Market Analysis for Commercial Investment Real Estate
What is being tested
Market analysis questions ask whether you can size supply and demand inside a defined market and predict where rents and vacancy are heading. Start with market delineation: the competitive market or submarket from which a property draws tenants, defined by geography, property type, price point, and tenant profile.
Concepts to master
- Supply: competitive inventory in rentable square feet or units, plus the construction pipeline and preleasing.
- Demand: user demand driven by employment, population, and business formation, measured as net absorption (occupied space gained or lost).
- Vacancy: physical versus economic vacancy, frictional versus structural, including sublet and shadow space.
- Equilibrium vacancy for the property type; rent levels, concessions, and effective rent.
- The market cycle - recession, recovery, expansion, oversupply - and where rents turn.
- Market rent versus contract rent; comparables adjusted for location, size, quality, and terms.
Traps
- Quoting metro-level vacancy for a submarket question.
- Confusing gross absorption (total space leased) with net absorption.
- Reading face rents as strength while ignoring free rent and tenant improvement allowances.
- Forgetting sublet or shadow space, which competes without appearing in the vacancy statistic.
- Extrapolating a single year of rent growth across an entire holding period.
Worked example
A submarket has 2,000,000 SF of inventory and 1,860,000 SF occupied, so vacancy is 7.0%. Next year 40,000 SF is completed, 12,000 SF of it preleased, and demand produces 15,000 SF of net absorption. New inventory is 2,040,000 SF; new occupied space is 1,860,000 + 12,000 + 15,000 = 1,887,000 SF, so vacancy rises to 7.5% and the market softens.
Rule of thumb: years of supply equals space under construction divided by annual net absorption. Four years of supply signals tenant leverage and downward pressure on rents.