Market Area Analysis: Identifying Neighborhoods and Districts

Chapter Title: Market Area Analysis: Identifying Neighborhoods and Districts

Introduction

Real estate valuation hinges on a thorough understanding of the subject property’s surroundings. This chapter delves into the scientific principles and practical techniques for defining and analyzing market areas, focusing specifically on identifying and characterizing neighborhoods and districts. Accurate identification is crucial because the characteristics of these areas exert a significant influence on property values.

1. Defining the Market Area

A market area is a geographically delineated region encompassing properties that compete with the subject property and are subject to similar market forces. Defining the market area is the first step in understanding the competitive landscape and identifying relevant data for comparison.

• 1.1 Principles of Market Area Delineation

  Market area delineation is not arbitrary; it relies on several key economic and geographic principles.

  • Substitution: Properties within a market area are considered substitutes for one another. Potential buyers or renters are indifferent between properties in the market area. This implies a high cross-elasticity of demand.
  • Homogeneity: Properties within a market area share similar characteristics, including physical features, land use patterns, socio-economic demographics, and regulatory environments (zoning, building codes).
  • Spatial Proximity: Although not the sole determinant, proximity is a key factor. Properties that are closer together tend to be more competitive. Spatial interaction models, such as the gravity model, can be used to quantify this relationship.
  • Boundaries: Market area boundaries can be defined by natural features (rivers, mountains), man-made features (highways, rail lines), political boundaries (city limits), or abrupt changes in land use or socio-economic characteristics.

• 1.2 Quantitative Methods for Market Area Delineation

  Several quantitative techniques can assist in defining market areas:

  • Spatial Statistics: Techniques like cluster analysis and spatial autocorrelation (Moran’s I) can identify areas with similar property characteristics.

    Moran’s I Equation:
    I = (N / S₀) * [Σᵢ Σⱼ wᵢ,ⱼ (xᵢ - x̄)(xⱼ - x̄) / Σᵢ (xᵢ - x̄)²]
    Where:
    * N = Number of spatial units
    * xᵢ = Variable of interest at location i
    * x̄ = Mean of the variable
    * wᵢ,ⱼ = Spatial weight between locations i and j
    * S₀ = Σᵢ Σⱼ wᵢ,ⱼ

    A positive Moran’s I indicates clustering of similar values.

  • Trade Area Analysis (Retail): In commercial properties, trade area analysis identifies the geographic region from which a business draws its customers. This involves mapping customer origins using address data and identifying the radius containing a significant percentage (e.g., 80%) of customers.

  • Regression Analysis: Regressing property values against spatial coordinates (latitude, longitude) can reveal spatial trends and identify areas with statistically distinct pricing patterns. This can delineate market area boundaries.

  • Geographic Information Systems (GIS): GIS software allows for the overlaying and analysis of various data layers (e.g., demographics, land use, sales data) to identify areas with similar characteristics and market forces.

• 1.3 Practical Application: Delineating a Residential Market Area

  Consider a single-family house in a suburban area. To define the market area:

  1. Gather Data: Collect recent sales data of comparable properties in the vicinity.
  2. Map Sales: Plot the sales on a map and look for clusters.
  3. Analyze Characteristics: Examine the properties within each cluster, noting similarities in size, age, style, and amenities.
  4. Identify Boundaries: Look for natural or man-made boundaries that separate the clusters. These boundaries may represent changes in school districts, traffic patterns, or the type of housing stock.
  5. Statistical Testing: Conduct tests (such as ANOVA) to confirm whether the price means are the same or different accross the identified areas.

  The resulting area represents the residential market area for the subject property.

2. Identifying and Characterizing Neighborhoods

A neighborhood is a smaller, more localized area within a market area, often characterized by a distinct identity and cohesive social fabric.

• 2.1 Defining Characteristics of Neighborhoods

  Neighborhoods are typically defined by:

  • Homogeneity: Similar housing stock, architectural styles, lot sizes, and landscape features.
  • Social Interaction: A sense of community, often fostered by local schools, parks, and community events.
  • Perceptual Boundaries: Residents often have a shared perception of the neighborhood’s boundaries, which may or may not align with physical or political boundaries.
  • Functional Interdependence: Residents rely on local businesses and services within the neighborhood.

• 2.2 Types of Neighborhoods

  Neighborhoods can be classified based on several factors:

  • Residential Neighborhoods: Characterized by single-family homes, townhouses, or apartments.
    • Subtypes: Custom-built subdivisions, attached housing (condominiums, townhouses), senior housing, rural housing.
  • Commercial Neighborhoods: Dominated by retail stores, offices, and service businesses.
    • Subtypes: Strip malls, neighborhood shopping centers, specialty retail areas.
  • Mixed-Use Neighborhoods: Combine residential, commercial, and even light industrial uses.

• 2.3 Methods for Identifying Neighborhood Boundaries

  Identifying neighborhood boundaries often requires a combination of methods:

  • Windshield Surveys: Driving or walking through the area to observe physical characteristics, housing styles, and land use patterns.
  • Community Interviews: Talking to residents, local business owners, and community leaders to understand their perception of neighborhood boundaries.
  • Data Analysis: Analyzing data on housing values, demographics, crime rates, and school performance to identify areas with similar characteristics.
  • Historical Analysis: Examining historical maps and documents to understand how the neighborhood evolved and how its boundaries have changed over time.

