Analyzing Locational Factors: Neighborhoods, Districts, and Markets

Chapter: Analyzing Locational Factors: Neighborhoods, Districts, and Market Areas

Introduction

Real estate valuation is fundamentally about understanding location. The principle of situs, the preference for a specific location, is paramount. This chapter delves into the analysis of locational factors, focusing on neighborhoods, districts, and market areas. We will explore the scientific principles and practical applications necessary to accurately assess how these factors influence property values.

1. Defining Neighborhoods, Districts, and Market Areas

• Neighborhood: A geographic area exhibiting a relatively homogeneous grouping of physical, economic, social, and political attributes. It is the most immediate environment affecting a property.
• District: A broader geographic area encompassing multiple neighborhoods with a unifying characteristic, such as a commercial, industrial, or residential focus.
• Market Area: The broadest geographic area analyzed, reflecting the overall supply and demand dynamics for a specific type of property. It is defined by competitive influences and encompasses properties that are considered substitutes by potential buyers or tenants.

2. Scientific Theories Underlying Locational Analysis

• Central Place Theory (Walter Christaller): This theory explains the spatial distribution of urban centers and service provision. Larger centers offer a wider range of goods and services, attracting consumers from a broader geographic area. This impacts retail property valuation by defining trade areas.

  • Formula: Christaller’s K-values (K=3, 4, 7) describe different market principles (marketing, transportation, administrative) where K represents the number of settlements served by a central place. This is a theoretical model to assess market reach.

• Bid-Rent Theory: Explains how land values decrease as distance from a central business district (CBD) increases. Different land uses (residential, commercial, industrial) compete for space, with those generating higher profits able to pay higher rents closer to the center.

  • Equation (Simplified): R(d) = P - (T * d)

    • Where:
      • R(d) = Rent at distance d from the CBD
      • P = Profit potential at the CBD
      • T = Transportation cost per unit distance
      • d = Distance from the CBD

• Urban Growth Models (Burgess, Hoyt, Harris & Ullman):

  • Concentric Zone Model (Burgess): Cities grow outward from a central business district in concentric zones, each characterized by different land uses and socio-economic groups.
  • Sector Model (Hoyt): Cities develop in sectors radiating from the CBD along transportation routes.
  • Multiple Nuclei Model (Harris & Ullman): Cities have multiple centers of activity, each with its own specialized function.

  These models can help in understanding the distribution of residential, commercial, and industrial areas, influencing property values in those sectors.

• Gravity Model: Used to estimate the interaction (e.g., retail traffic) between two locations based on their size (e.g., population or retail square footage) and distance.

  • Equation: Iij = k * (Pi * Pj) / Dij^2

    • Where:
      • Iij = Interaction between location i and location j
      • Pi = Population or size of location i
      • Pj = Population or size of location j
      • Dij = Distance between location i and location j
      • k = a constant reflecting socio-economic characteristics of that market area

3. Analyzing Residential Districts (Single-Family and Multifamily)

• 3.1 Single-Family Residential Districts

  • Defining Characteristics: Predominance of owner-occupied homes.
  • Subdistricts: Custom-built subdivisions, attached housing (condominiums, townhouses), senior housing, rural housing.
  • Value Influences (Examples):
    1. Accessibility:
       • Access to workplaces (assessed through commute time, measured in minutes or hours; transportation costs, measured in dollars per year).
       • Availability and quality of transportation services (measured by frequency of public transport or number of lanes).
    2. Amenities:
       • Proximity to shopping centers and cultural facilities (measured by distance in miles or travel time).
       • Proximity to and quality of schools (measured by standardized test scores, graduation rates).
    3. Environment:
       • Reputation of area (assessed through crime statistics, public surveys).
       • Residential atmosphere and appearance (assessed through visual surveys, code enforcement data).
       • Proximity to open space, parks, lakes, rivers, and recreational facilities (measured by acreage of parks, access points to water bodies).
    4. Restrictions:
       • Private land use restrictions (covenants, conditions, and restrictions - CC&Rs).
       • Public land use restrictions (zoning regulations, density restrictions).
    5. Future Development:
       • Presence of vacant land likely to be developed (assessed through zoning maps, development plans).

• 3.2 Multifamily Residential Districts

  • Defining Characteristics: Generally a predominance of renter occupancy and higher density than single-unit residential districts.
  • Subdistricts: Multistory/high-rise buildings, garden apartments, row houses, townhouses, cooperative apartments, condominium apartments, master-planned communities, mixed-use buildings.
  • Value Influences (Examples):
    1. Accessibility and Amenities: (Similar to single-family, but often with greater emphasis on public transportation).
    2. Unit Characteristics:
       • Unit size and layout (measured in square footage and number of bedrooms/bathrooms).
       • Amenities (balconies, in-unit laundry).
    3. Building Amenities:
       • Parking for tenants and guests (spaces per unit).
       • Common areas (gyms, pools, community rooms).
    4. Market Dynamics:
       • Vacancy and tenant turnover rate (percentage).
       • Rent levels (dollars per square foot per month).
    5. Environmental Risk:
       • Frequency of weather-related problems (flooding, tornadoes, fires).

