Lecture 2: An Introduction to Feasibility Analysis
&
Real Estate Process Project Overview
October 6, 2010
© JR DeLisle, Ph.D.
Feasibility Process
•
Definition of Feasibility Problem
– General Problem Statement
– Client Perspective
•
Strategic Evaluation
– Positional Analysis
– Selection and modification of Feasibility Model
•
Data Selection and Collection
– Capital Market Profile
– Spatial Market Analysis: Macro and Micro
•
Preliminary Analysis and Identification of Alternatives
– Spatial Considerations
– Financial Considerations
•
Use Filtering and Selection of Most Likely Candidate
– Goodness-of-fit criterion
– Satisfaction of Client Goals
•
Refinement of Alternative and Verification of Use
– Product Specification
– Risk Management and Due Diligence
• Implementation, Monitoring and Feedback
© JR DeLisle, Ph.D.
Project Deliverable 1: Static Analysis
© JR DeLisle, Ph.D.
Dimensionality of Real Estate
What are the three key dimensions of Real Estate?
S…. E…. L….
Static
Linkages
Environment
S…. E….. L ….
© JR DeLisle, Ph.D.
For more info on using in Feasibility Studies, see Case 4: http://jrdelisle.com/cases_tutorials/
Three Major Attributes of Real Estate
Three major attributes of real
estate . . .
– L,
– L,
– L.
. . . . . . . ulnerable,
. . . . . . . ulnerable,
. . . . . . . ulnerable.
The 2009 regime of real estate . . .
– D . . . . . . . istressed,
– D . . . . . . . istressed,
– D . . . . . . . istressed.
The 2010 + regime of real estate . . .
L, L, L
Butt, what the “L”?
© JR DeLisle, Ph.D.
Liability, Litigation, Liquidity (NOT!)
Types of Real Estate Feasibility Problems
• Site in search of a use
– Profile site
– Identify alternative uses and users
– Match most probable user to site
• Use in search of a site
– Profile user and establish real estate needs
– Identify alternative sites
– Match site to user
• Investor in search of involvement
–
–
–
–
Profile investor
Establish investment criteria
Identify alternatives
Match investor to alternatives
© JR DeLisle, Ph.D.
For more background, see Graaskamp: A Holistic Perspective at http://jrdelisle.com/research/
Site in search of a use
• Site in search of a use
– Profile site
– Identify alternative uses and users
– Match most probable user to site
© JR DeLisle, Ph.D.
Use in search of a site
Classify User:
Assess Needs
• Use in search of a site
– Profile user and establish real estate needs
– Identify alternative sites
– Match site to user
© JR DeLisle, Ph.D.
Investor in search of involvement
500
Private Investors
400
REITs
300
200
Pension Funds
100
Foreign Investors
Public Untraded Funds
Life Insurers
0
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
• Investor in search of involvement
–
–
–
–
Profile investor
Establish investment criteria
Identify alternatives
Match investor to alternatives
© JR DeLisle, Ph.D.
Ten Steps to Feasibility Site in Search of Use
1. Problem Statement
2. Situational Analysis
3. Legal-Political-Ethical
4. Physical-technical
5. Dynamic Location Attributes
6. Market Trends and Needs
7. Market Analysis
8. Alternative Site Specification
9. Alternative Site Analysis
10. Project Implementation, Monitoring & Feedback
© JR DeLisle, Ph.D.
A Definition of Feasibility
A real estate project is “feasible” when the real estate analyst
determines that there is a reasonable likelihood of satisfying
explicit objectives when a selected course of action is tested for
fit to a context of specific constraints and limited resources.
James A. Graaskamp
© JR DeLisle, Ph.D.
For more background, see Graaskamp on Real Estate
Project: Process Overview
© JR DeLisle, Ph. D.
Project Outline: Market Overview
•
•
•
•
• Macro-economic Situation
© JR DeLisle, Ph. D.
Project Outline: Alternative Uses
– General economy and implication
– Real Estate capital markets and capital flows
Identification of alternative uses
– General statement
– Preliminary specifications
– General Building Envelopes
– TRC, FD/BD Analysis
– Site allocation
Filtering analysis: Evaluation of Alternative Uses
– Goodness-of-fit
– Stress Tests/Trade-offs
Market
Legal/Political
• Regional/Local Market
–
–
–
–
Overall state of economy and implications
Real estate market overview; cycle stage, conditions….
