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Market/

Marketability

Analysis-

Applications in

Valuation

Appraisals

Presentation Panel:

Benjamin R. Sellers, MAI

Kerry M. Jorgenson, MAI

Stephen F. Fanning, MAI

Presentation Format

Presentation format

Cases presented• Real problems taken from our daily appraisals

Panel discussion

Audience discussion

Questions During Presentation

Send by text to 404-550-6359

Or write on card and pass to isle

Questions After Presentation

Raise hand, text or write on cards.

There’s No Magic Formula

Recognize that…

“The market analysis process is not static. It

varies with the availability of data, the

techniques that the appraiser chooses, and

the changing conditions of the market.”

Source: Market Analysis for Real Estate, 2nd Ed. 51

…as long as you address it

Objectives

Recognize the importance market analysis

has in the appraisal process

Identify problematic scenarios requiring “next level” of market analysis

Once recognized, apply conclusions to analysis throughout the report

Role of M/M Analysis in the Appraisal

Process?.....

Basis of Market Value“ Since the value of a property is equal to the present

value of all of the future benefits it brings to the owner,

market value is dependent on the expectations of what

will happen in the market in the future” ( AI Guide Note 12)

• Who Forecast Future Benefits ?

• How are future benefits forecasted ?

• How are those forecasted future benefits

applied in the three approaches to value?

Which Market Do We Forecast ?

Fundamental Markets

(Users)

Owner Tenants

Customers

Capital Markets

(Buy/Sell)

Debt Equity

Appraisal Process Part 1- H&B Use

The Study (Foundation)

P Property Analysis - Look

at site, legal and building to

determine property’s potential.

P L M C

LLocation Analysis - Look at

growth in the area, linkages to demand sources and determine use potential.

M Market Analysis - Look at surrounding competition and market demand.

C Capture (Marketability) Determine how much of the market demand the subject is likely to capture.

The Study – Setting the Foundation for

Highest and Best Use of PropertyPart 1

Six-Step Market/Marketability Process

Steps

1. Property productivity Analysis ( Determine the Product)

2. Delineate the market (Determine the market)

3. Forecast Demand ( Measure Demand)

4. Supply Analysis ( Measure current and forecast future

competition)

5. Market Condition Analysis ( Determine Market Environment)

6. Subject Marketability Analysis ( Determine Market Capture )

Step 1- Property Productivity Analysis

Subject Rating Veto Factor High Moderate Slight Mkt Std Slight Moderate High

Physical Characteristics

Site

Size X

Land-to-building ratio X

Parking

Number X

Convenience X

Topography

Circulation impact X

Drainage X

Landscaping X

Building Improvements

Exterior appearanceX

Construction qualityX

Signage appearanceX

Design flexibility X

Street visibility X

Step 1- Property Productivity Analysis –cont.

Subject Rating Veto Factor

Inferior Typical

High Moderate Slight Mkt Std Slight Moderate High

Tenant Mix and Marketing Features

Anchor size X

Anchor’s drawing power X

Tenant compatibility mix X

Image of center X

Shopper access: shop to shopX

Center’s amenity feature X

Legal Characteristics

Zoning/easements/legal

characteristicsX

Sub-rate no. of items 1 1 4 15 1 0 0

Times category score 0 2 4 5 6 8 10

Category score 0 2 16 75 6 0 0

Total subject property score 99

Percentage above or below

average-10%

Majority of Competition

Location of

Majority of

Demanders

Market Area

Subject Property

Step -2 Delineate the Market

Step 3-Inferred Demand by Historical Absorption

Office Space Absorbed\Constructed

0

100

200

300

400

500

600

Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7

Thousands

Construction Absorption

A

Change in

Leads

to

A

Change in

Which Leads

to

A Change in Demand for

Employment Office jobs Office space

Employment Industrial jobs Industrial space

Population Households Housing units

Income Effective

buying power Retail space

Step 3 Fundamental Demand Forecast

Steps 3,4 & 5- Market Condition Analysis

Market Analysis Steps CurrentForecast

+5 Years

Forecast

+10 Years

Step 3-Forecast of Supportable

Space (Sq. Ft.)

1,800,000 1,900,000 2,100,000

Step 4 -Less Current Competitive

Supply1,800,000 1,800,000 2,200,000

Step 4 -Less Forecasted New

Competition 0 400,000 0

Step 5- Market Residual Demand -

Comparing Supply with Demand

(Excess) Shortage

0 (300,000) (100,000)

Step 6- Subject Capture AnalysisID 1 2 3

Rating Criteria Subject Description Oak Description Vista Description

Rank

of

Factor

Size of Center 110,000 65,000 90,000

Location Factors

Current household density in 1

mile2 moderate 2 similar 1 inferior 13

Average household income in 1

mile1 $55,952 1 $55,952 2 $63,793 11

5 yrs. household density in 1 mile 1 moderate 1 similar 1 similar 12

Proximity to roads 1 average 1 similar 2adj. to

freeway10

Traffic volume by site 1 average 1 similar 2 freeway 8

Ease of access to site 1 average 1 similar 1 similar 9

Proximity to other demand sources 1 good 1 similar 1 similar 6

Center Factors

Size of center 3 110,000 1 65,000 2 90,000 5

Exterior appearance bldg. and site 3 very good 2 good 1 fair 2

Visibility from street 1 good 1 good 1 good 7

Adequacy of parking 2 average 1 fair 3 very good 4

Image of center 2 good 1 average 1 good 3

Bldg. design flexibility 2 good 2 good 1 big box 1

Anchor drawing power 2 good 1 across street 3 very good 14

Tenant/product variety 2grocery

anchor1

no major

anchor3 significant mix 15

Total Score 184 136 220 540

% of scores 34% 25% 41%

Pro rata by building size 42% 25% 34%

Total competitive space 265,000

Subject Marketability Conclusions

Mid-range forecast

Occupancy. Improving to 90% occupancy between Years 5 and 10, and then leveling off Rents. Remain level or decline slightly over the next five years and increase can be expected in years 6-10 after citywide residual demand appears positive in about year 6

