Does anyone do Economic Feasibility Studies?

[tsiegel]

As many of you, I am sure, I am sometimes given a feasibility study that was completed for a proposed development that I am appraising. I read these and sometimes they say more or less what I am saying in my report without the value conclusion and other times they dance around all of the analyses with nary a shread of local data to prove their conclusions. These studies are often completed (at high cost) by some out of state consulting firm who flew in for half a day, took one look at our local market, probably scrunched up their face trying to make sense of it and flew home and plugged their observations into their boiler plate report containing national survey data mixed with a healthy dose of local and regional economic/demographic information and shipped it. Maybe I am being mean, but I am sure I have read more than one of these things that are not worth the paper it is printed on.

So, I got to wondering... Why can't I offer these and do it right? I have started looking into it. Seems kind of fun. I thought I would check in here to see if anyone is doing that type of work in addition to typical appraisal work. If so, are there any pitfalls to be aware of? What credentials are the consumers of such a product on the look out for?

 

[Deleted member 126639]

I would look into taking the highest and best use and market analysis class, and ultimately get your demonstration report done, which will force you to work through a proper analysis. The Capstone class is very good for showing you the kind of data you need.

In my experience, the problem is you either use the dubious data you mention, or you have to do a tremendous amount of legwork and surveys. Residential projects are fine with demographic data, but it gets more dicey with other uses. In general, you can expect to spend a solid month compiling the survey data necessary to write such a report, if your client wants something very thorough.

In Maine, I would say that the long-term stagnation in the market would make it difficult to do much in the way of realistic projections for most commercial property types. In general, the only people who perform such analyses are big investors, and there doesn't seem to be that kind of product in Maine.

The reality is that even in strong markets, the fundamentals are bad, and forecasting future demand with solid data is almost impossible. Example. Even down here in DC, in the one underbuilt office district, (NoMa - by the train station), we have well over 1.5MM square feet of vacant space, including two 500,000 SF buildings entirely vacant. Even down here, it's difficult to realistically project an increase in just the 5,000 employees one would need to lease-up those buildings. The problem is allocating increases in demand. There is so much vacant space, except for apartments, that segmenting a regional increase requires surveys so you can rate the location of your property correctly. Really, any credible report is going to require some level of surveys, unless you are doing an apartment building in a strong market.

 

[tsiegel]

I would look into taking the highest and best use and market analysis class, and ultimately get your demonstration report done, which will force you to work through a proper analysis. The Capstone class is very good for showing you the kind of data you need.

Yes... I have taken the HBU & Market Analysis class. Great information and exactly why I think appraisers should be able to do these studies as well as (or better than) the folks who are currently recognized as competent in this area.

In my experience, the problem is you either use the dubious data you mention, or you have to do a tremendous amount of legwork and surveys. Residential projects are fine with demographic data, but it gets more dicey with other uses. In general, you can expect to spend a solid month compiling the survey data necessary to write such a report, if your client wants something very thorough.

I don't know about your market area, but in Maine we can never use those surveys. They are never appropriate for this market. I expend a huge amount of energy collecting data and completing surveys for all of the work I do all of the time. It is exhausting in this market. I am also not sure if I agree with you about residential projects not requiring more than demographic data. For example, a guy I know from a local agency providing lending assistance to a developer who had planned an affordable housing project in a very remote part of the state had a feasibility study done by a firm out of Louisiana for $11,000. They flew someone in for 1/2 a day who took one look around, flew home and tanked the project. The guy I know spent 1/2 a day of his time gathering some very basic local data from sources he had at his fingertips and sent it off to the firm for corrections as well as the various agencies involved in the financing decision. The study was revised and the project was funded and has been successful. This exemplifies my point.

In Maine, I would say that the long-term stagnation in the market would make it difficult to do much in the way of realistic projections for most commercial property types. In general, the only people who perform such analyses are big investors, and there doesn't seem to be that kind of product in Maine.

I see many of these studies completed for projects that are subsidized in some way through some type of tax credit or otherwise. The organization are not too keen on throwing money at a project that is not even feasible with the subsidy. Additionally, municipalities trying to spur economic development will get a study done to evaluate a proposal. In Maine, we have a lot of subsidized projects and a lot of need for economic development, so the studies do happen on a somewhat regular basis.

The reality is that even in strong markets, the fundamentals are bad, and forecasting future demand with solid data is almost impossible. Example. Even down here in DC, in the one underbuilt office district, (NoMa - by the train station), we have well over 1.5MM square feet of vacant space, including two 500,000 SF buildings entirely vacant. Even down here, it's difficult to realistically project an increase in just the 5,000 employees one would need to lease-up those buildings. The problem is allocating increases in demand. There is so much vacant space, except for apartments, that segmenting a regional increase requires surveys so you can rate the location of your property correctly. Really, any credible report is going to require some level of surveys, unless you are doing an apartment building in a strong market.

