Market Analysis and Highest and Best Use
Market Analysis
Market analysis examines demand, supply, and the interaction of price, rent, and vacancy. Know the four tests of highest and best use: legally permissible, physically possible, financially feasible, and maximally productive. Apply them in that order; the first failing test eliminates the use.
Highest and Best Use
Distinguish as vacant from as improved. As vacant considers what could be built; as improved considers whether the existing improvement should be retained or demolished. The trap is skipping the legally permissible test and analyzing a use that zoning prohibits.
Market Conditions and Cycles
Understand absorption, vacancy, and the four phases of a real estate cycle: recovery, expansion, hyper-supply, and recession. Recognize that market conditions adjustments are needed even for short time gaps in volatile markets.
Worked Example
A parcel zoned for retail is physically suited for retail or office. Retail rents at $30/sq ft with 90% occupancy; office rents at $35/sq ft with 70% occupancy. Despite higher office rent, retail may be maximally productive because effective income (rent × occupancy) is higher: $27 vs. $24.5 per sq ft. Compare effective income, not headline rent.
Exam Traps
Do not treat highest and best use as the current use; it must be the most probable use. And do not confuse market analysis with a marketability study-one analyzes the market, the other analyzes a specific property's absorption.