Levels of Market/Marketability AnalysisLevel A: Demand Forecast Inferred from General &

Descriptive Data and Sales and Rent Comps

Level B: Demand Forecast Inferred from General data ,

historical sales, rent comps, plus market trend

analysis

Level C: Demand forecast from inferred data, plus

Fundamental analysis of subject specific

submarket and competition and subject

capture

M/M is the Basis of H&B Use Conclusions

Use

Time (probable use date or occupancy forecast)

Market participants

–User of space

–Most probable buyer

Appraisal Process Part 2-Measure Value

The Study (Foundation)

P L M C

Measure the Property’s Market Value

using three different methodologies.

The H&B Use Conclusions sets the foundation for:

Part 2

Property Obsolescence

1

Cost

2

Sales 3

Income

Selecting Comparable Sales &

Rents

Adjustments to the Comparable

Rent & Occupancy Forecast

Application Example #1- Vacant Land

Where do you start the land valuation ?

• With sales of similar physical size, zoning and location –OR

• With user demand for sites like the subject ?

Application Example #1- Land Value

Application Example #2 - Income Approach

Case study showing Market/Marketability

study application in the income approach for a

proposed Assisted Living Center

Market Area Population Projections

2010

Census

STDB

2015

STDB

2020

Average

Growth %

Primary Market

(10-Minute

Drive Time)

All Ages 88,060 90,691 93,583 0.6%

Age 45-64 19,142 18,881 18,488 -0.4%

Age 65-74 4,693 5,890 7,045 3.6%

Age 75-84 3,307 3,119 3,431 1.9%

Age 85+ 1,641 1,683 1,602 -1.0%

Secondary

Market

All Ages 353,911 376,676 401,922 1.3%

Age 45-64 71,833 74,791 75,433 0.2%

Age 65-74 15,895 20,418 24,650 3.8%

Age 75-84 9,001 9,386 10,912 3.1%

Age 85+ 3,094 3,384 3,660 1.6%

Combined

General Market

(Greater Ogden

Area)

All Ages 441,971 467,367 495,505 1.2%

Age 45-64 90,975 93,672 93,921 0.1%

Age 65-74 20,588 26,308 31,695 3.8%

Age 75-84 12,308 12,505 14,343 2.8%

Age 85+ 4,735 5,067 5,262 0.8%

Current Supply – Greater Ogden (General Market Area)

Facility Name Street Address CityYear

Built

Drive

Time

Total

Units

Vacant

Units

Occupancy

Rate

Primary Market

Harrison Regent 4481 Harrison Boulevard Ogden 1986 1 90 12 86.7%

Mountain Ridge Assisted Living 1885 East Skyline Drive South Ogden 2001 4 108 18 83.3%

Legacy House of Ogden 5526 South Adams Avenue South Ogden 2000 5 78 3 96.8%

Apple Village 2600 East Hobbs View Circle Layton 1998 9 70 1 98.6%

Stoney Brooke 4390 South 700 West Riverdale 2002 10 16 3 81.3%

Primary Market Total 362 37 89.9%

Secondary Market

Aspen Assisted Living 2325 Madison Avenue Ogden 2013 10 32 6 81.3%

Gardens Assisted Living 1450 9th Street Ogden 1980 12 69 6 91.3%

Legacy Village of Layton 1201 North Fairfield Road Layton 2010 14 206 - 100.0%

Pheasant View Assisted Living 1242 Pheasant View Drive Layton 2011 16 21 - 100.0%

Beehive Homes of Ogden 931 East 1225 North Ogden 1989 16 11 2 81.8%

Quail Meadow Assisted Living 786 East 2100 North North Ogden 2013 17 24 - 100.0%

Emeritus Estates 1340 North Washington Blvd North Ogden 1997 17 81 3 96.9%

The Villas at Baer Creek 770 South Main Kaysville 2014 17 16 2 87.5%

Apple Tree Assisted Living 565 North 300 West Kaysville 1992 18 64 2 96.9%

Peach Tree Place West Haven 4607 South Midland Drive West Haven 2000 19 59 1 98.3%

Beehive Homes of Roy 4965 South 3500 West Roy 1999 19 11 3 72.7%

Lotus Park Care Center 3520 South 2639 West West Haven 2012 21 81 22 72.8%

Chancellor Gardens Clearfield 1425 South 1500 East Clearfield 1999 21 130 6 95.4%

