Market Analysis and Highest and Best Use
Supply, demand, and HBU
Market analysis examines supply, demand, and absorption. Absorption rate equals sales per period divided into available inventory, producing months of supply. Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive. Analyze the property as vacant and as improved; the existing use may not be the HBU. An interim use can be the HBU when a higher use is not yet feasible.
Traps
Candidates skip the legal test, treat current zoning as proof of feasibility, confuse market rent with contract rent, or assume the current use is automatically the HBU. Consistent use requires land and improvements to be valued on the same HBU premise. A use that fails the legal test is eliminated, not weighted.
Worked example
A site is zoned for four units, but demand supports only two, and construction cost makes four infeasible. The financially feasible HBU may be two units now, with four units as a future option. Rule of thumb: test legal permissibility first, then physical possibility, financial feasibility, and maximum productivity.