Regulatory environment; political mindset
Growth and trends
• Market structure; overview
• Major public projects of note (e.g., light rail, bridges)
Physical
•
•
Financial
Recommended Use
– Most likely use (s)
– Development Strategy
Project Outline: Financial Analysis
•
•
•
•
•
•
General parameters
Frontdoor/Backdoor
Discounted Cash Flow
Sources of capital
Risk/Return Analysis
Project timing
Real Estate Process
Construction Costs per RSMeans
RSMeans® Preliminary Cost Estimate
•
Site Plan
– Ingress/Egress/Parking
– Building Package/Design
– Elevations….
•
Estimate
Eric's
Project Name:
Description:
Apartments, Low
Rise
SEATTLE, WA
56,000 gross
square feet
Description:
COST BREAKDOWN
Low
Total Project Cost
Site work [Find products]
Masonry [Find products]
Finishes [Find products]
Equipment [Find products]
Plumbing [Find products]
HVAC [Find products]
Location:
Size:
$62.14
Median
High
$4,659,000
$546,000
$219,000
$497,000
University
District
Retail Stores
SEATTLE, WA
11,200 gross
square feet
COST BREAKDOWN
$2,761,000
$247,000
$54,000
$290,000
$3,480,000
$345,000
$134,000
$396,000
Total Project Cost
$89,000
$132,000
Total Mechanical and
$200,000 Electrical
$212,000
$136,000
$280,000
$168,000
$350,000
$247,000
Plumbing [Find products]
HVAC [Find products]
Electrical [Find products]
BackDoor Justified
Electrical [Find products]
Total Mechanical and
Electrical
Per-Unit Cost
Per Unit Mechanical and
Electrical
$159,000
$208,000
$284,000
$552,000
$45,000
$701,000
$68,000
$874,000
$102,000
$8,000
$13,000
$17,000
Backdoor Step 4: Final TRCj Calculation
TRCj =
Proposed Design
© JR DeLisle, Ph. D. RSMeans® Preliminary Cost
Real Estate Process
Project Name:
Location:
Size:
(Gim * NIR)
Wcc
© JR DeLisle, Ph. D.
=84,083*73.5%
0.005642312
$
10,953,168
Frontdoor/ Backdoor Reconciliation
Approach
Frontdoor Budget
Backdoor Justified
Gap to Rationalize
Project Outline: Neighborhood and Market
TRC
Rent/sf
$ Process
10,897,719
12.90
Real Estate
$
10,953,168
12.97
-0.51%
Low
82.28571
Median
High
$542,000
$19,000
$42,000
$48,000
$731,000
$32,000
$58,000
$68,000
$963,000
$56,000
$87,000
$96,000
$130,000
$167,000
$225,000
Project Outline: Static Attributes
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Delineation
•
Identify primary trade area; subareas
•
General Condition
•
Role in market; positioning
Static/Structural Perspective
© JR DeLisle, Ph. D.
Land uses
Physical: age, condition
Tenant mix: who’s in, who’s not
A. Site Profile
Strategic linkages
Size, shape, topography
•
Existing and proposed transit
Utilities and infrastructure
•
Pedestrian routes; volumes
B. Existing Improvements
Dynamic/Successional Perspective
C. Ingress/Egress
•
Life cycle stage
Existing and potential
•
Trends
Pedestrian circulation
•
Synergies
D. Legal Profile
Implications of Neighborhood/Submarket Analysis
Ownership
Easements, if any
E. Controlling legal/political attributes
Zoning, Land Use Controls, Incentives…
Private Restrictions
Other Constituencies (e.g., neighborhood, environmental, planning,
political)
F. Implications
Real Estate Process
Conclusion
Real Estate Process
© JR DeLisle, Ph.D.
© JR DeLisle, Ph. D.
Real Estate Process
Step 1: Problem Statement
•
•
•
•
•
•
Strategic Overview
Nature of Decision
Goals and Objectives
Business Considerations
Constraints
Scope of Analysis
– Inclusive vs. exclusive approach
– Dynamic vs. static approach
– Stochastic vs. deterministic
© JR DeLisle, Ph.D.
Context: Problem Statement
© JR DeLisle, Ph.D.
Investor Profiles
© JR DeLisle, Ph.D.
Step 2: Situational Analysis
• Strategic Overview
–
–
–
–
Macro-economic Environment
Capital Market Environment
Spatial Environment
Space User Environment
• Preliminary Site Assessment
– Situational Analysis: The Context
– Positional Analysis
• Context in which it fits/operates
• Draws on Structure, Succession and Situs Theory
– Opportunity Analysis: What it could be?
