market analysis for star city cinemas site in south
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Market Analysis for Star City Cinemas Site in South Fayette, PA
May 25, 2018 Submitted by Fourth Economy
Letter of Submittal May 25, 2018 Bob Garvin Goldberg Kamin & Garvin, LLP 437 Grant St Ste 1806 Pittsburgh, PA 15219-6002 Dear Bob: Fourth Economy is pleased to present this proposal to provide a Market Assessment to identify the highest and best use for the redevelopment of the Star City Cinemas site in South Fayette. Market forces are complex and dynamic. Making long-term development decisions in the face of the uncertainty created by these market forces is a daunting prospect. Fourth Economy helps to reduce that uncertainty. Our team has collectively assisted communities of all sizes to create actionable plans designed to capitalize on their assets for a stronger economy. Our diverse background, including community development, planning, policy, marketing, and data analysis allows us to bring a comprehensive set of skills to bear to support your planning needs. The approach we have outlined in the following proposal includes a market assessment focused on the residential, retail, commercial, and industrial sectors to address highest and best use for the site. Best Regards,
Jerry Paytas Vice President, Research & Analytics Fourth Economy Consulting 1501 Preble Ave. Pittsburgh, PA 15233 (412) 926-8576 [email protected]
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Fourth Economy Overview About Our Firm Fourth Economy is a mission-driven consulting group that seeks to equip change agents with the tools they need to build better communities and stronger economies.
Our experience in working on hundreds of projects informs our approach and guides us on where to begin with each client engagement. We recognize that each engagement requires a tailored and often iterative process. We strive to become partners with our clients and understand their needs and aspirations.
We blend both quantitative and qualitative inputs at every point in the consulting process, developing realistic recommendations that can be easily understood and readily implemented.
What Sets Us Apart?
Fourth Economy has assembled a team of experts who have worked in economic development agencies, industry, non-profit organizations, and tier-one research institutions.
We work at the intersection of diverse systems, from community development to economic development, from transportation to real estate development, and from legacy industry to entrepreneurial ecosystems. We use our experience in economic development to frame environmental, social, and cultural issues in a context that resonates with to investors and public policy leaders. This is demonstrated both through our work with 100 Resilient Cities and our award winning approach to helping communities leverage their quality of place assets to change their economic and demographic paths.
Our team serves as connectors in the fourth economy, bringing together the creative energy of individuals to make new ideas and plans happen, creating lasting results for our clients.
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Our Experience Fourth Economy has previously conducted an economic impact study for South Fayette township and has conducted economic impact studies for the Pike2Bike Trail in Bedford County, the Northern Lights Shopping Center in Beaver County, the Creative Real Estate Development Company (CREDCO) in Cranberry, and several projects for partners in Pittsburgh, including the Union Trust Building, Gardens at Market Square Project, Walnut Capital and Point Park University.
In total more than $19 million was awarded to our clients in Pennsylvania Redevelopment Assistance Capital Program (RACP) awards since 2013. Our success is based on the fact that we work with the client to ensure that these projects are positioned appropriately within the overall market and community context and leverage surrounding assets to ensure the greatest economic and community impact. Beyond the numbers, we help our clients tell that story.
Below are few additional examples of our regional strategy and market analysis clients. A full client listing can be found at http://fourtheconomy.com/what-we-offer/client-roster/
Carrie Furnace Market Analysis, Allegheny County Economic Development Fourth Economy provided an updated market assessment to reflect changes in the development plan and market conditions affecting the Carrie Furnace development. Fourth Economy worked with the Redevelopment Authority of Allegheny County and the Carrie Furnace Task Force to analyze the market opportunities for commercial, light industrial and residential development.
Reference: Nathan Strum (formerly with the RAAC), Executive Director, Grow Licking County Community Improvement Corp. 50 West Locust Street Newark, OH 43055 (740) 345-9757 ext. 3, [email protected]
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Sinking Spring Downtown Revitalization, BOSS 2020 Revitalization Committee, Sinking Spring, PA The Borough of Sinking Spring offers a high value strategic location for both the distribution of goods and as a residential hub. U.S. route 422 is a high volume East-West arterial bisecting the Borough and connecting it with both the Harrisburg and suburban Philadelphia market regions. Fourth Economy conducted a market analysis for the BOSS 2020 Revitalization Committee to assess the feasibility of a major real estate development project, located in the Borough of Sinking Spring’s central business district. The analysis considered the level of retail, commercial and residential uses envisioned for the site and the types and size/scale of development that would be most suitable for the site given both the site constraints and conditions as well as the goals for the redevelopment. . Once completed the New Town Center and Spring Market areas would offer a vibrant and walkable central business district with retail uses on the lower floors and a mix of residences and offices above. A common “green” park area would serve as a central civic gathering area and event venue. A new municipal office building would serve as an anchor tenant in the development. This type and scale of development is new to the immediate market area.