Family Tree of Morgan 862 East Mahogany Ridge Morgan 2009 22 43 2 95.3%

Beehive Homes of Layton 59 North King Street Layton 1996 23 12 - 100.0%

Country Pines Retirement 1748 West 1800 North Clinton 1993 22 109 8 92.7%

Beehive Homes of Clearfield 2221 South 100 West Clearfield 1994 25 11 8 27.3%

Family Tree of West Point 421 North 3150 West West Point 2005 26 35 3 91.4%

Beehive Homes of Eden 2547 N Valley Junction Dr Eden 2013 26 27 7 74.1%

General Market Area Total 1,404 117 91.7%

Current Supply and Occupancy by Level of Care – Greater Ogden

Independent

LivingLevel I Level II

Memory

CareTotal

Licensed Number of Beds 229 880 216 1,325

Total Units 250 210 783 161 1,404

Available Units (Vacant) 13 43 45 16 117

Weighted Average Vacancy 5.2% 20.5% 5.7% 9.9% 8.3%

Weighted Average Rates (Base Rates) – Greater Ogden

Unit TypeIndependent

LivingLevel I Level II

Memory

Care

Semi Private - - - $3,127

Private - $2,257 $2,784 $3,591

Studio with Kitchenette $2,245 - $2,753 -

One Bedroom $2,405 $2,317 $3,351 -

Two Bedroom $3,203 - $4,000 -

Competitive Property #3

Legacy House of

Ogden

Identification: Legacy House of Ogden Services Included in Base Rate

Location:5526 South Adams Avenue

Washington Terrace, Utah

Meals and Snacks: Included (3/day)

Utilities Included

Number of Beds/Units: 91/78 Housekeeping: Included

Level of Care: AL-2 & Alzheimer’s Recreation Program: Included

Year Built/Condition: 2000/average Scheduled Transportation: Included

Features and Amenities:Emergency call/intercom, beauty

shop, library, covered porch/patio.

Linen Laundry: Included

Personal Laundry: Available ($ charge)

Vacancy: 3.2% Cable TV in Room: Included

Source of Information: Marketing Director (801-476-7111) Telephone in Room: Included

Comments: This is a good quality facility located just east of the

Ogden Regional Medical Center.

Medication Reminders: Included

Dressing/Grooming Assist: Included

Bathing Assistance: Included

No. Unit Type

SF

Size

Base Rates

VacantAL-2 Alzheimer

28 Studio with Kitchenette 400 $2,900 -- 0

34 One Bedroom Apartment 600 $3,200 -- 1

4 Two Bedroom Apartment 774 $3,800 -- 1

2 Semi Private Beds 567 -- $3,800 0.5

10 One Bedroom Apartment 450 -- $4,300 0

78 Total 2.5

-- Second Person Charge -- $700 -- --

Primary Competition

Comp Facility Name Units IL Level I Level IIVacant

UnitsVacancy Rate

1

Mountain Ridge Assisted Living

1885 East Skyline Drive

South Ogden, Utah

31 Studio with Kitchenette - - $3,100.00 5

43 One Bedroom - - $3,500.00 12

6 Two Bedroom - - $4,100.00 1

18 Semi Private ALZ - - $3,300.00 -

10 Private ALZ - - $3,550.00 -

108 Subtotal 18 16.7%

2

Harrison Regent IL

4481 Harrison Boulevard

South Ogden, Utah

42 Studio with Kitchenette $2,195.00 - - 4

36 One Bedroom $2,695.00 - - 4

12 Two Bedroom $3,295.00 - - 4

90 Subtotal 12 13.3%

3

Legacy House of Ogden

5526 South Adams Avenue

Ogden, Utah

28 Studio with Kitchenette - - $2,900.00 -

34 One Bedroom - - $3,200.00 1

4 Two Bedroom - - $3,800.00 1

2 Semi Private ALZ - - $3,800.00 1

10 Private ALZ - - $4,300.00 -

78 Subtotal 3 3.2%

4

Apple Village Assisted Living

2600 East Hobbs View Circle

Layton, Utah

53 Studio with Kitchenette - - $2,375.00 1

6 One Bedroom - - $3,400.00 -

11 Private ALZ - - $3,700.00 -

70 Subtotal 1 1.4%

5

Stoney Brooke

4390 South 700 West

Riverdale, Utah

2 Private Half Bath - - $3,000.00 -

14 Private Full Bath - - $3,000.00 3

16 Subtotal 3 18.8%

Total/Weighted Average

- Semi Private -

2 Private Half Bath $3,000.00 -

14 Private Full Bath $3,000.00 3

154 Studio with Kitchenette $2,195.00 $2,707.00 10

119 One Bedroom $2,695.00 $3,370.00 17

22 Two Bedroom $3,295.00 $3,980.00 6

20 Semi Private ALZ $3,350.00 1

31 Private ALZ $3,845.00 -

362 Total $2,728.33 - $3,321.71 37 10.1%

Pipeline Projects (Developing Inventory)

Pipeline Projects Units # Beds Type Probable Supply

Primary Market (10-Minute Drive Time)

Former Ogden BHI (Subject)

Ogden±45 ±45 AL-2 Preliminary proposal

Unnamed Project

Ogden37 37 AL-2

Have concept approval. In the process of

getting site plan approval.

Unnamed Project

South Ogden80 80

AL-2

MC

This is a very preliminary project. The city

has not yet heard of it and no approvals in

place.

Subtotal

Primary Market162 162

Secondary Market (Greater Ogden Area)

Pheasant View Expansion

Layton15 15 MC

These have already been approved and

should be completed by summer 2016.

Syracuse Assisted Living

Syracuse49 49 AL-2

Construction is nearly complete and the

opening is scheduled for end of August.

Our House of Ogden

Ogden40 40 AL-2

This project has final approvals and is in the

process of obtaining a building permit.

Creekside Assisted Living

Marriot-Slaterville120 120

AL-2

MC

All approvals are in place. Construction is

expected to begin soon.

Seasons of Farr West

Farr West24 24 AL-2

Construction is underway. Grand opening is

scheduled for October 1, 2015.

