Importance of a Market Feasibility Analysis

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End users such as developers, syndicators and/or state agencies often hire professional market analysts to conduct a market feasibility analysis (market study) for a proposed development within a particular market.  But what is the need for, or importance of, a market study?  Further, and more importantly, what makes a good market study?

The need for, or importance of, a market study is quite simple.  This analysis is to provide a disinterested third party point of view for a given project based on the project’s competitive position within a particular market, while also determining the demand for the proposed project within that market.  Conversely, the components which make-up a good market study are more complex and can vary greatly depending upon the proposed project type.  However, there are several key components which every market study should include.

First and foremost, a Primary Market Area (PMA) must be established by the analyst, based on the proposed project’s location and project type.  This is the smallest geographic area from which the majority of support for a proposed project is expected to originate.  Accurately defining a project’s market area is crucial to providing an accurate and effective market study.  If an analyst defines a PMA which encompasses too large of an area, it is possible that demand for the proposed project will be overstated, which could result in the development of a project that is too large for a particular market.  Likewise, if an analyst is too conservative and defines a market area that encompasses too small of an area, it is possible that demand will be understated, potentially resulting in the development of a project that is too small and does not meet the needs of the market.  Inaccurately defining a PMA, primarily one that is too large could also result in the identification of inaccurate comparable properties.

Once a PMA has accurately been defined by an analyst, research of market trends should begin.  This includes, but is not limited to, identifying comparable/competitive properties, analyzing demographic and economic trends, conducting interviews with local stakeholders and identifying any comparable projects in the development pipeline within a given market.  The identification of comparable properties along with any comparable projects in the development pipeline is particularly important, as this along with the demographic trends will ultimately determine the type and size of product a particular market could realistically support.  The identification of accurate comparable properties will also help provide guidance in determining the competitive position of a project within a given market in terms of unit and project design, achievable rents and amenities offered.  This is particularly important during the early stages of development, as the identification of accurate comparable properties will ensure the developer does not leave out any key features being offered in a market, or include features that are not desired in a market.  In addition to analyzing the competitive position of a project within a market, it is also important that the impact a proposed project may have on existing comparable properties is considered.  In essence, a strong market will be able to support a new project without adversely impacting future occupancy rates among the existing comparable supply.

As indicated earlier, demographic and economic trends within a given market also play a crucial role in providing an accurate market study.  While overall demographic trends (population and household counts) are important components to a market study, more specific demographic trends should also be analyzed, based on the proposed product type.  For example, if the proposed development will target seniors or a specific special needs population (i.e. homeless, substance abuse, disabled, etc.), analysis of demographic trends within these demographic segments should be conducted, as often trends within such demographic segments differ from overall demographic trends within a market.  Economic trends such as business expansion, new business development and/or business closures/layoffs are also important factors to consider when conducting a market study, as economic growth often times will result in increased housing demand, while large-scale layoffs/closures could potentially result in a significant number of residents relocating to other areas, thus diminishing the need for housing in a given market.

If the market study being conducted is site specific (proposed site already determined), an on-site evaluation of the proposed site is also important, as this will reveal specific site attributes that could potentially impact marketability of a proposed development, both positively and negatively.  These include site accessibility, visibility, proximity to area services and an evaluation of surrounding land uses to determine the overall marketability of a proposed site.

Based on the key components discussed above, a market study should provide valuable insight to the end user in regards to the competitive position of a particular project, and more importantly, the need/demand for a particular project in a given market.  In conclusion, a competitive project is not always needed and a needed project is not always competitive; a good market study should be able to tell the story of what type of product is both needed and competitive within a given market.

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