Us Real Estate Industry Analysis

Published Date: 02 Nov 2017

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Introduction

Real estate is an extensive industry with a large number of stakeholders which is the subject of this environmental analysis seeking to analyze the industry beginning with its overview and definition as well as its size. The products and services in the industry are discussed with customer profiles and segments as well as the buying behavior being analyzed. The analysis also explains customers’ source of information and the pricing strategies applied in the market. Market financials are also explained by discussing the sales and growth trends as well as the marketing efforts that are experienced in the industry. The analysis finally explains the key industry trends and cites a case study of a successful marketing campaign in the industry.

Body

Industry analysis

Market definition and overview

Real estate industry basically consist of three fields; buying & selling brokerage, leases and management where buying and selling brokers help in bringing sellers and buyers together and assist them in price negotiations while leasing helps in bringing property owners and tenants together. On the other hand, management entails ensuring that client’s properties are taken care of and are filled with tenants. (Franchise, 2013) Other stakeholders in the industry include builders & developers, financiers and land owners. (Delloitte, 2013a)

The US Real estate market is currently experiencing a challenge with the economic slowly recovering from the 2008 recession. This can be demonstrated by low investments in the industry resulting in shortage more so in single family houses as there are few units being constructed while demand is high. In 2011, just 600,000 single family houses were constructed compared to a peak of 2.5 million in 2005. It is also estimated that the annual demand for single family houses has also fallen to 1.4 million compared to the 2005 demand. (Forbes, 2012)

However, although the US real estate industry had outlined a bleak horizon in 2012, it is showing signs of recovery with establishments exhibiting positive sentiments about the market. The recovery is being led from the commercial real estate segment although the segment continues to experience high vacancy rates with the continued trend of increasing unemployment casting a doubt into the future prospects. (Business Monitor, 2013)

On the other hand retail market has been posting impressive results trend that is being buoyed by the market shift into second tier shopping malls with increasing competition for high quality space. This is also benefiting from international interests in the US retail market. On the other hand, industrial segment seems to be eroded due to the economic downturn that severely impacted on individual operations and performances perspectives. However, the economy is experiencing modest expansion which is being replicated in the construction activities with growth estimates of 1.2% for the year 2013 which is an increase from a modest rate in 2012. (Business Monitor, 2013)

Size

The main properties in the real estate industry include industrial, multifamily, retail and offices. In addition, mature real estate markets like US tend to reflect a high proportion of retail property space while the economy also has a relatively fast growing alternative property sector which includes hospitality, student housing, self storage and medical offices. (Rreef, 2013)

In terms of service providers in the industry, US industry had around 517,800 brokers in 2010 with 595 of them being self employed while the market composition of brokerage firms was that fifty largest brokerage companies accounted for less than 30% of industry revenue. (Rreef, 2013) In addition, 165,000 agents operated as residential brokerage firms in 2012 generating $170 billion revenue while 25,000 organizations operated in commercial management and brokerage generating $30 billion revenue. (IBIS world, 2013)

In US, real estate industry activity follows population proportions hence varying between geographical locations. In this respect, southeast region accounts for 29.9% of the industry establishments with 32.9% of the industry’s revenue for the year 2012 due to its significant population. (IBIS world, 2013)

The industry can be classified on types of real estate properties consisting office space, industrial, retail, multifamily, hospitality including hotels and flexes which comprise of high tech production factories and warehouses. The industry size in terms of property type is as shown on the table below. (Florence, 2010)

US Real estate industry market size by property type in rentable building area and market cap based on mean prices mid-point for the year 2009.

Property type

Square feet

Price

Market Cap.

Office

12.058

$102

$1.230

Industrial

23.852

$45

$1.073

Flex

2.908

$75

$0.218

Retail

17.336

$101

$1.751

Health care

2.635

$490

$1.291

Hospitality

2.557

$95

$0.243

Mixed use

0.108

$95

$0.012

Multifamily

22.644

$62

$1.404

Specialty e.g. sports

$1.953

Total

84.094

$9.175

Source: Florence, 2010, April 26.