Reference: Sam Loth, Coordinator, BOSS 2020 Revitalization Committee, BOSS 2020 Revitalization Committee, 3940 Penn Avenue, Sinking Spring, PA 19608, [email protected]
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Moon Township Market Analysis, Moon Township Fourth Economy recently completed a market analysis for Moon Township, PA that serves as the basis for potential zoning updates in the township. The market study examined residential, retail, commercial and industrial uses and how trends in the market might impact the future demand and supply for different land uses. Additional outcomes of the study included the following:
● Understanding trends and opportunities for economic development initiatives. The team compared local, regional, and national trends to make informed predictions of how much residential and commercial development the Township could sustain.
● Recommending zoning updates that support the desired uses and facilitate the development process. The analysis also identifies barriers within the existing zoning code that would preclude the type of development recommended in the Comprehensive Plan, and suggests changes in the zoning code that would permit this kind of development.
● Examining in greater depth the potential market and zoning changes in critical priority areas for the Township.
Reference: Scott Brilhart, AICP, Asst. Manager/Planning Director, Township of Moon, 1000 Beaver Grade Road, Moon Township, PA 15108, Phone – (412) 262-1700, [email protected]
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Market Assessment Scope of Work Every community has a story to tell. Often that narrative is not reflected in the statistics alone. Fourth Economy approaches Market Analysis as a process where the team, in partnership with project managers and regional stakeholders, seeks to understand the various issues, trends, advantages and challenges impacting a community and the market context that influences its growth potential. Figure 1: Fourth Economy Assessment Strategy
Unlike traditional Market Analysis, Fourth Economy places a greater emphasis on the qualitative factors influencing growth. An overview of our process is provided in Figure 1. Figure 2: Example Local Market Area Map (West Broadway Corridor – Council Bluffs, IA)
The market assessment is a function of local and external factors that affect demand, as well as primarily local factors that affect the supply and product mix in the local market. Defining the local market area is one of the first critical tasks. Fourth Economy will assess the economic and demographic outlook of the local market area (Figure 1) as well as the regional market. This analysis
will focus on the four market sectors –residential, commercial, industrial and retail (Figure 3). The interaction of these sectors (or lack of it) at the local level will frame the
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barriers and opportunities for development and investment. We believe that this approach is necessary to provide an objective perspective on the real market potential in the area that will drive the highest and best use for the site. Figure 3: Market Sectors
Kick-off Meeting and Site Visit A kick off meeting and site visit will take place at the start of the project. The kick off meeting is most often limited to key project management team members. This is an opportunity to review the project approach and key tasks required. The consulting team and client project managers can discuss and share previous reports, maps or other documentation that can help to inform the study process. This is also an opportunity to identify early “go” or “no-go” points or issues that can impact the study and its findings. Ideally the kick off meeting and site tour will occur on the same day. The site tour is designed to provide insights into the assets of the development site, as well as its connection/proximity to other residential and community amenities. We would expect that project stakeholders would accompany the Fourth Economy team on this site tour. The site visit begins to position early observations and conditions within a framework designed to reveal the advantages and disadvantages for the development area and the degree to which gaps may exist between the market opportunities, your development goals, and the resources and asset base available to help achieve those goals.
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Primary Research Data alone cannot determine the fate of the Star Theater. While it can tell you what is possible, only the input of the community can tell you what is desirable, and what will therefore ultimately be successful. Fourth Economy will conduct interviews and a visioning survey to begin to frame the market opportunities. Community and Stakeholder Survey To solicit broad stakeholder input, we will develop an online survey to be shared via local news outlets, partner newsletters, and social media channels. The survey will seek to understand what uses residents would most like to see on the site. For instance, in North Central PA, we recently received over 800 responses to an visioning survey using online community groups, Facebook, and promotion through partner distribution channels. Similarly for work on Pittsburgh’s East Carson Street, we received 730 survey responses using neighborhood news outlets, NextDoor, Twitter, and Facebook.
