population growth may be
5. Relative price of housing services
controlled slowly, the increase growth rate in
household increases the demand for housing.
Housing statistics are derived mostly from public
Factors of housing supply.
records.
 The more important variables affecting the supply of
 New construction and the net change in housing and
housing include factors that
inventory under construction are derived from local
 affect the flow of saving,
building permit records.
 and investments into housing mortgage markets,
 The net change in housing vacancies is taken from
 government fiscal and monetary policies,
real estate companies or from the housing census.
 lender policies on interest and loan conditions,
 Demolitions and conversions to non-housing use
 and cost of construction.
would also be determined from building permit
• The interaction of supply and cost variables is highly
records.
complex, involving supply factors that affect
 New public housing construction would be available
 single-family housing financed by conventional
from public records.
private mortgages,
 houses under the government unified home
The increasing urbanization rate, or migration of
lending program,
households from rural areas to urban areas, usually
 houses directly financed by the SSS, GSIS and
results in a net increase in the demand for housing.
PAG-IBIG for the members,
 houses purchased by multiple-family units, and
 manufactured homes.
 Market analysis for socialized housing. Local housing
demand generally depends on four factors:

As a consequence, the housing supply as of a given time a. The rate of growth in the number of
depends on the quantity or volume resulting from: households.
b. Income and employment patterns
1. New construction in the open market c. Liquid asset holding income
2. The net change in inventory of finished units and d. Space, convenience, and style requirements
under construction.
3. The net change in housing vacancies
The demand for rental occupancy.
4. Demolitions and conversions to non-housing use.
 Compared to the owner-occupancy market, rental
5. New public housing construction and new
housing is more responsive to change in demand.
construction of manufactured homes.
 Rental occupants as group, tend to be more
Estimating the demand for owner occupancy. informed on the housing rental market than the
• The potential market for new housing projects families in the owner-occupancy market.
depends largely on the demand for housing in a  The rental market satisfies the housing demand on a
given neighborhood, community, or locality. special group whose housing needs are more nearly
• National housing statistics are available but may not satisfied by rental units than by owner-occupied
be current enough to be useful. units.
• Housing consultants may use local information to  To predict the potential demand for rental housing,
measure the demand for local housing. surveys of the potential demand among selected
groups must be undertaken.
 The Commercial Real Estate Market

 Though there are many types of commercial Central business districts.

real estate, office space and retail space  Historically the central business district (CBD) has played
dominate. a multiple role:
 The demand for retail space is a derived  as a center of city and municipal government and
demand – a demand derived from the  also served as a financial community and
potential volume of retail sales.  as an office center for those dependent on financial
 In turn, retail sales are dependent on the and government agencies.
buying power of the market area  Originally it was the main retail center, allowing for
population. the greatest amount of comparable shopping.
 With high pedestrian traffic, stores selling convenience
 Office space demands are more complex. goods found a ready market.
 The demand focuses on space for  In small towns, the CBD was typically the regional
 medical and dental clinics; marketing centre, and in larger cities, the CBD had a
 Local service-oriented businesses, such high concentration of cultural, entertainment, and
as accounting, real estate, and insurance; recreational facilities.
 and headquarters and branch corporate
offices.
 While favorable economic and institutional forces favored
revitalization of downtown Manila, most communities face five
main factors that limit the market for the CBD.
Observations of downtown Manila emphasize 1. Diversified property ownership – Central business districts are
problems facing most metropolitan centres, subdivided into relatively small lots and blocks to enable each
such as: proprietor to build for a particular purpose. Each property is
1. Declining sales in the large conventional constructed without regard to neighboring lots; buildings follow
middle-class oriented stores was caused the architectural preferences of the owner. Today, divided
by a shift in new office locations and a ownership of buildings that follow no common architectural plan
shift in retailing to lower-income makes it difficult to assemble land for redevelopment.
population.
2. Inadequate parking. The issue is not entirely related to the
2. Vacant office space was found in older number of parking spaces. Inadequate parking encompasses traffic
buildings with no immediate reuse. congestion, parking space inconvenient to main traffic generators,
3. Continuing social problems and physical parking that is expensive relative to the parking costs of shopping
deterioration of buildings endangered centre. Considered with other handicaps of the downtown area.
downtown revitalization of commercial This factor contributes to the further decline of the CBD.
and office buildings.
4. Unfulfilled housing needs were observed 3. The change in population. Virtually every city has lost population
in central area over the last generation. As middle – and upper-
in the downtown areas.
income groups have abandoned the city, the disadvantaged,
minority groups, and the unemployed have increasingly
concentrated in central space, further lowering the volume of
retail sales.
4. Poor land utilization.
Since downtown blocks were largely developed by single proprietors, the land use
pattern follow no integrated planning scheme. While main street frontages are
intensively used, the center block and secondary streets are often poorly utilized.

5. Change in downtown functions.

 The automobile, with its insatiable demands for space and access, has led
banks and financial institutions to consider abandoning CBD for suburban
drive-in facilities.
 Professional offices have moved to suburban office parks, and with the
transfer of department stores and shopping centers to suburbs, less pedestrian
traffic has lowered the demand for retail space and decreased the number of
customers for remaining businesses.
 Thus, the downtown has lost some of its attraction as a financial center, as an
office center, as a shopping center.
Today it is very clear that the downtown is not serving the same functions as
it did before.
THANK YOU

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