© JR DeLisle, Ph.D.
© JR DeLisle, Ph. D.
Situational Overview
LOCATION:
•
Portage Bay
U-District
•
Brooklyn Ave NE and NE
Boat St
•
UW Campus north of site
•
Water to South
ZONING:
•
IC-45-US zone
•
179,567 sf lot
•
50,200 sf max over land
•
39,584 sf max over water
Real Estate Market Analysis
Competitive Analysis
© JR DeLisle, Ph.D.
Step 3: SEL-Physical/Technical Context
Static Attributes
Dynamic Attributes
•
•
•
•
•
•
•
•
•
•
•
•
Size and shape
Topography
Drainage, water
Soils and subsoils
Utilities
Ingress/Egress
© JR DeLisle, Ph.D.
Functional layout
Orientation
Scale & texture
Comfort
Security
Nuisances/Environmental Issues
© JR DeLisle, Ph. D.
Static and Environmental Attributes
Jones ◊ Rappe ◊ Chang Consulting, LLC
Real Estate Market Analysis
Parcel Data Search
http://www.metrokc.gov/gis/Mapportal/iMAP_main.htm#
© JR DeLisle, Ph.D.
PID – Tax Records
© JR DeLisle, Ph.D.
Transaction Information from Parcel Map
© JR DeLisle, Ph.D.
Environmental Attributes
© JR
DeLisle,
Ph.D.
2006
Team B1
Dynamic Location Attributes
• Geographic Location
– Orientation
– Linkages
– Tributary analysis: connection
• Transportation Access
– Mode
– Physical Access: Walkability
– Travel anxiety or aggravation
• Exposure
– Visual
– Ingress/egress
© JR DeLisle, Ph.D.
Location and General Linkages
Fremont
South Lake Union
© JR DeLisle, Ph.D.
Jones ◊ Rappe ◊ Chang Consulting, LLC
26
Linkages and Connectivity
Downtown Seattle
University Village
University of Washington
Queen Anne
Capitol Hill
S. Lake Union
UW Med Center/Husky Stadium
Project Site
Project Site
• Easy vehicle, bus, bicycle access to University District via Eastlake Ave E.
• Easy vehicle, bus, bicycle access to Downtown, Capitol Hill, S. Lake Union, Queen Anne.
• Eastlake Ave: heavy traffic commuting between Downtown and U. District. 30,000 vehicle trips/day.
© JR DeLisle, Ph.D.
Micro-Linkages: Ingress/Egress
© JR DeLisle, Ph.D.
Step 4: Legal-Political-Ethical Constraints
• Legal-Political-Ethical Tie
– Constraints by law: Legal
• Site constraints
• Enterprise constraints (users)
– Constraints by Market
• Capital Market & Investor Constraints
• Community constraints
– Ethical/Political Constraints
• Sustainability and the irretrievable resource commitment
• Goodness of Fit
• Dynamic Nature
– Many constraints are subject to change/negotiation
– Final binding constraints involve trade-offs of legal/political/ethical
© JR DeLisle, Ph.D.
For more info on implications, see: Case 1: Building Envelope Calculations.
Seattle Planning Process: Overview
© JR DeLisle, Ph.D.
Seattle Codes
© JR DeLisle, Ph.D.
Seattle Zoning Designations
© JR DeLisle, Ph.D.
Seattle Zoning
© JR DeLisle, Ph.D.
Seattle’s Urban Villages
© JR DeLisle, Ph.D.
Building Envelopes: A Modular Approach
• Site Size
• Lot Coverage Ratio (LCR)
• Height Restrictions
• Parking Requirements
– Parking Index
– SF/Stall
• Floor Area Ratio (FAR)
© JR DeLisle, Ph.D.
Sensitivity: 6 vs. 4 Story Office Step 1
Gross Site SF
Lot Coverage Ratio
# Stories in Building
Parking Index (#/1,000)
Paving/Stall
Original
43,560
80%
4
4
400
GSSF
LC
#St
PI
PS
New
43,560
80%
6
4
400
Step 1: Calculation Building Envelop
BSFmax
=
=
43,560 *
0.1667 + [
=
34,848
1.7667
=
Original
© JR DeLisle, Ph.D.
GSSF * LC
(1/#St) + [(1/(1,000/PI)) * PS)]
19,725
18,837
80%
1.60
]
SF
Total Replacement Cost (TRCm): Overview
© JR DeLisle, Ph.D.