4. Analyzing Commercial Districts

• Defining Characteristics: Concentration of commercial activities.
• Types of Commercial Districts: Highway commercial districts, retail districts (regional, super-regional, neighborhood shopping centers), downtown central business districts (CBDs), office districts, entertainment districts.

• Value Influences:

  1. Trade Area Analysis:

     • Define the primary, secondary, and tertiary trade areas.
     • Estimate population, income, and spending patterns within each trade area.
     • Use geographic information systems (GIS) to map customer locations and identify market penetration rates.

     Potential Sales=Number of Households × Average Income×Retail Expenditure Factor × Penetration Rate

  2. Accessibility:

     • Traffic counts (average daily traffic - ADT).
     • Intersection quality (signalization, turning lanes).
     • Parking availability (spaces per 1,000 square feet).
  3. Competition:
     • Identify existing and planned competing businesses.
     • Analyze market share and strengths/weaknesses of competitors.
  4. Economic Health:
     • Employment growth rates.
     • Business vacancy rates.
     • Sales tax revenue trends.
  5. Location Within City Proximity to anchors, core groupings, and customer base.
     • Index of Retail Saturation (IRS) = (Number of potential customers in the area × annual retail spending per customer)/Total retail space in area
  6. Vacancy and Rental Rates Determine viability for an area based on its population.

5. Analyzing Office Districts

• Defining Characteristics: Office uses with supporting retail services and other related services.
• Subdistricts: Central business districts, suburban office parks, concentration of office properties of a particular class, office condominiums.
• Value Influences:
  1. Accessibility to Labor Force:
     • Time-distance from potential labor pool (measured in commute time).
     • Availability of public transportation.
  2. Building Characteristics:
     • Floorplate size (square feet).
     • Ceiling height (feet).
     • Quality of construction and condition.
  3. Market Dynamics:
     • Vacancy and rental rates (percentage).
     • Absorption rates (square feet leased per year).
  4. Visibility and Exposure:
     • Signage opportunities.
     • Traffic counts.
  5. Competition:
     • Character and location of existing or anticipated competition.
     • Availability of land for expansion.

6. Analyzing Retail Districts

• Defining Characteristics: Concentration of competing retail locations, often along a major street. Outlots for banks, fast food restaurants, and other uses.
• Subdistricts: Regional and super-regional shopping centers, community shopping centers, neighborhood shopping centers, specialty centers, mixed-use centers, strip retail centers.
• Value Influences:
  1. Purchasing Power of the Population:
     • Income levels.
     • Consumer spending patterns.
  2. Locational Considerations:
     • Time-distance from potential customers.
     • Access.
     • Traffic signals.
  3. Physical Characteristics:
     • Visibility.
     • Attractiveness.
     • Quality of construction and condition of properties.
  4. Market Dynamics:
     • Vacancy and rental rates.
     • Competition.
  5. Labor Availability Store employees and office workers nearby.

7. Analyzing Central Business Districts (CBDs)

• Defining Characteristics: Concentration of major retail, financial, governmental, professional, recreational, and service activities.
• Value Influences:
  1. Local Population (Residents and Workers):
     • Density and mix of uses.
  2. Transportation Linkages:
     • Public transportation infrastructure.
     • Highway access.
     • Pedestrian traffic.
  3. Municipal Land Use Policies:
     • Density restrictions.
     • Parking requirements.
     • Signage ordinances.
  4. Market Dynamics:
     • Vacancy and rental rates.
     • Property class and overall desirability.
     • New Urbanism Movement
     • A concentration of companies in strong business sectors, often scrutinized closely by analysts.

8. Practical Applications and Related Experiments

• Trade Area Delineation: Conduct a customer spotting exercise at a retail location to map customer origins and delineate trade area boundaries.
• Comparative Sales Analysis: Analyze sales prices of comparable properties within different neighborhoods to quantify the impact of locational attributes on value. Use regression analysis to isolate the impact of each significant location variable.
• Retail Gravitation Study: Apply the Gravity Model to predict retail sales potential for a proposed shopping center based on population density, distance from competing centers, and spending patterns.
• Demographic Study: Create a customer profile based on census and survey data to determine the customer’s need and spending habits in the district.

9. Telecommuting

Impacts telecommuting has on a district:
Telecommuting influences supply and demand for housing in a residential district.
Telecommuting exceeds public transportation as the preferred commuting option in the top US metro areas.

Conclusion

Analyzing locational factors is a crucial aspect of real estate valuation. By understanding the underlying scientific theories, applying appropriate analytical techniques, and considering the specific characteristics of neighborhoods, districts, and market areas, appraisers can develop well-supported and reliable value opinions. This chapter provides a foundation for more advanced analyses of market trends and property-specific attributes.