From the figures, it is clearly visible that the most space was in industrial use followed by multifamily houses, retail and office while the least space was in the mixed use. On the other hand the figures shows that the most highly valued space as reflected by the price per square feet was the health care space followed by office, retail and mixed use with the least being the industrial space. (Florence, 2010)

In addition, office space was 40 square feet per head with concentration correlating with population distribution. New York dominated the market as Los Angeles and Washington, D.C. followed. However, Washington D.C had the highest green office space per capita.

Industrial space was 76 square feet per head with concentration along population centers, highways and transport nodes.

For retail space, there were 56 square feet per head with concentration following population distribution.

Multifamily experienced less movement to less affordable markets with ownership being high where land was cheap as well as lowering rent proportion.

For flex which comprises the high tech production spaces and warehouses there was concentration in production areas.

Hotels and hospitality had the highest concentration found in Orlando and Los Angeles. However, Los Angeles leads with 102 million square feet hotel space accounting for 35 million tourists in a year. (Florence, 2010)

Products and Services

Stake holders in real estate industry providing products and services comprise of commercial developers, multifamily developers, REITs, insurance companies, real estate lenders, REITs real estate brokers, private local real estate operates, real estate managers, bank real estate lenders, real estate consultants, CBMS lenders/issuers, home builders/residential land developers as well as architecture and designers. (PWC, 2013a)

Real estate products and services include valuations, leasing, brokerage services, properties, property management services and mortgages where property management is subdivided into commercial and residential properties management as properties are divided into commercial and residential. Services include mortgages brokerage services, property management and real estate brokerage services. (PWC, 2013b) The rental and leasing sector of real estate industry comprises of services in leasing, renting and allowing use of intangible and tangible assets. It also entails managing rental estates, buying, selling for others, appraisal of real estate and renting for others. (US Department, 2013)

Customer profile and Market segments

Real estate market’s segmentation is on basis of psychographic and demographics classifying the market into categories by behavioral and psychological attributes as below.

Segmentation by physical attributes:

Geographic segmentation involves division and targeting customers by their location mostly suited for real estate where products including properties are usually location based.

Demographics which focuses on characteristics including age, nationality, religion, sex, race, status, marital status. By use of census data, sellers in real estate are able to identify their target markets and classify them into these segments for the purpose of their marketing services and products provision.

Socioeconomic characteristics including education, income, occupation, social class and homeownership help sellers identify clients for their products. This helps the sellers identify the tastes and preferences of the segments as well as their ability to buy different types of products.

Geo-demographics segmentation combines all attributes of physical, demographics and social economics. This helps the sellers identify the most suitable segments by identifying them by their location, status, preferences and ability to buy. This result to the high value clients who have a preference for efficiency and modern designs located in prime locations being targeted with high value properties in those locations while the low income clients who would prefer less expensive designs being targeted with the appropriate low cost products in their appropriate locations. (PWC, 2013b)

On the other hand, behavioral segmentation in real estate industry attribute market segments on basis of Lifestyles attributes which highly determines their preferences. A customer’s lifestyle determines the features of a property that they look for while the property’s locations as well as design are significant as they must appeal to the customer’s definition of what is acceptable for their lifestyle. This attribute mostly applies for individual customers since institutional customers look beyond their individuals tastes. (PWC, 2013b)

Based on the above segmentation factors, examples of customer segments in US real estate industry comprise of individuals as well as institutional investors. Individual investors can be classified into; aged retirees, middle class employed individuals as well as the high net-worth individuals. On the other hand, Real estate investments investment trusts (REITs) and Real estate fund managers forms significant segments as institutional customers in their capacity as investors.

Old aged retirees form a key segment as they have a significant income and savings as their demand for retirement homes. However the segment is significantly changing in its attributes due to the retirees increasing preference for suburban homes rather than the previous demand for rural homes. The segment is also having increasing independence in their decision making and finances without support from their offsprings. The segment’s key demand’s concerns include serenity and security.

Middle class individuals also form a significant segment for real estate market target due to their ability to buy and demand for accommodation within their work areas as they usually happen to be individuals in a gainful occupation. Their attributes include middle age, educated and likely to have a family. They also include professionals and are key customers for fairly priced properties in the market and office space.

