The Importance Of Performing A Real Estate Market Analysis In Denver
Real estate development can be both financially rewarding and financially risky — as any developer knows. Due diligence is critical to determining whether a given real estate project in Denver is worth the investment. Due diligence should involve thorough research into the project’s costs vs. the potential return on investment (ROI).
Why Do You Need to Conduct Real Estate Market Research?
To calculate your development project’s potential ROI, you need to have a strong understanding of Denver’s real estate market. Performing local real estate market research will help you identify potential competitors and aid you in better understanding your project’s costs and potential profits. It would also help if you researched how the real estate market might change over time. A project that pencils successfully now may not be successful five years from now due to certain factors. A thorough analysis can help you identify potential challenges down the road.
How to Perform a Real Estate Market Analysis
Because real estate development requires a significant investment of time, money, and effort, you’ll want to make sure that the local real estate market is conducive to your plans. Conduct a detailed real estate market analysis, focused on the following primary aspects of Denver’s real estate market:
Research and Evaluate the Location
When looking for the perfect development site, first do significant research into the neighborhood. For instance, how close are the nearest amenities (such as grocery stores, banks, gas stations, and similar)? How far away is the main highway or primary artery? What does crime data show for this neighborhood? What is the school district like? This data informs how in demand the area is. If a neighborhood is known for crime and is in a low-performing school district, it will affect how much you can sell or rent your development property.
You should also perform research into the future of the neighborhood. For instance, if you’re looking at a more rural area and you know that in two years, a major highway will be built a mile away from the development site you’re considering, this could make the neighborhood much more attractive to potential buyers. Future construction of a new school or additional residential properties can drive growth as well. On the other hand, certain changes can hurt the value of your property as well, such as future plans for a freeway in close proximity.
Collect Data Relevant to Your Real Estate Project
In addition to researching and evaluating the Denver location you’re considering, collect a wide range of data to gain insight into your project’s potential value and profit. Here are a few examples of data that you should collect and analyze:
- Population size – The bigger the population, the more potential buyers and renters there will be. Take a look at the population growth rate over the years. If the population has been growing steadily, it means there’s a better chance of renting or selling your property once it’s built. On the other hand, if population size is on the decline, this site could prove to be a poor investment.
- Unemployment rate – A high unemployment rate indicates two things: first, many people may not have the money to rent or buy a new property. Secondly, there aren’t many jobs available, which means the area is less likely to attract new buyers or renters in the future. This trumps population size in many instances.
- Housing prices – Housing prices in your area will give you a good idea of what you can ask for in terms of rent or sale price. Pricing needs to be comparable and often, competitive, with similar developments in the area. Compare the current housing prices to the potential costs of developing your project. Check also whether housing prices have been increasing or decreasing over the years.
- Sales – Have sales been going up or down in recent years? If sales have been going down, it could make it more challenging to make an immediate profit on your property. Depending on your project, look at residential or commercial property sales.
Compare Similar Properties
A critical facet of predicting the ROI of your project is to obtain a realistic understanding of how much you can sell or rent your property for. The easiest way to do this is to compare the project to similar properties near the site you want to develop. These properties are known as “comps,” and this process is known as a “comparative market analysis.” Comps should be similar in function (for instance, if you’re building townhomes, then you should look at other townhomes), be similar in size (as in square feet, number of bedrooms, types of features, number of stories, and more), and should be located in the same neighborhood. When looking at comps, be sure to look at the following:
Although you may have already looked at housing prices and sales over time, you should look at current listings that are pending. Pending listings give you a more accurate idea of how much comps are going for at this time and how in-demand they are (if there aren’t many pending listings in the area, it could be an indicator that the area is not a good investment at present.
Expired listings are essentially failed sales. They are properties that have gone unsold. If the number of expired listings in the area is high, it indicates that there may not be a lot of demand for the real estate project you’re planning in that area. It could also suggest that these listings were priced too high, providing valuable insight for predicting a more realistic ROI.
Vacancies refer to the number of expired and active listings that have gone unsold or unrented. If there’s a significant number of vacancies — especially compared to the number of total listings — it’s a sign that there’s a lot of competition and not a lot of demand, both of which could affect potential profit. On the other hand, if there are very few vacancies, it means that either inventory is low or there are many buyers, which means listings don’t stay active for very long. These things can indicate a seller’s market in the area, which would be a positive.
A Thorough Evaluation of the Local Real Estate Market is Critical to Determining Feasibility
No two real estate markets are the same. If you’re planning a real estate development project in Denver, first get a good understanding of Denver’s current market as a whole and the neighborhood in which you’re planning the development. Every real estate project that you initiate should begin with a thorough real estate market analysis. Such an analysis will provide you with insight into the current market in the neighborhood, nearby competitors, potential ROI, and how future changes to the area could affect your property. Conducting local real estate market research allows you to determine if your project is feasible over the long term.