Residential Market Analysis Fourth Economy begins with an analysis of the community and regional demographic structure. The goal is to identify the critical current trends and conditions related to residents, commuters and the current and future workforce. Demographic trends will be analyzed to identify the residential potential for the development site and supporting areas as appropriate. The demographics provide insights into the future needs for services, as well as a critical asset or constraint for the workforce supply and demand. The residential analysis is a function of local and regional demographics that affect the demand for housing, as well as the supply and product mix in the local housing market. Even in a declining region, there is a market for housing to replace stock that is outdated or which cannot be cost-effectively renovated. Fourth Economy will identify gaps in the local and regional housing supply, the potential demand for those housing types and the regional competition for those residents. Figure 4: Residential Market Factors
Supply Factors Demand Factors
● Age of housing ● Housing costs (own/rent) ● Product mix: homes, condos, rentals ● Housing size and amenities ● New Construction, Permits ● Vacancy (also a demand factor)
● Age of population ● Income level and growth ● Jobs and job growth ● Movers and migration ● Population growth ● Vacancy (also a supply factor)
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Retail Market Analysis For the retail analysis we examine the spending power of the local residents and the degree to which local businesses are able to capture that spending potential or to which they rely on attracting customers from a larger catchment area. This analysis identifies where the surpluses and gaps are in local retail markets, which when compared with surrounding communities, provides guidance on the opportunities for retail development. The retail analysis may indicate opportunities for development on the site itself, as well as identify potential assets for residents or gaps in services that may need to be filled in order to attract your target market. In the example below, the local sales of groceries exceeds local spending by $28 M, which requires at least 9,098 consumers from outside the local area to spend that $3,172 each year at local businesses ($28M / 9,908). The spending from these external consumers is enough to support 9 businesses. On the other hand, local spending on household furnishings exceeds the local sales at a level that could support 6 businesses. Figure 7: Sample of Retail Attraction and Leakage
Expenditure Type Local Spending Local Sales Groceries $ 142,207 $ 171,064 Attracts Consumers Eating and drinking places $ 90,163 $ 106,392 Attracts Consumers Housekeeping supplies $ 22,202 $ 120,633 Attracts Consumers Household furnishings & equipment $ 54,842 $ 45,867 Leaked Sales Apparel and services $ 64,224 $ 107,045 Attracts Consumers Vehicle & parts purchases $ 110,471 $ 135,622 Attracts Consumers Gasoline and motor oil $ 80,418 $ 60,998 Leaked Sales Entertainment $ 76,876 $ 33,183 Leaked Sales Personal care products & services $ 20,074 $ 42,320 Attracts Consumers Miscellaneous $ 43,143 $ 121,450 Attracts Consumers
Commercial Market Analysis Fourth Economy considers the commercial or office market by examining the building stock and comparing it to the available and vacant space in the larger market and comparable areas. Based on historical and projected growth of office employment and the expected capture of the local area, Fourth Economy will estimate the opportunity for different types of office space in the local market and what strategies can be employed to realize those opportunities. Fourth Economy will prepare estimates based on industry standards of 200 SF per employee and a low estimate based on 50 SF per employee, which is more in line with
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benchmark space requirements and reflects the growing trend towards “hotelling” of office employees. Figure 8: Commercial (Office) Market Factors Supply Factors Demand Factors
● Quality of physical inventory ● Operating Costs (own/rent) ● Product mix: location and
amenities ● Building size and configurations ● New Construction, Permits ● Vacancy (also a demand factor)
● Distribution of firms by size ● Employee space requirements ● Jobs and job growth in office
industries ● Commuting patterns ● Traffic counts ● Vacancy (also a supply factor)
Industrial Market Analysis With increasing automation, the need for manufacturing space is driven more by the level of output than the level of employment. Fourth Economy will prepare demand estimates based on both projected employment and projected output growth. Fourth Economy will make a preliminary assessment of what industries are most suited for this location and then assess the market outlook for those industries. Figure 9: Industrial Market Factors
Supply Factors Demand Factors
● Quality of physical inventory ● Operating Costs (own/rent) ● Product mix: location and amenities ● Building size and configurations ● New Construction, Permits ● Vacancy (also a demand factor)
● Product / industry forecasts ● Distribution of firms by size ● Employee space requirements ● Space requirements for output ● Vacancy (also a supply factor)
Market Analysis Report / Market Opportunities Report Once the initial economic development and market analysis has been completed, Fourth Economy will prepare a draft for review and comment. This analysis will identify the strengths and weaknesses of the market potential for the primary development sectors for the development site.