High net-worth individuals are another segment of individuals with relatively high income and with demand for more sophisticated properties and designs which also requires sophisticated transactions and financing. They are basically the target for the industry’s premium priced properties in the core/prime locations. (Kotler & Keller, 2006)

Real estate investments investment trusts (REITs) have recently increased as institutional customers and a key segment which accommodates investors including high net worth individuals and non US pensions in a bid to minimize foreign investment real property taxes. Their presence has also increased due to an increased pressure from private and public groups to qualify their business for REITs due to the favorable valuation and pricing the REITs enjoys. The segment has also seen a change with a consolidation of public and private companies to form more sophisticated managements which are emerging as leaders in retail, industries, official, multifamily and hospitality segments. (Delloitte, 2013a) This creates a segment of high value clients for the industry sellers. (Ernst & Young, 2013a)

Real estate fund managers also form a significant portion of real estate investors who are key customers with the funds focusing on taking advantage of the pipeline opportunities in the distressed real estate market. Other customers include institutional real estate investors. (Delloitte, 2013a)

Customer buying behavior

The industry’s consumer activities comprises of groups, organizations and individuals’ selection, purchasing, use and disposal of properties satisfying their needs. However, real estate transactions of buying and leasing are high involvement transactions that require more complex decision making hence depending on various factors affecting individuals and institutional customers’ buying behavior. (Gilbler, 1998)

For individual customers, buying behavior in real estate industry is significantly guided by preferences for certain attributes which the properties offer. Some customers could be guided by security attributes, design, and proximity to key services as well as properties’ efficiency in energy use. Thus customers tend to buy or lease properties that meet their preferences on these attributes. Affordability is another key factor that determines the customers’ behavior with transactions being more likely to be done when clients have the ability to make the payment which is in-turn highly dependent on their income level, savings as well as credit availability. Therefore, these factors guide the customer behavior in determining when, where and from whom to buy. A perfect example illustrating the customer behavior in real estate industry can be a family that is looking for a house to buy. Their buying would be dependent on the size of the house depending on the family size, its proximity to schools, healthcare services as well as security depending on the children in consideration. The availability of finances to the parents making the decision would also matter on deciding the period of the year that they would consider the transaction to be most appropriate. The buying is also characterized by the choice of the service they use like the brokerage service which would highly depend on the perceived competence of the provider and the convenience that they seem to offer. (Kotler & Keller, 2006)

On the other hand, the buying behavior of institutional investors who are key customers in the industry at the current economic conditions is based on consideration of elements including capital where the transaction would be considered in the context of:

Capital preservation as they seek to reshape their capital base and operations.

Capital raising through assessment of future capital requirements and funds resources evaluation.

Capital optimization in which they seek to deliver cash as well as working capital and portfolio assets management.

Investing capital through strengthened transactions appraisal and execution. (Ernst & Young, 2012)

Investors risk perception in real estate industry as also a significant determinant of customer’s buying behavior also highly dependent on their market familiarity. With a better understanding of local markets, local buyers are usually more confident hence having higher risk appetite and a competitive edge over foreigners. (Ernst & Young, 2013a) On the other hand, foreigners who have had a long presence in US and those who have made correct choices for local partners tend to make successful investments with rates of 20% to 30% hence their buying behavior being highly determined by market familiarity. (Ernst & Young, 2013a)

Customer’s source of information

It is estimated that 84% of property buyers in US searches the internet for properties even before visiting a real estate professional. In addition, 93% buyers checks the internet for homes as 72% of those taking drive-by’s even before they schedule a visit with a professional. In their search, clients are usually looking for photos, descriptions and location guides. Other sources of information for consumers include the advertisements on Televisions, organized shows by real estate related associations as well as publications and newspapers. (See Virtual, 2013)

Other key sources of information include S & P Dow Johns indices which provides the market with index based concepts’ research and data as a subsidiary of the McGraw Hill companies which is the global largest resource with over 115 years experience in providing solutions to retails and institutions investors. (S & P, 2013) Real estate service providers like brokers are also key source of information for clients providing insights into the market trends to aid customers in decision making. However, the service providers also source their information from seasoned researchers and experts in the industry including organizations like Ernst and Young, PWC and Delloitte who provide comprehensive industry reports that are informative and which act as a guide to service providers and clients as well. (Delloitte, 2013a)