Quail Meadow - Expansion

North Ogden20 20 MC

Under construction. Completion expected by

early 2016.

Clinton Alzheimer’s Special Care

Clinton66 66 MC

This group is in the process of resubmitting

a site plan.

Unnamed Project

Roy31 31 IL

This project has final approvals and is in the

process of getting a building permit.

Subtotal

Secondary Market365 365

Total Pipeline

(Greater Ogden Area Overall)527 527

Projected Construction

High Scenario Mid Scenario Low Scenario

Pipeline Projects Units ProbabilityProbable

UnitsProbability

Probable

UnitsProbability

Probable

Units

Primary Market

Subject 45 100% 45 100% 45 100% 45

Unnamed Project 37 25% 9 50% 19 75% 28

Unnamed Project 80 0% - 25% 20 50% 40

Subtotal Primary Market 162 33% 54 52% 84 70% 113

Secondary Market

Pheasant View Expansion 15 75% 11 90% 14 100% 15

Syracuse Assisted Living 49 100% 49 100% 49 100% 49

Our House of Ogden 40 50% 20 75% 30 100% 40

Creekside Assisted Living 120 75% 90 90% 108 100% 120

Seasons of Farr West 24 100% 24 100% 24 100% 24

Quail Meadow Expansion 20 100% 20 100% 20 100% 20

Clinton Alzheimer’s 66 25% 17 50% 33 75% 50

Unnamed Project - Roy 31 50% 16 75% 23 100% 31

Subtotal Secondary Market 365 67% 246 82% 301 95% 349

Total General Market 527 57% 301 73% 384 88% 461

Percent needing help with

ADL’s

Percent needing help with personal care from

Others (US, 1997 to Present, Source NHIS)

Age 65-74 Age 75-84 Age 85+

1997 3.4% 7.9% 21.3%

1998 3.4% 7.5% 19.2%

1999 3.2% 8.0% 17.9%

2000 3.4% 7.4% 19.1%

2001 3.5% 7.6% 18.9%

2002 2.8% 7.4% 19.5%

2003 3.2% 6.6% 22.6%

2004 3.1% 7.4% 18.2%

2005 3.3% 6.8% 19.1%

2006 3.5% 6.2% 17.3%

2007 3.3% 7.7% 21.5%

2008 3.4% 6.7% 19.3%

2009 3.1% 7.1% 19.5%

2010 3.7% 7.9% 19.1%

2011 3.6% 8.0% 22.4%

2012 3.2% 7.6% 18.5%

2013 3.3% 10.5%

Average 3.3% 7.3% 19.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Trend of % Needing Help with ADL's

Age 65-74 Age 75-84 Age 85+

Potential Market (Persons Needing Assistance with Activities of Daily Living)