TRCm and Sources of Capital
Item
Land Costs
Construction Costs
Known Soft Costs
Const-Related Fees
Subtotal of Known Costs
Financing Fees
Total Replacement Cost (TRCm)
Permanent Loan
Equity
Total Capital
© JR DeLisle, Ph.D.
=
=
Cost
$
435,600
$ 2,440,468
$
139,509
$
541,784
$ 3,557,360
$
314,807
$ 3,872,167
TRC *
TRC *
Percent
LV
(1 - LV)
Cost/Fee
11.2%
63.0%
3.6%
14.0%
74.3%
8.1%
100.0%
=
=
$
$
$
25.7%
100.0%
3,097,734
774,433
3,872,167
Change Rationale: Zoning, Traffic
© JR DeLisle, Ph.D.
Step 6: Trade Area Delineation
• Micro: Region/City/Sub-market
– Spatial trends
• Community or regional growth, spatial skewing, scale and timing
• Structure: Sub-market relationship to broader economic base
– Economic Base
• Employment: composition, drivers, growth
• Elasticity: sensitivity of growth to economic conditions
• Market Segments
– Current Market Segments
– Projected Growth by Market Segment
© JR DeLisle, Ph.D.
Trade Area Delineation: Rings are Out
© JR DeLisle, Ph.D.
Is this the Trade Area?
Trade Area Delineation
15 Minute drive
10 Minute drive
5 Minute drive
SIT
E
© JR DeLisle, Ph.D.
Step 7: Competitive Market & Demographics
• Competitive Analysis
–
–
–
–
Supply: Number
Value proposition
Price points
Competitive advantages
• Market trends and opportunity areas
– Aggregate data on local population, employment, income, etc.
– Industry trends relevant to the project (e.g., office, retail, apt, ind, hotel)
– Significant popular attitudes and trends in location market
© JR DeLisle, Ph.D.
Competitive Analysis
©
DeLisle,
Ph.D.
ToJRlearn
how
to identify
competitors and land uses, see: Tutorial 3: Reverse Directory.
Competitive Information Sources: Commercial
Brokers Association
www.commercialmls.com
Search all
© JR DeLisle, Ph.D.
CBA: Properties for Sale Output
© JR DeLisle, Ph.D.
Market Analysis and Synergy
© JR
DeLisle,
2006
Team FPh.D.
Step 8: Alternative Uses/Users’ Profiles
• Identify Preliminary Uses
– Major property types: retail, office, warehouse
– Secondary Property sub-types
– Single-use, mixed-use
• Profile preliminary users
– Internal Analysis
• Entities & packets of functions
• Drivers of Value
• Trends & Life cycle stage
– Real Estate Elements
• Spatial needs & internal vs. external orientation
• Approach to real estate solutions
© JR DeLisle, Ph.D.
For a guide to free demographic data, see: Tutorial 4(a): Easi-Demographics.
Market Segmentation Analysis
• Definition: Homogeneous Groups
– Similar within clusters
– Different among clusters
• The Five-W’s
–
–
–
–
–
Who: classes of consumers (markets)
What: homogeneous subsets
Where: spatially or across markets
When: it is feasible and economically viable
Why: can be targeted
Value Impacts?
© JR DeLisle, Ph.D.
Demographic Analysis
© JR DeLisle, Ph.D.
Select Trade Area
© JR DeLisle, Ph.D.
Apply Customized Trade Area Analysis
© JR DeLisle, Ph.D.
Target Market
© JR DeLisle, Ph.D.
Profiles & Trends
© JR DeLisle, Ph.D.
Target Market Analyis
© JR DeLisle, Ph.D.
Step 9: Alternative Uses and Scenarios
© JR DeLisle, Ph.D.
For more info, see: The Interactive Design-Marketing Model in Determining Highest and Best Use
Alternative Use Decision-Making Process
• Specify Alternative Use Process/Level of Analysis
–
–
–
–
–
Determine goals and objectives
Select criteria for evaluation
Assign weight to each criterion (e.g. 1 to 10)
Rate strength of each alternative (1 to 10 scale)
Weight (multiply) strength score by importance score
• Compare
– relative rank order of alternatives based on total scores
– total score vs. cost/return to make economic trade-off
• Understand
– Attribution Analysis
– Sensitivity Analysis
© JR DeLisle, Ph.D.
