Should We Invest In That? Part 1 of 6 – Location and Market Analysis

Mar 28, 2024

First featured on LinkedIn:

Location and Market Analysis

When it comes to real estate investing, everyone knows the old adage that investing in real estate is all about “location, location, location;” but what does that mean in the context of retail investment?  When we think about location, we start with an analysis of the overall market dynamics before assessing the viability of any particular location.

Our analysis of an overall market is typically focused on two factors:   (1) Demographics; and (2) Market Demand.  By analyzing these factors together, we are able to determine the overall vitality of a retail real estate market.

Demographic Deep Dive:

  • Population Density and Growth: We start by examining the population density and growth trends in the area surrounding the retail asset. High population density usually indicates a potentially large customer base, and positive growth trends suggest future increases in consumer traffic.
  • Income Levels: Analyzing the income levels within the area provides insights into the purchasing power of the local population. Higher income areas might support luxury or specialty retailers, whereas areas with lower average incomes might be more suitable for discount or value-oriented retailers.
  • Consumer Spending Habits: We will also compare consumer spending habits for a particular market to the tenant mix within a center.  For example, we might assess consumer preferences for certain types of products or services, the demand for experiential retail or curbside or online shopping versus in-store purchases.

Moving on from demographics, we then turn to market demand.

Demand Insights:

  • Supply and Demand Dynamics: We will assess the current supply of and demand for retail space in the market. This includes evaluating vacancy rates, rental rates, and absorption rates to forecast potential performance. This will often involve using the demographic information that we have already analyzed.  For example, if a high-income market is lacking luxury retail, it may signal a good opportunity to re-tenant existing vacant space with high-end retailers.
  • Retailer Performance and Tenant Mix: Analyzing the performance of existing retailers in the area and similar markets helps us predict which types of stores will attract customers and generate revenue. The goal is to create a complementary tenant mix that draws diverse consumer segments, increases foot traffic, and encourages longer visit durations.  We have the ability to cross-compare very detailed consumer information to truly understand how consumers in a particular market behave.
  • Growth and Development: This factor largely turns on whether the governing authorities in a market are receptive to real estate development and operations.  It can include factors like tax incentives, the restrictiveness of construction and zoning regulations and timelines for permit and approval acquisition.

Once we are satisfied that a particular market meets our qualifications, we examine particular investment locations.  Two primary factors in this examination are (1) evaluating the competitive landscape of a location, and (2) understanding the accessibility and visibility of a site.  Identifying competitors and assessing accessibility are crucial steps in underwriting a retail asset, as they directly impact the asset’s potential for customer foot traffic and its ability to stand out in the market.

The Competitive Landscape:

  • Competition Analysis: We identify and evaluate the characteristics of nearby retail properties, including the types of retailers, market positioning, quality and variety of existing retailer’s offerings, and foot traffic and sales performance.
  • Impact on Rental Rates: Competitor presence and success levels significantly affect rental rates. A dense presence of thriving retailers can increase demand for retail space, enabling the property to command higher rents. However, a market saturated with competitors might restrict rent increases. We use this insight to predict the property’s revenue potential effectively.
  • Positive effects of Competition: Competition isn’t just a hurdle; it can also enhance the property’s value by fostering a retail hub, which draws more visitors and benefits all nearby businesses. This requires a case-by-case analysis to truly understand how the exact competitive mix in a location affects a site.

Accessibility and Visibility:

  • Proximity to Major Roadways: Assessing how close the property is to major highways and roads is crucial. Proximity enhances the property’s accessibility to a wider customer base, potentially drawing shoppers from beyond the immediate neighborhood. This factor is vital for retail properties that rely on high volumes of foot traffic and impulse visits.
  • Visibility: We also examine the property’s visibility from these major roadways and other high-traffic areas. Good visibility increases brand exposure and can attract unintending consumers who may make spontaneous shopping decisions. A property that’s easily seen by those driving or walking by is more likely to draw in customers without the need for extensive marketing.
  • Traffic flow, parking and access: Properties with straightforward access from main roads, minimal congestion, ample parking for peak times, and close proximity to public transit routes are more attractive to tenants and shoppers, enhancing the property’s appeal and expanding its potential customer base.

All of the above factors are weighted when looking at the pros and cons of a specific investment.  Just because a center is weak in some areas, does not mean that it is not a viable investment.  However, the failure to meet certain thresholds in an analysis of the market or location underwriting can be a deal-breaker for a particular property.