• 2.4 Factors Influencing Property Values within Neighborhoods

  Numerous factors influence property values within a neighborhood, many of which were extracted from the provided PDF text:

  • Access to Workplaces: Proximity and ease of commuting.
  • Transportation Service: Availability of public transportation and road infrastructure.
  • Access to Shopping Centers and Cultural Facilities: Convenience and amenities.
  • Quality of Schools: A major driver of value, especially for families.
  • Reputation of Area: Perceived safety, cleanliness, and desirability.
  • Residential Atmosphere and Appearance: Curb appeal, landscaping, and maintenance.
  • Protection from Unwanted Commercial and Industrial Intrusion: Zoning regulations and buffers.
  • Proximity to Open Space, Parks, Lakes, Rivers, and Recreational Facilities: Access to nature and outdoor activities.
  • Presence of Vacant Land Likely to Be Developed: Potential for future improvements or negative impacts.
  • Private Land Use Restrictions (CC&Rs): Impact on property rights and aesthetics.
  • Public Land Use Restrictions (Zoning): Permitted uses and development density.
  • Vacancy and Tenant Turnover Rate (Multifamily): Stability and demand.
  • Foreclosures and Short Sales (Multifamily): Impact on prices and perception.
  • Frequency of Weather-Related Problems (Multifamily): Risk of damage and insurance costs.
  • Location within a city or town or proximity to anchors and core groupings(retail): Foot Traffic
  • Quantity and quality of the purchasing power of the population(retail): Income

3. Characterizing Districts

A district is a larger area than a neighborhood, often encompassing multiple neighborhoods and characterized by a specific land use or economic activity.

• 3.1 Types of Districts

  Districts are often categorized based on their dominant land use:

  • Residential Districts: Areas primarily dedicated to housing.
  • Commercial Districts: Areas dominated by retail stores, offices, and service businesses.
    • Subtypes: Highway commercial districts, retail districts (regional, super-regional, neighborhood shopping centers), downtown central business districts (CBDs).
  • Office Districts: Areas concentrated with office buildings and supporting services.
    • Subtypes: Central business districts, suburban office parks, office condominiums.
  • Industrial Districts: Areas dedicated to manufacturing, warehousing, and distribution.
  • Entertainment Districts: Areas with a concentration of entertainment venues, restaurants, and related businesses.
  • Mixed-Use Districts: Combining different land uses, such as residential, commercial, and office.

• 3.2 Key Characteristics of Commercial Districts

  Commercial districts are defined by the following characteristics:

  • Trade Area: The geographic area from which the businesses draw their customers.
  • Retail Mix: The types of stores and services available in the district.
  • Accessibility: Ease of access for customers, employees, and suppliers.
  • Parking: Availability and convenience of parking.
  • Traffic Flow: Volume and pattern of pedestrian and vehicular traffic.
  • Vacancy Rates: Percentage of vacant storefronts or office spaces.
  • Rental Rates: Level of rents compared to other districts.
  • Zoning Regulations: Rules governing land use, building heights, and parking requirements.

• 3.3 Analyzing Office Districts

  Analyzing office districts involves considering:

  • Location Considerations: Time-distance from potential labor force, access, highway medians, and traffic signals.
  • Building Configuration: Floorplate size, ceiling height, and other physical characteristics.
  • Physical Characteristics: Visibility, attractiveness, quality of construction, and condition of properties.
  • Direction of Observable Growth: Development trends in the area.
  • Character and Location of Existing or Anticipated Competition: Supply and demand for office space.
  • Availability of Land for Expansion: Potential for future development.
  • Pedestrian or Vehicular Traffic Count: Volume of traffic near the property.
  • Vacancy and Rental Rates: Market conditions for office space.

• 3.4 The Dynamics of Central Business Districts (CBDs)

  CBDs are subject to complex dynamics influenced by:

  • Transportation Facilities: Accessibility by public transit, highways, and parking.
  • Land Use Policies: Zoning regulations, density restrictions, and historic preservation codes.
  • Mix of Uses: Combination of office, retail, residential, and entertainment.
  • Local Population: Number of residents and workers in the area.

• **3.5. Experiment: The impact of zoning on Land Value

Zoning is a powerful instrument to influence urban development. Here is an experiment to show this:

1. Obtain a spatial map of the city including a zoning layer that shows different zones.
2. Obtain a list of all residential properties located in a specific market area of the city.
3. Spatially join the properties and the zoning layer.
4. Filter properties that fall in two specific zones A and B. Zone A should allow high density development, whereas zone B should limit density to a minimum.
5. Do a statistic t-test (t = (x̄A - x̄B) / sqrt(s²A/nA + s²B/nB)) using the land value of the properties. It will show that zone A properties have a significantly higher land value due to the possibility to build higher density.

Conclusion

Understanding and accurately identifying neighborhoods and districts is essential for sound real estate valuation. This chapter has provided a scientific framework for defining market areas and characterizing their constituent neighborhoods and districts. By applying the principles and techniques described herein, appraisers can develop a more thorough and accurate understanding of the factors that influence property values.