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Once the initial economic development and market analysis has been completed, Fourth Economy will prepare a Market Analysis report for the priority areas. This will include short summaries for each priority area that can be incorporated into development marketing materials. The Market Analysis will identify the strengths and weaknesses of the market potential for the primary development sectors for the development site. Figure 10 presents a sample residential market overview to demonstrate the kinds of information that will be summarized for each sector (Residential, Retail, Commercial and Industrial) and for each priority area. Figure 10: Sample Residential Market Overview
Residential Market Overview
Favorable Factors The population has stabilized and there are pockets of growth. Years of conservative housing construction have helped local home values remain steady vs. U.S.
Unfavorable Factor High vacancy in the region depresses values and discourages new residents. Home sale prices may not reflect the market due to the prevalence of Love and Affection sales as well as institutional transfers and sales.
Site Recommendations
The market area has an existing housing gap or need for 327 units valued between $150,000 and $499,999. There is a need for more 2 bedroom or more rental units, as well as unfilled demand of 525 units that would rent for less than $500 per month and demand for 270 units that would rent at $1,500 per month or more.
Fourth Economy will examine the market opportunities in each sector to identify the highest and best use for the site based on the market conditions and development opportunities.
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Value and Tax Analysis Fourth Economy will provide an estimate of the potential post-development value of the property and projected tax revenues based on the market opportunities and highest and best use. Given that no development plans or designs will be available, these estimates will be developed using a Net Operating Income method. This is not a formal appraisal, but an estimate based on the proposed development plans. The actual development budget, design and quality of execution will ultimately affect the final valuation and related tax generation of the property. The value of commercial real estate is usually determined using one or more of three standard valuation techniques. One approach is the use of comparable properties, which is best used when they are a sufficient number of similar developments in the market area. We expect this site will be unique and not have good comparables, therefore we do not recommend this approach for this site. A second approach is the cost approach, which is based on the development budget, adjusted for design, construction, functional utility, grade of materials and depreciation. Since no development plans will be available, this approach is also not feasible. A third approach is the income approach which is most used with commercial properties that generate annual income, and is the easiest to estimate when there are no actual development or investment plans.
Income Approach The income approach values a property based on its potential to generate income. This method is generally used for commercial structures such as apartments, office buildings, malls, etc. The income approach estimates the annual gross income based on market rental rates and the square footage in the proposed development. From this gross income, subtract any losses from vacancy or other occupancy costs to get the effective gross income. Operating expenses are also excluded to estimate the Net Operating Income (NOI). The NOI is divided by a capitalization rate (cap rate) published for the market area. The capitalization rate (cap rate) is the rate of return, or yield, that other investors of property are getting in the local market. The cap rate is similar to the interest rate for bonds or the earnings to price ratio for stocks. Cap rates are lower for more desirable properties than less desirable properties, for the same reason that Treasuries have lower interest rates than junk bonds because of the higher quality and lower risk of a Treasury investment. CBRE conducts an annual survey of investor cap rates in markets across the United States. The CBRE North America Cap Rate Survey for the Second Half of 2017 provided cap rates for the Pittsburgh market.
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Cap Rates Class AA Class A
Office - CDB 6.5 to 7 6.75 to 7.25
Industrial 6.75 to 7.5
Retail 6 to 7
Assuming you have an estimated NOI of $1 million, the Cap Rate will provide the following estimates of the property value.
1. NOI = $1,000,000, divided by 1. Cap Rate of 6.5 = Property Value of $15,384,615 2. Cap Rate of 7 = Property Value of $14,285,714
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Budget Fourth Economy expects to complete the scope of work in approximately three months for a not to exceed cost of $38,940. The estimated pricing for each task is outlined below.