Year

Age 65-74 Age 75-84 Age 85+ Total

Population % ADL'sPersons

with ADLsPopulation % ADL's

Persons

with ADLsPopulation % ADL's

Persons

with ADLs

Persons

with

ADLs

Primary Market

2015 5,890 3.3% 194 3,119 7.3% 228 1,683 19.5% 328 750

2016 6,105 3.3% 201 3,179 7.3% 232 1,666 19.5% 325 758

2017 6,327 3.3% 209 3,240 7.3% 237 1,650 19.5% 322 767

2018 6,558 3.3% 216 3,303 7.3% 241 1,634 19.5% 319 776

2019 6,797 3.3% 224 3,366 7.3% 246 1,618 19.5% 315 786

2020 7,045 3.3% 232 3,431 7.3% 250 1,602 19.5% 312 795

Secondary Market

2015 20,418 3.3% 674 9,386 7.3% 685 3,384 19.5% 660 2,019

2016 21,202 3.3% 700 9,674 7.3% 706 3,439 19.5% 671 2,076

2017 22,016 3.3% 727 9,970 7.3% 728 3,494 19.5% 681 2,136

2018 22,861 3.3% 754 10,275 7.3% 750 3,549 19.5% 692 2,197

2019 23,739 3.3% 783 10,589 7.3% 773 3,605 19.5% 703 2,259

2020 24,650 3.3% 813 10,912 7.3% 797 3,660 19.5% 714 2,324

Combined General Market

2015 26,308 3.3% 868 12,505 7.3% 913 5,067 19.5% 988 2,769

2016 27,307 3.3% 901 12,853 7.3% 938 5,105 19.5% 996 2,835

2017 28,343 3.3% 935 13,210 7.3% 964 5,144 19.5% 1,003 2,903

2018 29,419 3.3% 971 13,577 7.3% 991 5,183 19.5% 1,011 2,973

2019 30,536 3.3% 1,008 13,955 7.3% 1,019 5,222 19.5% 1,018 3,045

2020 31,695 3.3% 1,046 14,343 7.3% 1,047 5,262 19.5% 1,026 3,119

Senior Care Demand/Utilization

Independent Living Assisted Living Skilled NursingTotal Senior

Care

Year UnitsOccupancy

Rate

Occupied

UnitsUnits

Occupancy

Rate

Occupied

UnitsBeds

Occupancy

Rate

Occupied

Beds

Occupied

Units/Beds

1987 674 92.0% 620 544 90.0% 490 4,948 6,058

1988 771 92.0% 709 544 90.0% 490 4,923 6,122

1990 771 92.0% 709 649 90.0% 584 6,397 76.0% 4,862 6,155

1991 885 92.0% 814 676 90.0% 608 6,479 80.0% 5,183 6,606

1992 885 92.0% 814 747 90.0% 672 6,634 83.2% 5,519 7,006

1993 885 92.0% 814 841 90.0% 757 6,725 83.4% 5,609 7,180

1994 885 92.0% 814 1,060 90.0% 954 6,939 82.0% 5,690 7,458

1995 1,064 92.0% 979 1,285 90.0% 1,157 6,708 84.3% 5,655 7,790

1996 1,127 92.0% 1,037 1,366 90.0% 1,229 6,862 82.1% 5,634 7,900

1997 1,175 92.0% 1,081 1,570 90.0% 1,413 6,913 78.2% 5,406 7,900

1998 1,175 92.0% 1,081 1,770 90.0% 1,593 6,683 80.6% 5,386 8,060

1999 1,175 92.0% 1,081 2,070 90.0% 1,863 6,920 76.7% 5,308 8,252

2000 1,450 92.0% 1,334 2,650 78.0% 2,067 7,044 75.8% 5,339 8,740

2001 1,516 93.0% 1,410 3,224 79.0% 2,547 7,118 72.7% 5,175 9,132

2002 1,516 90.0% 1,364 3,667 80.0% 2,934 7,110 72.7% 5,169 9,467

2003 1,833 82.8% 1,518 3,832 82.4% 3,156 7,155 71.6% 5,123 9,797

2004 1,799 85.5% 1,538 4,022 87.2% 3,508 7,178 69.2% 4,967 10,013

2005 1,742 93.4% 1,627 4,094 90.1% 3,690 7,231 68.5% 4,953 10,270

2006 1,742 93.4% 1,627 4,242 89.9% 3,816 7,163 69.7% 4,993 10,435

2007 1,742 93.4% 1,627 4,391 89.8% 3,941 7,505 68.9% 5,171 10,739

2008 1,827 93.4% 1,706 4,539 89.6% 4,067 7,493 69.3% 5,194 10,967

2009 1,827 93.4% 1,706 4,687 89.4% 4,192 7,628 69.1% 5,267 11,165

2010 1,789 92.2% 1,649 5,138 90.5% 4,651 7,762 64.5% 5,005 11,305

2011 1,905 89.0% 1,695 5,244 90.6% 4,753 7,802 66.2% 5,166 11,614

2012 2,020 86.2% 1,741 5,350 90.7% 4,855 7,970 64.7% 5,154 11,750

2013 1,884 88.4% 1,665 5,943 90.5% 5,380 7,971 64.3% 5,122 12,167

2014 1,881 94.1% 1,770 6,295 91.3% 5,748 8,205 62.5% 5,128 12,646

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

1985 1990 1995 2000 2005 2010 2015

Pen

etra

tio

n R

atio

Penetration Ratio Trend

Senior Care Supply and Demand Analysis (Utah Counties 2014)

CountyOccupied

IL/AL Units

Occupied

NF/SNF

Beds

Total

Senior Care

Occupancy

Seniors

With ADLs

Penetration

Ratio

Ratio to

Expected

(at 70.4%)

Population

Ages

45-64

Ratio 45-64

to Seniors

With ADLs

Cache, Rich 387 154.9 541.9 650 83.4% 118.5% 19,652 30.2

Box Elder, Weber,

Morgan, north Davis1,364 874.2 2,238.2 3,171 70.6% 100.3% 107,233 33.8

Salt Lake, Tooele,

south Davis3,766 2,367.0 6,133.0 7,774 78.9% 112.1% 256,637 33.0

Summit, Wasatch 57 28.2 85.2 337 25.2% 35.9% 17,694 52.4

Utah, Juab 1,255 647.5 1,902.5 2,477 76.8% 109.2% 80,947 32.7

Millard, Sanpete,

Sevier, Wayne, Piute135 162.6 297.6 594 50.1% 71.2% 14,023 23.6

Beaver, Garfield, Iron 70 97.2 167.2 418 40.0% 56.8% 11,363 27.2

Daggett, Duchesne,

Uintah56 151.2 207.2 368 56.3% 80.0% 11,621 31.6

Carbon, Emery,

Grand, San Juan50 199.3 249.3 500 49.9% 70.9% 13,762 27.6

Washington, Kane 619 326.4 945.4 1,856 50.9% 72.4% 30,765 16.6

Total/Average 7,759 5,008.5 12,767.5 18,147 70.4% 100.0% 563,697 31.1

y = 0.0228x + 0.1966

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

15.0 20.0 25.0 30.0 35.0

Mar

ket

Cap

ture

(%

of

Nat

ura

l D

eman

d)

Ratio of Age 45-64 Population to Seniors with ADLs

Local Market Capture Rate Vs. Age 45-64 Population

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1987

1988

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Senior Care Market Distribution