Pricing strategies

Pricing strategies applied in the real estate market includes premium pricing and differentiated pricing. Premium pricing targets the high net-worth target market including individual and institutions. The strategy sets above average prices for properties that appeal to the high value clients and which meets the criteria of most valued designs, prime locations as well as bearing most valued features. This is for instance applied in sale of home sites and properties within golf communities and islands. On the other hand, differentiated pricing is applied for properties targeting different segments with properties that suit their preferences. This strategy seeks to provide differentiated products that suit customers depending on their ability to buy or lease and the features that they look for hence the differentiated pricing strategy. (Kotler & Keller, 2006)

In addition, pricing in real estate depends on various factors with demand and supply being some of the key factors for consideration in establishing the appropriate pricing strategies. This can be attested by the market’s increased demand due population growth, vacation and old houses demolition which resulted to a significant price rise in the market. (Forbes, 2012) In that respect, house prices were indicated to have risen by 4.5% for 10 cities composite while the 20 city composite posted a 5.5% for the year 2012 due to a high demand. There was also a price rise in 19 cities with an exception of New York where prices fell. (S & P, 2013a)This comes as prices for properties are exceeding or meeting the pre-recession level as it is being experienced in cities like Boston, New York City, Washington, Chicago and Los Angeles with a significant increase in demand. (PWC, 2012) Demand increase can also be associated with the significant increase of rents making it more prudent to own a house rather than rent one. (Forbes, 2012) Pricing strategies also put in consideration the credit market rates like mortgage based securities that are making a return into the spotlight with an increase in transactions activities. This is seen as one of the major factors towards the prices approaching or exceeding pre-recession levels. (PWC, 2013a)

Real estate pricing strategies also depend on the transactions involved which include leasing and rents as well as the units’ market sale price. (PWC, 2012) In addition, investors focus is shifting with property pricing reflecting a consideration of leases values, diversification, market’s jobs growth, cities economic production and peoples’ choice on where to stay. (PWC, 2012) In this respect, home prices are expected to rise in 2013 with an average housing price rise being expected to be around 5% p.a. This is due to the market periodic booms and busts which pushes the price gains below or above the trend. (Forbes, 2012)

Pricing is also dependent on the cost of construction with the table below illustrating prices for different types of properties in US as a ratio of their replacement cost. (Florence, 2010)

Property prices as a ratio of replacement cost.

Property type

Approximate U.S National Average price as % of Replacement cost.

Office

68%

Industrial

42%

Flex

65%

Retail

88%

Health care

94%

Hospitality

46%

Mixed use

51%

Multifamily

32%

Source: Florence, 2010.

From the table above, at a ratio of 94%, healthcare space is shown to be highly priced in respect to its replacement cost. This is an indication of the high demand and the value placed on the space ac compared to other spaces. The relative value is then followed by the retail space, office and flex while multifamily has the least ratio which is an indication of the least value that is placed on such properties of the high supply of the space which has been considered in pricing. (Florence, 2010)

Financials

Sales

Revenues related to rental and sales for real estate agents accounted for 62.3% of total industry revenue while 37.7% could be accounted for by the commercial sector in the year 2012. (IBIS world, 2013)

The key determinants of sales and leasing transactions volume include the fiscal pressures on the US government and corporations which indicates a need for organizations to diversify their assets in order to raise capital. The other factor is the financial attractiveness of transactions to the occupiers as well as renting comparison to owner occupation. In US, due to low interest rates and high occupational costs including rent there has been a favor towards selling and leasing by occupiers increasing the sales. In addition, growth of private equity is also acting as a catalyst for real estate transactions in US where private equity transactions averaged at $286 billion or 2.5% of the country’s GDP over three years to 2006. (Rreef, 2013)

On the other hand, although there is a lack of liquidity from banks, there has been an increase in other leaders and insurance organizations. Thus as insurance companies emerge as an alternative source of funds due to them been more risk averse, they have increased sales by extending loans for high quality assets with a 50%-60% loan to value ratio rage. (Ernst & Young, 2013a)

The trend in sales can be illustrated by an example of property sales is Hillsborough County as shown on the table below comparing the sales for years 2011 and 2012.

