All real estate decisions must have three feasibility tests to ensure
the positive outcome.
Market analysis is the process of
determining whether the market will support a particular use at a particular site so that is
1) Market Feasibility,
Does the forecasted supply and demand
relationship for the property in the selected location indicate success?
2) Location and Site Feasibility,
Will the location and site support the
3) Financial Feasibility,
Does the projected financial picture
indicate sufficient profit with the risk?
Market Feasibility is the process for identifying
Demand, Supply and Capital and Political conditions faced by the type of real estate in a selected
In market analysis, a common way to
uncover commercial real estate potential opportunities is to look for gaps. A gap exists when demand exceeds
When demand equals the supply, the
vacancy rate equals zero. When supply greatly exceeds demand it’s considered over supply.
Most real estate economist use
employments as the primary predictor of real estate demand. Basic
employment includes all the activities that produce more good and services than can be consumed in local area.
Total basic employment is a total of basic employment for all industries. EBM, Economic base multiplier is the
ratio of total employment to basic employment in each industry. Total
future employment can be obtained through multiplying EBM, economic base multiplier by basic
The supply of commercial real estate is
the total amount of inventory for property type. Pipeline is new
inventory of that is process of being added to the market. Forecast
total supply inventory in an area is all the existing space that is vacant , occupied, built, forecasted or
demolished for a particular area for specific time period. Vacancy measures the intraction of supply and demand.
Absorption is the amount of inventory that becomes occupied during specific time period.
Location and site feasibility
Location/ site feasibility can be categorized to
two classifications, site selection and best and highest use. Site selections asks the question,” what is the
best site for the specific use?” and best and highest use asks the question, “what is the best use for the
A real estate location / site analysis
addresses two essential questions, “is the proposed development possible and is it
practical?” In another words, is the intended use both technically and
Site analysis focuses more on technical
feasibility and identifies if the location/ site is possible. Some technical components are physical limitation
(site size and shape, natural features), regulatory requirements (zoning, future land use) and environmental
concerns (hazards materials, federal laws)
Location analysis focuses more on functional
feasibility and identifies if the location is practical. Some functional characteristics include demographics
(make up of costumer base by age, income), accessibility and linkages (proximity to customer base, suppliers),
traffic generators (other outlets to attraction that will cratepatronage), competition (direct and
Financial feasibility is a price that allows a
reasonable profit commensurate with the risk involved. Financial feasibility also means keeping the occupancy
cost at a level commensurate with user’s budget requirements. The proposed new location can be financially
feasible if, the occupancy cost does not exceed the maximum acceptable percentage of expected sales estimate by
An investor seeking to purchase income
producing real estate is faced with establishing several budgets, each of which must track the potential impact
of future market conditions. One, purchase budget includes considerations of purchase price, loans, points,
closing, recordation’s fees, legal costs, appraisals, surveys, environmental and property inspections.
Two, holding period, the operating money budget includes analysis and future estimate of the items outlined on
annual property operating data. APOD. Third, disposition, the sales
proceeds budget estimates items such as the possible future sales
price, commissions to be paid, loan payoffs requirements and penalties, closing costs to be paid by seller and
One way to accomplish the financial
analysis is to calculate the internal rate of return (IRR) of expected cash flows and sales proceeds after tax
over the investments projected holding period and compare it with investor’s desired
yield. Alternatively, the investor can use net present value analysis
to discount future cash flows at the desired rate to present value that can be compared purchase costs