Skilled Nursing Assisted Living Independent Living

y = 0.00001011x + 0.00204R² = 0.39

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

$35,000 $45,000 $55,000 $65,000 $75,000

IL/A

L P

rop

ort

ion

of

Tota

l Sen

ior

Car

e D

eman

d

Median Household Income

IL/AL Demand Compared to Household Income

y = 0.00002667x - 0.3349R² = 0.62

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

$25,000 $27,500 $30,000 $32,500 $35,000 $37,500 $40,000

IL/A

L P

rop

ort

ion

of

Tota

l Sen

ior

Car

e D

eman

d

Median Household Income for Age 75+ Households

IL/AL Demand Compared to Age 75+ Income

y = 0.00000368x - 0.1036R² = 0.74

0.0%

20.0%

40.0%

60.0%

80.0%

$90,000 $140,000 $190,000 $240,000IL

/AL

Pro

po

rtio

n o

f To

tal

Sen

ior

Car

e D

em

and

Median Net Worth of Age 75+ Households

IL/AL Demand Compared to Age 75+ Net Worth

Fundamental Analysis of Supply and Demand - Mid Scenario

General Market Area - Greater Ogden

2015 2016 2017 2018 2019 2020

Population Age 65-74 26,308 27,307 28,343 29,419 30,536 31,695

% With ADL Limitations 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%

Subtotal 868 901 935 971 1,008 1,046

Population Age 75-84 12,505 12,853 13,210 13,577 13,955 14,343


Subtotal 913 938 964 991 1,019 1,047

Population Age 85+ 5,067 5,105 5,144 5,183 5,222 5,262


Subtotal 988 996 1,003 1,011 1,018 1,026

Total With ADL Limitations 2,769 2,835 2,903 2,973 3,045 3,119

Senior Care Penetration Ratio 69.7% 70.0% 70.5% 71.0% 71.0% 71.0%

Natural Senior Care Demand 1,930 1,984 2,046 2,111 2,162 2,215

Adjustment for In-migration/Outmigration 1.06 1.06 1.06 1.06 1.06 1.06

Total Senior Care Demand 2,043 2,104 2,169 2,237 2,291 2,347

Proportion Captured by IL/AL 63.0% 64.0% 65.0% 66.0% 67.0% 68.0%

IL/AL Demand (Occupied Beds) 1,287 1,346 1,410 1,477 1,535 1,596

Adjustment for Frictional Vacancy ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90

Supportable Supply (Units) 1,430 1,496 1,567 1,641 1,706 1,774

New IL/AL Construction (Units) - 268 117 - - -

Projected IL/AL Supply (Units) 1,404 1,672 1,789 1,789 1,789 1,789

Residual Demand (Oversupply) 26 (176) (222) (148) (83) (15)

Projected IL/AL Occupancy

(Demand ÷ Supply)91.7% 80.5% 78.8% 82.5% 85.8% 89.2%

Fundamental Analysis of Supply and Demand - Mid Scenario

General Market Area - Greater Ogden

2015 2016 2017 2018 2019 2020

IL/AL Demand (Occupied Beds) 1,287 1,346 1,410 1,477 1,535 1,596

Adjustment for Frictional Vacancy ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90 ÷ 0.90

Supportable Supply (Units) 1,430 1,496 1,567 1,641 1,706 1,774

New IL/AL Construction (Units) - 268 117 - - -

Projected IL/AL Supply (Units) 1,404 1,672 1,789 1,789 1,789 1,789

Residual Demand (Oversupply) 26 (176) (222) (148) (83) (15)

Projected IL/AL Occupancy

(Demand ÷ Supply)91.7% 80.5% 78.8% 82.5% 85.8% 89.2%

Projected Subject Occupancy (stabilized) 83.0% 81.0% 85.0% 89.0% 93.0%

Subject Capture (% of pro-rata share) 103% 103% 103% 104% 104%

Residual Demand Conclusions (2019)

Low

Scenario

Mid

Scenario

High

Scenario

Primary Market Demand, Occupied Units

(10-Minute Drive Time) 353 370 387

Adjustment for Frictional Vacancy (10%) ÷ 0.90 ÷ 0.90 ÷ 0.90

Supportable Supply in Primary Market 393 411 429

Forecasted Supply 475 446 416

Residual Demand in Primary Market (82) (35) 13

Secondary Market Demand 1,115 1,166 1,217

Adjustment for Frictional Vacancy (10%) ÷ 0.90 ÷ 0.90 ÷ 0.90

Supportable Supply in Secondary Market 1,239 1,295 1,352

Forecasted Supply 1,391 1,343 1,289

Residual Demand in Secondary Market (152) (48) 63

Total Residual Demand for General Market Area (234) (83) 77

Occupancy Forecast for the General Market Area 80.2% 86.8% 94.4%

Developing a DCF that Reflects Market Cycles

1. Over what time frame should the

fundamental demand forecast be made?

(5/10 years, typical projection period, or

just until end of cycle)

2. What is the likely trend in rents through

the real estate cycle?

3. What is the proper way to handle fixed and

variable expenses through market cycles?

Major Issues in M/M Application in Appraisals

4. What should be the proper relationship of

discount rates and cap rates through the

four stages of the real estate cycle?

5. What should be done if market participants

are not yet recognizing foreseeable changes

in market conditions?


6. Should the cash flow forecast be what the

market participants expect, or what the

appraiser/analyst predicts?

7. In extracting discount rates from a

comparable sale, should an appraiser use

the buyer’s estimates or make an

independent forecast consistent with

fundamental demand analysis?


8. If the forecasts and discounting are based

on typical buyer expectations, what is the

value of fundamental demand analysis?

Application Example #3 - Building Obsolescence

Market/ Marketability Analysis in

Litigation Valuation

A Parking Analysis Case study

Market Analysis Conclusions

Why is Market Analysis important?

“The data and conclusions generated through

market analysis are essential components in

other portions of the valuation process.”

Source: The Appraisal of Real Estate, 14th Ed. Page 42

Highest & Best Use

A typical appraisal report states:

As Vacant is commercial

As Improved is commercial

• Analysis is required by standards

• Does this provide needed/required analysis?

