Define: Real Estate Market Analysis

Hello again,

When explaining my profession to those outside of the commercial real estate industry, the most common responses tend to elicit the inevitable "mmm...hmmm" or "How interesting,...". Eyes dance nervously this way and that, scanning the horizon for familiar faces, searching for any excuse to jump ship gracefully.

It is either that the average person is disinterested in commercial real estate markets or it could be that the average person lacks the vocabulary necessary for basic communication in the commercial real estate field.

It is this second downfall that I wish to address in this post, but first let me direct you to those who have already accomplished this task, the good people at the CCIM Institute. A powerful demonstration of real estate terminology can be found here.

Below are a few definitions that I hope will help you break the ice at social events.

1. Vacancy Rate: Vacancy Rate = Vacant Space / Total Space

It is important to understand that a vacancy rate is not a bad thing. Commercial vacancy rates are analogous to the civilian unemployment rate, in that a "natural" vacancy rate is assumed to exist in all healthy markets and movement to the extremes of either above or below this rate are disastrous. An exceptionally low vacancy rate is harmful in that it raises the costs associated with finding new space for growing businesses and these high transaction costs can impose friction causing growing pains for firms in the area, as well as acting as a barrier for firms that wish to move into the market. A high vacancy rate is undesirable as well, since it means that available resources are underutilized.

The vacancy rate is of interest in that under normal circumstances it moves in the opposite direction as market rents. When the vacancy rate is above the natural rate, rates tend to fall and when the vacancy rate is below the natural rate, rents will tend to increase.

2. Market Rent: Quoted in dollars per foot leased per month. It is also common to quote rents in dollars per foot leased per year, a practice that is popular in markets outside of California.

There is a significant difference between asking rents and effective rents.

Asking rents are easier to obtain; it is the price quoted by brokers before a building is leased. They are the sticker (asking) price of the property as it is advertised.

Effective rents are harder to obtain; it is the price actually paid once concessions such as free rent and tenant improvements are figured into the equation. The effective rents are of much more interest since it involves private information and can vary dramatically from tenant to tenant.

In my experience, these are the two numbers that most people are interested in; How much space costs and how much space is available.

For those that are interested in these all too important numbers, I direct you to the most recent editions of the Colliers Market reports. Published by yours truly on a quarterly basis, this is a good start to understanding the basics of the Inland Empire.