NAIOP Research Offers a Multi-Dimensional Approach to Office and Industrial Market Analysis
October 21, 2021
WASHINGTON, D.C. –The pandemic has changed the dynamics of work, has accelerated demand for e-commerce and has led professionals to rethink assumptions about which commercial real estate markets are safe and which markets are risky. The NAIOP Research Foundation has developed a two-dimensional model for evaluating and comparing metropolitan office and industrial markets that simultaneously evaluates multiple market characteristics such as size and risk, avoiding some of the limitations of traditional one-dimensional market rankings.
A two-dimensional grid classifies large, less-risky markets differently than large but volatile markets. Similarly, it allows practitioners to clearly identify smaller low-risk markets. With this additional information, a developer or investor can make more informed decisions about which markets are best aligned with their firm's investment strategy and risk tolerance.
For example, it might lead a risk-averse investor interested in West Coast office markets to take a closer look at Orange County, California, instead of higher-volatility markets in the San Francisco Bay Area or Seattle, which frequently appear at the top of traditional market rankings. Similarly, a developer interested in higher-yielding office properties in the Midwest might look to Columbus, Ohio or Cincinnati, which have similar levels of volatility to Chicago but higher cap rates.
The Foundation’s report, A Two-Dimensional Approach to Evaluating Commercial Real Estate Markets, draws the following conclusions:
- A two-dimensional grid analysis improves on market ranking methodologies by allowing users to simultaneously analyze and compare markets across multiple characteristics such as size, price risk (the risk of a decline in asset value) and liquidity risk (the risk of being unable to locate a buyer).
Market size and average transaction prices do not reliably predict price or liquidity risk. Several comparisons of market size and price to measurements of volatility reveal similar levels of price and liquidity risk for large, medium and small markets. Larger and higher-priced markets are not necessarily less volatile than smaller or lower-priced markets.
A grid analysis can differentiate between high-volatility and low-volatility markets, whether they are large, mid-sized or small. This information can help both risk-averse and opportunistic investors prioritize markets they would not otherwise consider and better align their investments with their risk tolerance and objectives.
Like market rankings, a grid analysis is best used as a starting point for additional research. Although two-dimensional analysis provides more information about markets than ranking methodologies, it does not provide a complete picture of a market’s risk/reward characteristics or its prospects.
A two-dimensional grid that focuses on describing market characteristics instead of ranking markets along a single dimension also avoids a common pitfall of traditional tier and ranking systems: offending the economic development agents that object to their region’s ranking. It is harder for a representative of Kansas City or Sacramento or Portland to object to where their market is placed on a two-dimensional grid that objectively describes quantitative data.
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NAIOP, the Commercial Real Estate Development Association is the leading organization for developers, owners, investors and related professionals in office, industrial, retail and mixed-use real estate. NAIOP provides unparalleled industry networking and education and advocates for effective legislation on behalf of our members. NAIOP advances responsible, sustainable development that creates jobs and benefits the communities in which our members work and live. For more information, visit naiop.org.
Kathryn Hamilton, NAIOP vice president for marketing and communications
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