Pricing by Task and Element Estimated
Cost
1 Primary Research
1.1 Community / Stakeholder Input $2,640
2 Residential Analysis
2.1 Market demographics and trends $1,320
2.2 Housing Supply $1,320
2.3 Characteristics of key market targets $1,320
2.4 Housing Market Opportunities $2,640
3 Retail Analysis
3.1 Consumer Expenditures $1,320
3.2 Retail Sales $2,640
3.3 Retail Gaps and Surpluses $1,320
4 Commercial / Industrial Analysis
4.1 Commercial / Industrial Employment Projections $2,640
4.2 Commercial / Industrial Space Demands $1,320
4.3 Commercial / Industrial Supply $3,960
4.4 Commercial / Industrial Opportunities $2,640
5 Value & Tax Analysis
5.1 Net Operating Income Assessment $2,640
5.2 Cap Rates and Value Estimates $1,320
6 Project Management
6.1 Site Visits $2,640
6.2 Project Management $2,640
6.3 Deliverables (reports and data) $4,620
Total $38,940
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Project Staffing
Jerry Paytas, Ph.D.
VICE PRESIDENT, RESEARCH & ANALYTICS Jerry founded Fourth Economy in 2010 with Rich. He loves working with clients who are curious, driven, and believe in the power of data and information. He’s good at figuring out how to analyze information that may not have a standard resource or method and then condensing the results to help clients reduce uncertainty and develop an implementable path forward. Jerry has an analytical mind and brings a critical eye to ideas and projects.
Education
University of Pittsburgh Graduate School of Public and International Affairs Ph.D., Public and International Affairs M.A., Urban and Regional Planning The Johns Hopkins University, Baltimore, MD B.A., International Affairs
Prior Experience
GSP Consulting, Pittsburgh, PA Directed research for state, regional and local economic development strategies Carnegie Mellon Center for Economic Development, Pittsburgh, PA Managed an applied research and policy center that provided fact-based regional development policy analysis and recommendations Heinz College, Carnegie Mellon University, Pittsburgh, PA Trained more than 200 pragmatic development analysts and activists in Urban and Regional Economic Development Ben Franklin Technology Center, Pittsburgh, PA Managed $1.5 million annual business service program to support technology startups
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Jamie Reese
TOP NERD Jamie is curious and determined in her work and revels in finding out about root causes and effective solutions to today’s most pressing questions. She works with organizations that have a vision but need help with the details – she delves deep into data, finding ways to measure things that look like they can’t be measured. Jamie believes that we must continually explore and test new ways to create strong communities and economic opportunity. Key to Jamie’s success is a belief in solid research that combines data with political, cultural and historic context. Jamie likes exploring new places and meeting new people and her dog Daisy is her happy accomplice.
Education
University of Pittsburgh Graduate School of Public and International Affairs, Pittsburgh, PA M.P.A. West Chester University of Pennsylvania, West Chester, PA B.A., Anthropology
Prior Experience
Borough of Wilkinsburg, PA Provided site-specific vacant property disposition strategies to support ongoing blight remediation and tax base expansion efforts New Kensington Community Development Corporation, Philadelphia, PA Coordinated outreach, communications, and development support related to community engagement, economic development, and housing counseling
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Emily Brown
ECONOMIC DEVELOPMENT STRATEGIST Emily sees economic development as a way to create a more equitable world. She excels at finding consensus and developing actionable plans. Few things give her more satisfaction than working with communities to develop and achieve metrics for measurable change. She is resourceful, practical, and a believer in elegant and just solutions. Emily’s hobbies include playing bocce, listening to podcasts, and going to see live music.
Education
Georgia Institute of Technology, Atlanta, GA Masters of City and Regional Planning Allegheny College, Meadville, PA B.A. English
Prior Experience
International Economic Development Council, Washington, DC As Director of Applied Research, managed federal and foundation funded grant projects, created curriculum development and administered and lead research efforts for the Economic Development Research Partners, the organization’s think tank. Kickstarter: Cards Against Urbanity, Washington, DC Part of a team that created and crowdsourced funds for the development of Cards Against Urbanity, a cheeky game designed to provide education about urban planning. 1776, Washington, DC Contributed a monthly column to the Insights section on how technology is changing the urban landscape. Main Street Morgantown, Morgantown, WV As a VISTA, assisted in fundraising efforts for a downtown farmers’ market pavilion and provided support with event planning.
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