Making sense of market research reports

Over the course of my time as a real estate advisor, I have turned to the market reports of other brokerage firms for the necessary market insight and data points to stay on top of things.  These reports can range from a two pages to several dozen pages, ranging from a brief summary to comprehensively highlighting every major transaction in the market, key trends and predictions, case studies of major deals, and insight into what may come in the year ahead.

I would like to aid my readers in their quest for knowledge and career longevity by providing two services:
1. To help my readers “dissect” a research report
2. To provide review of the major brokerages’ reports availability and depth

In order to fully comprehend the finer points of a research report, one has to be familiar with the component parts.  Rather than choose a specific brokerage firm’s report for this step, I will instead utilize The CoStar Office Report – Q1 2007 – Chicago Office Market.  This report weighs in at a whopping forty-one pages of Adobe PDF glory and analyzes both the downtown and suburban office markets in Chicago (similar reports are available for other markets at – CoStar Quarterly Market Report Online Store.  For this exercise, we will not be evaluating specific data in the report, instead focusing on the key sections and statistics worth understanding as a tenant.  We’ll reserve deep analysis for when we evaluate the individual brokerage reports in the near future.

The Analysis

The Table of Contents
The Table of Contents (TOC) is always the best place to start.  The TOC shows us that there are a couple of supporting sections (Methodology, Terms & Definitions) to aid us with our comprehension of the report.

Methodology
The methodology, when provided, is a handy place to find out how the researchers went about gathering their data.  It may also explain how certain statistics are calculated.  Since this is not a review of CoStar, I won’t discuss the accuracy of CoStar’s data in this post.

Terms & Definitions
CoStar’s report includes a respectable two-page glossary of terms.  Even without the rest of the report, this glossary is valuable to the beginning real estate executive, highlighting key terms you will see in this and other reports, as well as elsewhere within the commercial real estate industry.

Market Highlights & Overview
The overview acts much like an executive summary, highlighting major activities, trends and statistics in the metro area.  CoStar’s report also provides good snapshot comparisons against historical statistics.  Let’s step through each of the key subsections to this section.

  • Absorption – an analysis of the space being consumed.  Higher absorption means one or more of the following:
    • Businesses are expanding
    • New businesses are moving in to the area
    • Space has been removed from the market

    Low absorption tends to lead to higher vacancy, which in turn means better conditions in which tenants can seek space and negotiate terms.

  • Vacancy – an analysis of the space unoccupied or available in the market.  Higher vacancy means one or more of the following:
    • Businesses have contracted their space needs
    • Businesses are relocating from the area
    • Space has been added to the market faster than it can be absorbed

    High vacancy is often better for tenants because supply then outstrips demand.  Less than 15% vacancy in a market begins to tip the scales in favor of landlords.  When vacancy drops below 10%, it is often a sign that the market can support new space or buildings.

  • Largest lease signings – this section lists some of the big players in the market.  Knowing the largest users in your building(s) can increase your likelihood of getting the best deals when negotiating your lease(s).  A good tenant representative broker should know all of the big players in your market or submarket.
  • Sublease vacancy – how much sublease space is on the market.  This information can be useful if you are either shopping for deals on sublet space or considering subletting some or all of your own space.  Be aware that sublet space can have wildly different rental rates due to the inclusion of build-outs, furnishings or other non-building amenities, but will typically be lower than conventional space in the same building.
  • Rental rates – Everyone wants to know these numbers – brokers, other tenants, developers, the bank – you name it.  While there is no comprehensive database of actual rental rates, CoStar has fairly reasonable approximations due to the size of their database.  For better accuracy in a given market or building, ask your tenant representative to prepare a comps sheet of similar closed deals in the market.
  • Deliveries and construction – When a new product comes online, that’s good news for tenants.  Although new buildings typically command the highest rents, this greater supply often creates a vacuum effect , pulling tenants from older A and B class buildings, increasing relative vacancy and with it, improving negotiation conditions for tenants.  When possible, your tenant representative should align your lease negotiations with favorable market conditions.
  • Inventory – the total space in the market.  This data is most useful for calculating vacancy percentages.
  • Sales activity – major building transactions are a must-know for tenants and real estate decision makers.  When buildings exchange hands, tenants must not only be aware of their rights as determined deep within the small print of their lease.  Tenants also need to understand the motives that different landlords and leasing agents may take with respect to their buildings.  This can have a material impact on the terms and concessions available to tenants.

CoStar Markets and Submarkets
CoStar has provided a quick overview of the key markets and submarkets within the Chicago metropolitan area.  As a real estate decision maker, it’s useful to identify your market and submarket – this way, statistics that are broken down by geography or submarket will have more meaning for you.

Employment & Tenant Analysis
This section is a blend of employment and tenant statistics.  Most useful for data junkies, these statistics can also be handy for the human resources executive or department when it’s time for strategic planning.  The industry trends can also be useful as benchmarks to see where your firm compares to the overall industry figures.
Lease expiration statistics might be of value if you wanted to execute a complex strategy aligning your lease expiration with or against the market.  However, I do not recommend trying to “play the market” when it comes to your space needs.  Instead, rely on the sound advice of your tenant representative to use their expertise and negotiate terms that align with your long-term business strategy.

Inventory & Development Analysis
This section provides an overview and statistics related to new and in-progress construction.

Figures at a Glance
The provided statistics in this section are most useful for comparing submarkets and building class types.

Leasing Activity Analysis
Here we have an overview of local office leasing conditions.  Pay particular attention to Select Top Office Leases (p. 22) to help you identify any major tenants in your building(s).

Sales Activity Analysis
Sales activity, to reiterate an earlier comment, is useful to tenants when it changes the negotiation landscape.  Note if your building or other buildings in close vicinity to you have changed ownership recently.

Analysis of Individual CoStar Markets
Local submarket analysis is a good opportunity to gain a greater understanding of current trends and historic activity.  This analysis may help forecast future market dynamics in your area.

The CoStar Market Report Order Form
Ok, so this isn’t an essential element of the report, but it’s nice to know that you can pay CoStar to learn about other markets where you have a presence.  If you go this route, buy the current reports online at CoStar.com as PDF for $99/report.  You could also contact your tenant representative, who could provide you with all of the market information you seek.

Your thoughts?

As this goes to publication, CoStar is charging a la carte for their reports for non-subscribers.  I’m in the process of getting permission to include either the full report or screenshots of the report that we analyzed above.  In the mean time, you can acquire the Chicago report at the CoStar Quarterly Market Report Online Store.  In the future, I will be exploring individual brokerage firms’ reports and analyzing specific data points.  If you would like to see specific features analyzed in more detail or have opinions to share on this subject, go ahead and comment.

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