When it comes to real estate development, meeting market demands ensures a good return on your investment, whether it’s a high-rise complex, a master-planned community, or a commercial rental space. However, as expert real estate consultants from VERTEX explain, even if your projects go as smoothly as possible, always meeting the budget or timeline predictions, which is, let’s face it, is a relatively rare and ideal outcome, equity lenders and providers will ask for a market feasibility study as a part of the usual due diligence process.
They need assurance, provided via high-quality analysis, that the allocated budget and return on investment are feasible. Market feasibility studies come in as an indispensable part of satisfying the lender’s financial risk management requirements for construction projects. These studies evaluate viability, constraints, and potential alternative opportunities, to determine if the desired outcomes correspond to actual conditions.
What is a market feasibility study, and what is its purpose?
In the construction industry context, market feasibility studies are usually one of the earliest phases of the due diligence process. They consist of preliminary investigations to determine whether a specific construction project is viable. This is particularly important for large, complex projects that require significant investments; if they fail to meet market demands, the financial backers could suffer substantial monetary loss.
Feasibility studies are carried out to satisfy the following purposes:
- They need to determine whether the future finished structures are viable.
- They kickstart the process of preparing the necessary project documentation, like formulating a business case, inspecting the project execution plan, strategic brief, etc.
- Identifying other feasible options in case market conditions change.
Sometimes, when there’s large-scale projects that span many years, more than one feasibility study is conducted to cover different aspects and offer all possible solutions for various purposes. This may include:
- Environmental risks.
- Necessary regulatory approval and the likelihood of obtaining it in time.
- Sufficiency of client’s budget.
- Any potential design-related maintenance issues.
This complexity of the feasibility study will ultimately depend on the needs of stakeholders and general contractors, requirements of regulatory bodies, or other third parties with a vested interest in the project. Of course, the client can always decide if they want to proceed to the next phase of the feasibility study based on previously presented assessments.
The quality of the study
The quality is ensured by entrusting the feasibility study to professional real estate consultants, who know the area they’re operating in and can provide reliable information. It’s crucial that experts conducting the study have an exceptional working knowledge of all the complex moving parts of the AEC industry. An experienced research team includes real estate advisors with extensive knowledge about construction and real estate development so that they can provide valuable input regarding real estate development strategy. Being familiar with the local market area or having connections they can use for this information is essential.
A high-quality market feasibility study will provide:
- Quantitative data (statistics, demographics, etc.).
- Relevant qualitative information.
- Concrete data explaining the basis for its conclusion.
- Options for ensuring the project remains feasible.
The researcher analyzes the gathered information to understand the nuances of the trends and uncover the insights required to form the final opinion. This will allow them to advise the client on it in the Market Feasibility Report.
The cost of the study
The cost of the study will primarily depend on:
- The scope and complexity of the project, its size, type, and sophistication. Multiple release stages, different product types, and multiyear build-out schedules can also significantly influence the price.
- Location and market area. A well-defined market will reduce the necessary research time, and the location determines specific project development’s attractiveness. Gathering market data can be pretty straightforward in places where they’re available to the public and easily accessed online. In contrast, other areas require more extensive research, knowing who to call or visit for accurate information, or even purchasing copies of official records.
- Details necessitated to develop a final opinion. After gathering quantitative and qualitative data, the researcher needs to analyze them and consider demographic trends, potential disruptions, or trend accelerations due to technology and other market elements.