The Value Proposition: Cost < >Value ?
Value * Rate = Income
Value
* Rate
Income
Frontdoor
Value * Rate => Income
© JR DeLisle, Ph.D.
Backdoor
Value <= Income
Rate
Frontdoor Model: Sequence
TRCm
* Wcc
GIr
NIr
/ NIR
Land
Hard & Soft Costs
TRCm
© JR DeLisle, Ph.D.
NIR = 1 – (Er + Ptx + Vr)
Backdoor Model: Reverse Engineered
Market
TRCj
/ Wcc
GIm
NIm
/ NIR
Land
NIR = 1 – (Er + Ptx + Vr)
Hard & Soft Costs
TRCj
© JR DeLisle, Ph.D.
Frontdoor/Backdoor Reconciliation
Approach
Frontdoor Budget
Backdoor Justified
Gap to Rationalize
© JR DeLisle, Ph.D.
TRC
Rent/sf
$ 3,872,167
$26.60
$2,910,982
$20.00
33.0%
33.0%
In the End, It’s All About the Numbers
2006 Team E2
© JR DeLisle, Ph.D.
For more info on making numbers “easy to crunch,” see: Case 3: Frontdoor/Backdoor Analysis.
Alternative Use: Numbers and More Numbers
2006 Team C1
© JR DeLisle, Ph.D.
To get your costs in line, see: Case 2: Total Replacement Cost Analysis.
Discounted Cash Flow (DCF) Analysis
- Sales Exp
- Tax on Sale
- Mtg. Bal.
Net Reversion
PV CF +
= Ej
Sales Price
PV NR
Equity Justified: PV of CF + PV Net Reversion
Stabilized
NOI
NIr
© JR DeLisle, Ph.D.
© JR DeLisle, Ph.D.
GIr
Most Fitting Use: An Integrated Approach
ForDeLisle,
more Ph.D.
info,
© JR
see: Case 6: Most Fitting Use.
Most Fitting Use: Standardizing Scores
Unweighted Most Fitting Use
Criteria
Most Suitable Use
Politically Palatable
Highest & Best Use
Unweighted Ratings
Office Retail Industrial Apartment Hotel AVG
8.4
6.8
5.8
9.8
8.4
7.9
6.1
8.2
2.6
6.8
6.3
6.0
5.9
4.0
3.7
7.5
6.3
5.5
6.8
6.3
4.0
8.0
7.0
6.4
Weighted Most Fitting Use
Criteria
Most Suitable Use
Politically Palatable
Highest & Best Use
Weighted Ratings
Wgts Office Retail Industrial Apartment Hotel AVG
40%
3.4
2.7
2.3
3.9
3.4
3.1
30%
1.8
2.5
0.8
2.0
1.9
1.8
30%
1.8
1.2
1.1
2.3
1.9
1.6
100%
7.0
6.4
4.2
8.2
7.2
6.6
Attribution of MFU/Weighted
Criteria
Most Suitable Use
Politically Palatable
Highest & Best Use
Weighted Ratings
Office Retail Industrial Apartment Hotel AVG
48%
43%
55%
48%
47% 48%
26%
38%
18%
25%
26% 27%
25%
19%
26%
27%
26% 25%
100% 100%
100%
100% 100% 100%
Deviation from Average
Criteria
Most Suitable Use
Politically Palatable
Highest & Best Use
Weighted Ratings
© JR DeLisle, Ph.D.
Office Retail Industrial Apartment Hotel AVG
7% -13%
-26%
25%
7%
0%
2%
37%
-57%
13%
5%
0%
8% -27%
-32%
37%
15%
0%
6%
-3%
-36%
25%
9%
0%
Alternative Use Recommendation
© JR DeLisle, Ph.D.
Step 10: Final Use Specification & Packaging
© JR DeLisle, Ph.D.
Project Profile
© JR DeLisle, Ph.D.
Design Concepts
2006 Team C1
2006 Team A2
© JR DeLisle, Ph.D.
2006 Team B1
Final Design and Financials
© JR DeLisle, Ph.D.
For info on fine-tuning DCF, see: Case 5: Discounted Cash Flow Analysis.
Financial Snapshot & Implementation
© JR DeLisle, Ph.D.
Implementation Timeline, Risk Mgmt. and
Marketing
© JR DeLisle, Ph.D.
Exit Strategy and Conclusion
© JR DeLisle, Ph.D.
Timeline
© JR DeLisle, Ph.D.