I agree with you wholeheartedly. It is very difficult to forecast demand or to project whether the current economic conditions and trends will continue long enough for any analysis to be accurate. That said, the firms that do these studies make such projections and are often way off. Sometimes due to this difficulty in fortune-telling and sometimes it is simply that they did not even look at the local market (IMO). I guess I am wondering why we, as appraisers, cannot be a part of that arena as well as the typical appraisal work we generally do.

 

[Deleted member 126639]

I don't know about your market area, but in Maine we can never use those surveys. They are never appropriate for this market. I expend a huge amount of energy collecting data and completing surveys for all of the work I do all of the time. It is exhausting in this market. I am also not sure if I agree with you about residential projects not requiring more than demographic data. For example, a guy I know from a local agency providing lending assistance to a developer who had planned an affordable housing project in a very remote part of the state had a feasibility study done by a firm out of Louisiana for $11,000. They flew someone in for 1/2 a day who took one look around, flew home and tanked the project. The guy I know spent 1/2 a day of his time gathering some very basic local data from sources he had at his fingertips and sent it off to the firm for corrections as well as the various agencies involved in the financing decision. The study was revised and the project was funded and has been successful. This exemplifies my point.

No, I am talking about YOU doing to the survey. If there is no published data upon which you can rely, you are going to have to speak with many people. Demographers at the University of Maine, legions of investors, any trade organizations for your product type, government officials. A real, thorough analysis is going to cost a lot more than $11,000. Think $35,000. If you've taken the class, we're talking about the difference between a Level C and Level D analysis. In many markets, you have no choice but to perform a Level D analysis.

For anything involving a government subsidy, supply and demand factors simply don't apply. Are there lots of people who want better housing or some housing? Sure, that demand is obvious. You're an appraiser, not a demographer, so you have no choice but to look at what specialists are projecting with respect to an increase in low-income cohorts versus existing housing supply. The poor will always demand more than what they have.

Honestly, $11,000 to look at ESRI data and compile a list of existing affordable housing units doesn't sound so bad, especially for a local. ESRI pioneered data driven demographic analytics in the 1960s, and is still the standard used in every university and by the US Census Bureau. That's really enough for virtually every investor. The only way you could provide something more authoritative than ESRI data would be to hire a PhD at the University of Maine. If ESRI projects the population cohort for people making less than say $25,000 a year is going to increase by 10% over the next five years, and you have zero affordable housing developments in the pipeline, it's pretty easy to make a credible conclusion.

 

[Terrel L. Shields]

So, I got to wondering... Why can't I offer these and do it right?

Seems the market is for ones that are not so right

The last one I saw was about $5,000. It was for a truck stop in a town too small to really support same and the feasibility was marginal. However, the person who was doing the project was versed in the local market and only used this as a secondary support for his own "instinct", if you will. Also, it was unique in a number of ways. It is a tire shop with an associated feed store, a shop that builds small utility trailers, part of the site also hold feed items for horses and cows, and in addition to the utility trailers they weld up gates, round bale feeders, corral panels, etc. They sell wire and fencing. They are a NAPA parts dealer. They have a conv. store section, in addition to off-road and on-road diesel and other fuel pumps. In back is a restaurant open afternoons as a bar, and they feed breakfast up front. AND they are the new liquor store (the only one in town.) Need firewood? same property. And the owner deals in vintage muscle cars.

The report acknowledged that there simply were no comparable operations in the region. And outside the common demographics, he had a few projections about demand increasing and where the break even point was with other truck stops for gasoline sales (and according to the owner a year later wasn't that far off although initial demand only increased, there was not a surge at first then leveling off. )

 

[Rlong]

I have also thought that at least some appraisers or firms would produce as good or better than some of these reports. They often do seem to be on the optomistic side, even when the data would not seem to support that and/or simpley lack substance.

I think it would depend on your market (many of us are likely in markets with limited demand for this, and/or limited data to develop them) and how much you want to put into developing that business line, tracking down that market, etc.

I like it, if you like it!
Bob in CO

 

[David Mescon]

I have done these. Intimate local market knowledge is essential. It could be done by someone from out of the area, but it would be difficult to impossible to do it properly without the help of a local expert. They are fun to do. It's like putting a puzzle together. Then again, I've always enjoyed complex HBU problems.

 

[Deleted member 126639]

I have done these. Intimate local market knowledge is essential. It could be done by someone from out of the area, but it would be difficult to impossible to do it properly without the help of a local expert. They are fun to do. It's like putting a puzzle together. Then again, I've always enjoyed complex HBU problems.

They are fun, if you are paid appropriately!

 

[David Mescon]

Used to charge $150 per hour for most of that stuff.

 

[tsiegel]

Used to charge $150 per hour for most of that stuff.

So, you billed hourly? I think it is funny that trying to arrange myself to bill hourly is more confusing to me than figuring out how to set myself up to do that type of work. I guess I am used to working in fits and starts. Tracking my process seems impossible. Ha!