Sales Trend for the period 2011 – 2012.

Transactions

2012

2011

% Change

Closed sales

$13,570

$11,820

14.8%

Paid in cash

$5,400

$4,408

22.75

New pending sales

$14,788

$12,308

20.1%

New listings

$18,475

$17,446

5.9%

Median sales price

$148,000

$130,000

13.8%

Average sale price

$194,403

$176,442

10.2%

Days on market

$42

$59

-28.8%

Source: Florida Realtors, 2012

Closed sales are a key measure in evaluating the market performance. From the table above, a 14.8% increase in 2012 from 2011 figures shows a significant sales growth in the market. On the other hand, cash sales are also a significant measure of the ability of investors to buy a property upfront and their increase as shown in the table above indicates an increase in the ability to buy in the US market hence the trend of increasing sales. (Florida Realtors, 2012)

Growth

Growth in US real estate invested stock for real estate market highly depends on three factors; appreciation, net additional, as well as sales and leaseback.

Appreciation impacts on changes in rents as well as well as on the value of real estate from one period to another. For instance, the value of office sector in US was forecasted to appreciate by 10% over four years to 2010.

Appreciation can be demonstrated by a look at the third quarters’ properties appreciation for four years from the year 2002 to 2012 as illustrated by the graph below.

US Real estate property third quarters appreciation graph

2012 Q3 Four-Quarter Price Change Graph

Source: Federal Housing Finance Agency, 2013.

The illustration shows a significant property appreciation for the period between 2002 and 2005 which signified a significant growth in real estate value. However, the period between 2006 and 2011 shows a negative growth as an indication for a falling value of the industry products with the economic downturn that was globally experienced during that period. A further look at the trend beyond the year 2011 to 2012 indicates a significant appreciation in properties’ value which indicates a growth in the market as the economy recovers from the recession.

Net additional impacts on growth of invested stock through space added less that which is removed from invested stock through demolitions.

Sales and leasebacks involve the value that gets transferred from owner occupation to invested stock. In US, sales and leasebacks were 30% to 40% for the year 2012. (Rreef, 2013)

Industry measures

Some of the measures in the US real estate industry include the House Price index provided by the Federal Housing Finance Agency which indicated that house prices in US rose by 1.1% for third quarter in the year 2012. (Federal Housing, 2013)

Standard and Poor case Schiller Home Price Index is also a key measure of change of value for residential real estate in 20 metropolitan cities in US. The index indicated that there was a high level share of non-distressed sales since 2008 which is positively impacting on property prices showing a sign of relief in real estate industry. (S & P, 2013a)

Marketing efforts

Real estate industry is increasingly changing with products and service providers required to develop and deliver value to their clients. This calls for adoption to changing customers’ expectations and the overall market change by providing high quality service and market insights to aid in decision making. (Delloitte, 2013a) In addition, the marketing efforts usually focus on enhancing selection of amenities and features, building designs ,pricing and sales as well as improving due diligence. (Ernst & Young, 2012)

The industry players attends seeks to deliver value to their target segments through marketing strategies including

Differentiation strategy where they seek to establish their products or services ranging from services to brokerage services by providing unique qualities like designs, efficiency or added after sale services.

Concentration strategy is also being applied by operators in the industry where they select their target market and concentrate their effort on meeting their demand rather than creating products for a larger market. This is applied to ensure that the segment gets tailored services and products. (PWC, 2013b)

These strategies have been effectively applied to enhance among other things; above the average market rent, informed design, reduced vacancy in property lease and rental management, reduced sales and marketing expenses as well as improved underwriting and informed market measurements. (PWC, 2013b)

Traditional marketing efforts applied

Operators in the real estate industry apply varied marketing strategies including the pricing strategies where segments are targeted with prices that would appeal to them depending on their income level and with prices that would favorably compare with the competing properties in the neighborhood. Promotion is also applied through communication means like advertisements using the print and digital media as well as advertising through the internet where real estate brokers enlist the properties for sale or for lease for their customers. The market also experiences promotions meant to attract customers to certain properties through strategies like use of discounts. (Kotler & Keller, 2006)

