Markets form the primary environment where opportunities await firms that can discover and exploit them. Marketers tend to be highly aware of dependence on buyers' or renters’ behavior for success. Many executives show too much concern for the competitive environment. They should have learned from examples of real estate firms that were so intent on competitors' moves that they ignored market needs and fell prey to new entrants who were attuned to markets.

What is a real estate market ?

A market comprises individuals and organizations with the purchasing and renting power, desire, and authority to buy or rent any specified real estate.

That definition has two components:

  1. The individuals or organizations that compose the market
  1. The extent of their purchasing power.

We are going to deal with markets in the first sense regarding their identification and interpretation; and in the second sense regarding market potential.

This stage begins in seeking to find or identify the relevant markets, those that will or should be renters for what the real estate firm will offer. When market categories have been chosen, the interpretive tasks begin: finding the characteristics, the wants, and the dissatisfactions of renters; determining the firm's position among them; and interpreting the opportunities as bases for strategic plans.

When the firm (or a PMU (product market unit) in it) is satisfied to continue in markets now served, their identification may be obvious but such complacency may be an error. Markets may be changing for present accommodation or expansion may be vital even to maintain rental turnover. Ambitious firms seek to tap other potentials. The greater the ambition or pressures, the tougher the search for the right markets.

Criteria for classifying markets are essential. The broadest are the four general classifications below:

Large firms (or PMUs) market to all these categories (at least indirectly) and possibly all would merit individual strategies. Even when they are markets already served, the strategists should check their definitions, for doing so may reveal markets that are not homogeneous (as supposed) and that contain significant special groups.

Demographic criteria refer to numbers of people or other populations (for instance, number of ACT government departments). They can show the sizes and locations of markets. They may indicate individual or group characteristics or states of existence, such as age, sex, race, occupation, income, family size, marital status, and type of residence.

Related to these are geographic criteria, of which there are three broad types:

All of the foregoing have been given standard classifications and are used in modem government censuses that provide basic parameters for marketing. These variables describe population size, composition, distribution, and buying power (but there may be serious drawbacks in long intervals between collection and issuance of government data).

There are also standard criteria for classifying industrial markets. It is a uniform numerical system that is the universal key in this nation for data on establishments engaged in any economic activity.

Qualitative criteria for classifying markets are equally essential in strategic planning. Statistical data are a comfort to the planner, with their seeming precision and their readiness for analysis, but unfortunately they reveal little qualitatively. In spite of the statistics on, let us for example, ACT government departments or on “high tech” companies in the ACT, they reveal little about the needs, renting practices, or other qualities of those groups. For example, some departments have a much more rigorous renting criteria (largely based on OH&S) than other departments. Some departments quite readily decentralize whereas others insist on siting in the CBD.

Two major decisions remain, following determination of which classification types are suitable. One is obtaining data that will identify which categories (within the types) offer sufficient rental potential to merit consideration. The other is identifying the logical markets (on the basis of that evidence) to study and interpret.

Many market categories exist, but a relatively small number offer enough potential to spend time on interpreting them.

Gathering data on market categories is required in order to have an objective basis for choosing markets. Qualitative category systems suffer here, because no statistics are available on their sizes and locations, and so the user has three options:
  1. Select categories in those systems on sheer judgment
  2. Have time-consuming special studies made to identify and quantify them
  3. Choose some existing statistics that may serve as proxies in order to identify them.

These obstacles discourage the use of qualitative classifications for choosing markets. The subject of obtaining quantitative data belongs in the field of marketing research, not strategy, so I just comment on it. The easiest to obtain are demographic statistics from the ABS. The best source is “Supermap”.

Real estate forms can classify their rental data in the standard census categories to be compatible with government demographic data and to use such data as market indicators with which to compare performance by geographic areas. However, these comparisons are valid only if there is correlation between the firm's rental turnover and the chosen demographics (such as status of the government department), which would need to be demonstrated.

Deeper analysis on other renter characteristics is possible only if the real estate firm can record these characteristics about each renter. Since most producers of office space for example, rent out indirectly (that is, through an agent), they can obtain data on consumer renting only by purchasing them from research services (eg BOMA). Industrial marketers have advantages in pinpointing their renters’ characteristics.

When the real estate firm considers rental accommodation lines that it does not presently offer, there are greater tasks in acquiring valid market data. When considering new forms of existing rental space, the more innovative renters must be identified. It is most difficult to identify markets for absolutely new accommodation or uses, and special marketing research may be needed. Lead time for marketing studies would require an early start on strategic planning.

Given the data on market categories, market identification can proceed. The strategist probably would consider numerous segments before choosing those whose data indicate that they are most relevant to the product line being planned. Rather fine breakdowns may be needed to reveal market segments where the firm has opportunities. It may prove to be necessary to conduct qualitative studies of renters to determine which categories would be logical market targets.

Market interpretation

With the logical markets defined, the strategist must study them to detect the opportunities and threats they offer (SWOT analysis). Since strategic planning is going to be focused on them, this interpretation is vital to the situation analysis:

1. First consider interpretation for accommodation and markets in which the firm is already marketing. As an example, let us say that industry rents are available, by region and departmental type, and that currently the firm holds a 20 to 25% market share in all regions except the ACT, where it is only 13%. Does that mean that the real estate firm has an opportunity in the ACT, with a strategy that would raise its market share to the national norm?

Before answering that question, the firm needs to see trends, not just a current snapshot (dynamic data). Our data over the past four years show that the firm held a 21% share in Sydney that fell slowly for two years and then dropped 5 percentage points this past year. Whatever caused that drop may be a threat, some menace that could start eroding other markets as well. For example, a trend towards strata purchases instead of renting. This becomes a complicated matter.

The firm should also look at the importance and profitability of the Sydney market, for it may be a lesser concern than other markets. If it decides to look further at its situation, more data are needed for diagnosis. What is going on, in that region for that business, that has caused the erosion? Perhaps answers may be learned from sources that are informed about the Sydney region, including the firms’ rent representatives. Beyond that, the problem may merit the time and cost of qualitative research in that region.

The strategist is going to need to have such conditions and their causes revealed for a fruitful situation analysis. There cannot be intelligent determination of objectives or stratagems unless we know what market opportunities or threats are to be attacked. You will notice that our example was an elementary one, and that market interpretation often faces more elusive conditions and forces. If a strategist has ample data with adequate breakdowns, the causes and opportunities in a situation may be inferred from those facts.

The great strategic strokes usually require the real estate firm to become innovative in the accommodation it offers and in its marketing. The risks are high, and careful situation analyses are needed particularly of markets. Probing of those markets entails custom studies of users or renters, followed by painstaking interpretation.

All situation analyses should include data on market potential, current and forecasted. I will discuss that aspect of interpretation next.

Market analysis and forecasting

There are three different determinations involved in the analysis and projections of markets:
  1. market potential
  2. rental potential
  3. rental forecast.

To distinguish them, I will give a definition and an example of each.

Market potential is defined as the capacity of a market to assimilate rental accommodation via an agent. This usually refers to the amount of space that the market can rent in either the current period or the next period that is under planning.

It may be estimated, based mainly on economic variables and consumer attitudes, that real estate firms do not have a market potential of renting 1 million square metres of office space in the ACT in the year 1997.

Rental potential is defined as the maximum share of market potential that a real estate firm within the ACT can expect to obtain for specific commercial rental space. This also is typically for the current period or that under planning.

Based on its current share of the market, marketing efforts, production capacity, and other considerations, Matlock Real Estate may expect to obtain a 25 % market share in 1997. In other words, its rental potential would be 1.95 million square metres.