• If you don’t get the market analysis/HBU

right, you don’t get the value right

Identifying Depreciation

Ideal

ImprovementToo MuchToo Little

Depreciation

ExistsDepreciation

Exists

Identifying Depreciation

Comparison to ideal improvement

“Any difference in value between the existing

improvement and the ideal improvement

would be attributable to depreciation…”


Subject Property DescriptionLocation

Neighborhood: Established suburban office/industrial district Secondary office location within the market area

Subject Office Building

Site: 0.18 acres

Improvements: 2 stories; 5,042 SF (2,521 SF each level)

Age/Condition: 35 years with recent renovation/Average

Current Occupancy: 50% (Owner occupies 2nd level)

Historical Occupancy: High turnover on main level

Rental Rates: Typical/Below market on main level

Current Tenants: Engineering firm (owner)

Competition: Offices ranging from 5 to 35 years old with significant similar user space in close proximity.

Subject Property

Productivity Analysis

Step1: Identification of subject attributes

What are market expectations?

How does each factor affect potential tenants?

• Legal – What is required by zoning?

• Physical – What is required by market?

Step 1: Legal Analysis

Identifying the problem

• *Subject is a legal non-conforming use

• Grandfathered use is legal

• But value is based on market

Existing (10 Spaces) Zoning Requirements

GBA 5,042 SF 5,042 SF

÷ 300 SF

Spaces per 300 SF 0.60* 1.0

Definition

Legal-nonconforming use defined as:

“A legally nonconforming use is a use that was lawfully established and maintained but no longer conforms to the land use regulations of the zone in which it is located.”

“Zoning changes may create under-improved or over-improved properties.”

“Zoning ordinances usually permit a preexisting, or grandfathered, use to continue but may prohibit expansion or major alterations of any structures that support the nonconforming use.”

Source: The Appraisal of Real Estate 14th edition, page 349-350

Step 1: Physical Analysis

Market Demands:

What are the characteristics of the expected

end users?

Comp Parking Spaces GBA Spaces per 300 SF of GBA

1 24 5,017 1.44

2 16 4,000 1.20

3 30 8,000 1.13

4 40 9,672 1.24

5 30 8,000 1.13

6 11 2,800 1.18

Average 1.22

Median 1.20

Subject 10 5,042 0.60

Productivity Conclusions

Step 1 Conclusion: Identify the problem

SubjectZoning

(Required)Market

(Demanded)

Spaces per 300 SF 0.60 1.00 1.20

% Deficiency 40% 50%

H&B Use “As Vacant”

Physical & Legal

Market demanded parking requirements 1.20 per 300 SF of GBA

Maximum GBA based on physical and legal (keeping with market demands for parking)

2,500 SF

Divided by 300 SF ÷ 300 SF

Equals 1.00 spaces per 300 SF = 8.33 spaces

Times 1.20 spaces per 300 SF x 1.20

Equals market demanded parking = 10 spaces

Ideal ImprovementOne story 2,500 SF office with 10 surface parking spaces

H&B Use as Vacant

105.82'

5' SB

70.85' 16' SB 60' 4.29' 45' SB 79.23'

40'

5' SB

105.29'

2,500 SF

Ideal improvement

Existing Improvements

105.82'

5' SB

70.85' 16' SB 60' 4.29' 45' SB 79.23'

40'

5' SB

105.29'

2,500 SF

Existing improvement

5,042 SF

H&B Use “As Improved”

HBU Improved – Maximally Productive

Existing improvements = over improvement to site

Efficiency of improvements are negatively affected by insufficient parking

Functional obsolescence exists

Depreciation must be measured and applied within the approaches to value

Methodology Solution

Capitalization of Income Differences

“Differences in net operating income can be capitalized

to derive an adjustment when the income loss incurred

by a comparable property reflects a specific deficiency in

the property….”


Capitalized Income Differences

Capture loss in value attributed by the

capitalized difference in rent loss.

Rent and broker surveys reveal:

• Deficiency property rents range 35% lower

• Deficiency property vacancy levels range

50% higher

DCF Input Conclusions

No Parking Deficiency

Parking Deficiency

Rent Vacancy

Upper Level 201 $12.00 7.0%

Main Level 101 $12.00 7.0%

Main Level 102 $12.00 7.0%

Rent Vacancy

Upper Level 201 $12.00 8.0%

Main Level 101 $8.00 14.0%

Main Level 102 $8.00 14.0%

Application

Application Solution

• A discounted cash flow analysis to measure loss

• Rental rate reduced from $12.00 to $8.00 per SF for bottom

level (half of space) to account for the parking deficiency.

• Vacancy increased to weighted average 11% to account for

parking deficiency

• Longer marketing period in acquiring tenants due to the

parking deficiency.

DCF without parking deficiency

DCF with parking deficiency

Calculation

Calculation of Functional Obsolescence for

Parking Deficiency

Application

Final Opinion Conclusions

Income Approach

Application

Final Opinion Conclusions

Sales Comparison Approach

Application Example #4 - Cap Rates

Use of Market /Marketability Analysis

in Cap Rate Selection , Comparison and

Adjusting the Cap Rate

Subject Property DescriptionLocation

Neighborhood Retail Center in a small (30,000 pop) older town on the northern outskirts of a major metropolitan area. The metro area northern growth is starting to impact the town with new growth .

Subject Retail Center

Size: 110,000 square feet

Age: 10 years

Condition: Good

Current Occupancy: 80%

Historical Occupancy: 95% (an electronics store left last year)

Rental Rates: Good - some of the highest in town

Current Tenants: Regional Grocery, drug store , restaurants and

auto parts, dry cleaning etc.