Industry trends

Notable trends and factors that are bound to shape the changing US real estate industry include:

Increasing lack of adequate products for prudent investments which is affecting investors as they advance in their risk spectrum as there are no enough products to meet their yield’s needs. This is due to the unappealing cap rate with the high market interest rates. It is only the prime located assets that can perform well under these conditions. However, prime properties are limited in number as there are few class A office buildings and fortress malls. The tight financing also makes it less likely to find lenders for investors to leverage on the higher beta properties. (PWC, 2013b)

Moving into secondary markets and localization is also affecting investors as they can only rely on localized partnerships and operations. This is due to lack of investment banks and investors reach to and understanding of internally and idiosyncrasies of the smaller metropolitan and midsized areas.

Transaction values also remain relatively low due to the current normal rates which do not favor significant volume of transactions. This is expected to continue as investors seek to buy and hold for capital gains.

There is an increasing risk of interest rate due to Federal Reserve supply of currency to keep the rates down due to low economy growth. However, with the government deficit, it may be uncertain as to whether interest rates would be stable and its impact on mortgage holders. (PWC, 2013b)

Overbuilding of multifamily houses due to their demand that has outstripped supply. The low lending rates have enhanced borrowing hence increasing construction in the sector. This is causing a shift from office building to the multifamily hence the overbuilding.

There is an increasing cluttering in the safe markets as investors shun other places with lenders opening doors to high value clients. This is as a result of the economic conditions which are rife of uncertainty hence the lenders playing it safe by placing hurdles for other borrowers.

Change in tenants demand is being experienced with their increasing demand for efficiency, practicality and collaborative open space and environmental plans which is a shift from their previous emphasis on premium, on scale and quality. This is resulting into brands ranging from skyscrapers to marble finishes rather than the corner offices and boardroom amenities. (PWC, 2013b)

According to the US census, there is an increasing migration by the population to the Sunbelt region. Consequently, the counties with a widely growing population are Nevada, California, Florida, and Arizona hence increasing the number of apartments, office buildings and retail centers in the region. (IBIS world, 2013)

In a survey done by PWC in the year 2012, there were significant trends noted from the respondent’s perspective including:

People increasingly looking for other districts where residential areas meet commercial interests as the core districts in urban area markets are becoming highly priced.

Efficiency in terms of cost to tenants as well as impressive designs is becoming key factors for client’s willingness to pay high prices.

A shift in location of industrial properties as the market focuses on demand by the large scale users who seek specialized spaces hence buildings that suit the demands activities. (PWC, 2012)

In addition, with the slowing growth of the emerging markets, Euro zone crises and a dampening global economic confidence as well as low corporate earnings; the US real estate industry is experiencing increasingly experiencing a challenge more so in financing. This has resulted to a growing creation of real estate fund managers seeking to take advantage of and benefit by pooling funds and investing in sectors including single family residential market. (Ernst & Young, 2012)

Case study

This case study analyzes a golf club community estate in Carolina known as Bria’s creek. The private golf community estate is analyzed for its marketing campaign and results where the estate management sought to market it to enhance and boost release of estate home sites.

In the beginning, the estate had been overshadowed by the neighboring Kiah Island’s popularity. However, the estate’s location and neighborhood to Johns Island made its estates appealing and marketable to the high value clients. To achieve their objective, the estate management hired IF marketing company which undertook the estate’s marketing as well as advertising through a series of print, rebranding and direct as well as interactive marketing campaigns. This was done to create a customer perspective of an estate that offered a private golf and privacy due to its limited membership and proximity. IF company used marketing tools including internet marketing through website to reach the appropriate segment of high value individuals. The type of information provided in the internet marketing campaign included; stunning imagery, in-depth information about the estate and a statement on the limited availability of space. With a successful campaign, the marketing effort resulted to about 100 qualified leads in a month which eventually resulted to increased demand and estate sales with their price increasing from $300,000 to $500,000 in just 18 months. (IF Marketing, 2013)