Evaluating a site's potential is one of the most crucial steps in real estate development. It involves analyzing various factors that affect the feasibility, profitability, and suitability of a project on a specific location. In this article, you will learn some of the best practices and tools to assess a site's potential and avoid costly mistakes.
The first thing you need to evaluate is the market demand for your proposed project. You have to understand the current and future trends, preferences, and needs of your target customers and how they match with your product type, price, and quality. You can use market research, surveys, interviews, and data sources to gather information about the demographics, income, spending, lifestyle, and preferences of your potential buyers or tenants. You also have to consider the competition, supply, and absorption rate of similar projects in the area and how they affect your market share and pricing strategy.
The projects we are focused on today are multi-tenant in nature which requires identifying sites large enough to accommodate multiple users. This adds a layer of complexity when looking at market demand. "Will this site work for a convenience store and a drive-thru coffee?" One way to simplify the equation is to find sites with good market fundamentals. What are those? Markets that are growing - and should keep growing - because there is a diversity of employment which is spurring residential growth which in turn creates demand for retail.
Finding a knowledgeable broker who lives in my research area and becoming their best friend is beneficial. Boots on the ground, especially those living in the community, are a wealth of information, especially if you are new to the town and are not on a personal level with the city powers.
The next thing you need to evaluate is the site characteristics and how they influence your project design, cost, and performance. You have to inspect the physical features, dimensions, shape, topography, soil, drainage, utilities, access, visibility, and environmental conditions of the site and how they affect your construction methods, materials, layout, orientation, and amenities. You also have to check the zoning, land use, building codes, easements, covenants, and other legal and regulatory restrictions and requirements that apply to the site and how they limit or enhance your development potential.
Good dirt is hard to find in a growing market. There are many components to "good dirt" and a checklist of the main (read "expensive") ones like topography, flood plain, zoning, and sewer connection (just examples - there are many more) can be helpful if you are talking to a seller or broker about raw land. Even if you are not tenant-driven in your land search, it is helpful to think about what type of users would require a traffic signal or road frontage, etc. and whether this particular site has these features that are important or essential to some tenants.
This development phase involves a substantial amount of research and analysis. The more you can discover before putting too much time and effort, especially MONEY, into a site you want to work on because you love it, but the the tract doesn't make development sense. I usually contact a city planner with specific locations and get their feedback.
The third thing you need to evaluate is the financial feasibility of your project and how it meets your investment goals and criteria. You have to estimate the total development cost, including land acquisition, site improvement, construction, financing, marketing, and contingency costs. You also have to project the potential revenue, cash flow, and return on investment from your project, based on your market analysis, pricing strategy, occupancy rate, operating expenses, and exit strategy. You can use financial models, pro forma statements, sensitivity analysis, and risk assessment to evaluate the profitability and viability of your project and compare it with alternative scenarios and opportunities.
This is not my strong area. I can research and site-select anything on my own. Financial models are something I defer to the experts for. Once I am satisfied with the initial research (I do include land cost and lot yield) and the site proves viable in that aspect, I then meet with the financial experts, and we go deeper into the model.
The fourth thing you need to evaluate is the social impact of your project and how it contributes to the community and the environment. You have to consider the benefits and costs of your project for the stakeholders, such as the neighbors, local businesses, public agencies, and civic groups. You also have to assess the environmental sustainability of your project and how it minimizes the negative effects and maximizes the positive effects on the natural resources, energy consumption, carbon footprint, and biodiversity of the site. You can use social impact assessment, stakeholder engagement, green building standards, and corporate social responsibility to evaluate the social impact of your project and align it with your values and vision.
THIS ONE. It's the garbage dump syndrome; everyone wants or uses one but does not want it in their backyard. We do not get much pushback for our retail centers, but storage, storage is an entirely different story. Again the general public wants to use it, but it can't be next to their fence. I personally am into sustainable living but as we all know unless you have an unlimited budget this is difficult to pull off.
The fifth thing you need to evaluate is the SWOT analysis of your project and how it summarizes the strengths, weaknesses, opportunities, and threats of your site's potential. You have to identify the internal factors that give you a competitive advantage or disadvantage over other projects, such as your location, design, quality, cost, and team. You also have to identify the external factors that create favorable or unfavorable conditions for your project, such as the market demand, competition, regulations, economy, and trends. You can use SWOT analysis to evaluate the strategic fit of your project and how it leverages your strengths, mitigates your weaknesses, exploits your opportunities, and avoids your threats.
The sixth thing you need to evaluate is the site selection and how it compares and ranks the site's potential with other alternatives. You have to weigh the pros and cons of each site based on your evaluation criteria, such as the market demand, site characteristics, financial feasibility, social impact, and SWOT analysis. You also have to consider the availability, timing, and terms of each site and how they affect your negotiation and acquisition process. You can use site selection matrix, scoring system, and decision analysis to evaluate the site selection and how it supports your development objectives and priorities.
Do you believe in the site? This is not the first piece of criteria to consider, but after evaluating a site on its merits within a market with good fundamentals, if you still don't believe in a site, you aren't going to be able to pitch it to an end-user.