Competition: Moderate currently but new

Super Walmart Coming within 2 miles

H&B Use Conclusion

Use: Neighborhood Retail

Timing: Subject entering a down market cycle with rebound not expected for about 10 years.

• Rents stable to declining over next 5 years with rents rebounding slightly year 5-10.

• Occupancy over the next ten years ranging from current 80% to 60% and then rebounding by about year 10 back

to the low 80% range.

Market Participants:

• Most Probable Buyer: Investor /Operator

• Most Probable Users: Moderate income households

Comparable Sales Data

Location Size Age (yrs)

Major

TenantsRents

Competition

In 1.5 Mile

Market Area

HH-

Pop.

1.5

Mile

Avg.

HH $ in

1.5 Mile

5 Yr.

HH/ Pop.

Growth

Com

1Adj Metro 129,995 4

National

grocery;

Restaurants;

Men’s

Warehouse

$21 -

$28

Average not

oversupplied24,325 $126,015 4,105

Com

2Adj Metro 97,297 10

National

grocery;

Restaurants,

Rack Room

Shoes

$18-

$23

Average not

oversupplied11,119 $85,032 1,499

Com

3

Subj. City

#3125,000 15

Regional

grocery;

Hardware;

Jr. Dept.

$15-

$19

Moderate

supercenter will

impact

12,378 $46,311 283

Subj 110,000 10

Regional

grocery;

Restaurants;

Jr. Dept.

$15-

$20

Extensive new

super center

coming

6,759 $53,882 911

Sales Comps Description

Comparable

Sales

Sale

Date

Occupancy

at Sale

Actual

Seller

Cap

Rate

Buyer

Expected

1st Year

Occupancy

Buyer

Expected

1st Year

NOI Cap

Rate

Comp #1

2 Years

Ago 95% 6.50% 95% 6.8%

Comp #2

3 Years

Ago 85% 7.20% 95% 7.9%

Comp #3

2 Years

Ago 80% 8.00% 90% 9.0%

Avg. 87% 7.2% 93% 7.9%

Buying Power and Supportable Retail

Sales ComparisonLine

No.Current Year Subject Comp #1 Comp #3

1Total number of

households in 1.5 miles*2,781 10,135 5,157

2Average household

income$53,882 $126,015 $46,311

3Total household income

in primary market area$149.M $1,277.1M $238.8M

4Percentage income spent

on retail37% 37% 37%

16

Total demand for

occupied sq. ft. of retail

and service/office space

from primary and

secondary trade area

103,140 879,082 164,386

Sales Ranking AnalysisImproved Sales Ranking Comparison

Sale ID #-> Subject 1 2 3 Rank

ID

#Sale Price Per Sq. Ft. $230.00 $170.00 $117.00

Describe Rating Describe Rating Describe Rating DescribeRating

1

Market Conditions

(Date of Sale)Current 1 2 Yrs Ago 2 3 Yrs Ago 2 3 Yrs Ago 2 1

Property Factors2 Occupancy at sale 80% 1 95% 3 85% 2 80% 1 8

3Design Quality/Age

ConditionGood/ 10 yrs old 2 Good/4 yrs 3

Good/ 10

yrs. Old2 Avg/15 yrs 1 3

4Land to Building

Ratio4.27 1 4.10 1 3.90 1 3.85 1 2

5 Tenant Quality/MixAvg. Regional

Anchor1

Excel

National

Anchor

3

Good

National

Anchor

2

Avg

Regional

Anchor

1 12

6Exposure/Traffic By

SiteGood 1 Good 1 Good 1 Good 1 6

7 AccessCorner Two Major

Thoroughfares2

Corner Two

Majors2

Front one

Majors1

Average

Corner1 9

Sales Ranking Analysis, cont.Location Factors

8

Character and

Compatibility with

Adjacent Land Uses

Average good

neighborhood

growing to the west

2Good newer

subdivisions4 Avg /Good 3

Avg. but

Slightly Older

Neigh.

1 4

9

Proximity and

Linkages (cumulative

attraction ) to Current

Retail

Average Some

complimentary land

uses

1 Very Good 3 Good 2 Average 1 7

10Proximity and Linkage

to Current residential

Average but most

new growth at west

edge of market

area

1Good in Four

Directions2

Good in

Four

Directions

2 Average 1 10

11

Population of

Residential in 1.5 mile

Radius

6,759 1 24,325 4 11,119 2 12,378 3 11

12

Avg. HH Income in 1.5

Miles$53,882 2 $126,015 4 $85,032 3 $46,311 1 13

13Employment in 3 Miles Limited 1 Good 3 Average 2 Limited 1 5

14

Population Growth

Forecast in 1.5 miles

for next five years

911 2 4,105 4 1,499 3 283 1 14

Total Score 148 321 224 128 821

Cap Rate Comparison By Rating Score

Rating Score

OA

R

Market/Marketability Analysis In Appraisals –

The Conclusion

An appraisal requires forecasting in the H&B

Use and in the three approaches.

“ Forecasting in any enterprise is fraught with

hazards….But forecasting the appraiser must,

or change his profession to another in which he

can search the annals of history , looking

backwards with reasonable certainty rather

than forward in a realm of economic

uncertainty”

( source: “Chapter 14 : Income Forecasting and Analysis” Alfred A. Ring, The Valuation of Real Estate, 2nd

Edition (Englewood Cliffs, N.J. : Prentice-Hall Inc., 1970) 205

market/ marketability analysis- - appraisal institute · location analysis-look at growth in the...

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