Financial Feasibility For Mixed-Use Projects
Demystifying the process of market analysis and financial feasibility for mixed-use projects is key to a successful development. Here are the steps.
Jill Bensley

With urban developments becoming more popular and complicated with a mix of uses that can include for-sale and rental residential, all types of retail, entertainment, office, museums and other uses, how do we know the level and timing of demand? Can we accurately predict our real return on investment? What is the right number and type of residential units? How much retail and what type of retailers should go on the site? What type and amount of office space will be needed in the next 10 years? Who will come to shop? How much can we expect them to spend? How much will the appropriate building program cost? What is the overlap of uses? How will one element of the project affect spending in the other elements? How much parking must we provide to accommodate the busiest 10 to 15 days of the year on our site? What will the developer’s return on investment be? Once established, will the building program stand the test of time? Will people still come in 2020?

Before we arrive at the right answers, we must ask the appropriate questions. A market and financial feasibility exercise for a mixed-use project must answer all these questions and more. The field of study is based on two important principles that are the basis of a free market economy: supply and demand. The clear metrics of these two principles are the backbone of every real estate project.

Demand

Demand always measures people, their needs, wants and what they are willing to spend. This metric is called the “available market” and it is comprised of many segments, some of which may overlap; they are always important to project performance:

• The Resident Market: This market consists of the demographics and psychographics of the 10-, 25- and 50- mile markets around the site. When JB Research performs studies, we measure population, income, education (very important for retail and entertainment spending), age, and employment characteristics. We also measure their psychographic characteristics — that is, the behavior of like groups based on a group of characteristics such as urbanization, income, education, marital status, race and other. We can actually predict behavior and buying patterns and preferences from studying psychographic clusters.

• The Overnight Visitor Market: This segment is very important in some markets, as these visitors shop and dine on their trips and spend a significant amount on many types of goods and services. They can be expected to support many elements of the project.

• The Seasonal Market: These are people who may come to the region for the winter, especially in a warm climate where many of these projects are being development. These so called snowbirds can be quantified, qualified and their preferences tracked to estimated which elements of the program they can be counted on to support.

• The On-Site Market: These visitors are already nearby doing something else. They may be office workers, visitors to nearby cultural attractions, shoppers at nearby retail projects, municipal workers on even residents living nearby. They will make frequent trips to the project and provide support for some elements such as restaurants, retailers and services. They may even choose to live at the site.

Other metrics to measure include local and regional:

• Retail sales

• Retail expenditures

• Office space absorption by size and price

• Employment growth

• Hospitality unit development, hotel room sales and occupancy

• Housing unit construction

• Housing unit absorption by price, category and type

• Attraction performance

Supply

The supply analysis identifies and measures the performance of regional and national competitive and model projects. We research all factors including location, size, year built, lease up period, prices and rents, amenities, tenant profiles, customer demographics and residence, development cost and other important factors.

Projections/Market Share

The metrics of both demand and supply are applied to the various property uses to project the share of market achievable at the subject property. This is expressed as “market share” and is normally a percent of the total market. With experience it is possible to be very accurate in predicting performance based on market research.

Consumer Research/Focus Groups

Should the project require it, for example if a new real estate product is being offered, we have conducted focus groups that guide design of the various component elements of the program. Focus groups are always recommended for products new to market. However, they may not be necessary for product recommendations that have some good experience in the marketplace.

Return On Investment

The final metric measures attendance, absorption and other items derived from the penetration analysis. These factors are set as top line metrics for a 10-year operating pro forma. The financial analysis projects all sources of revenue and elements of expense for each real estate use tested and for the project as a whole.

Development cost is projected based on developer’s input and comparable project costs for each element of the project and for the consolidated development. As such, return on cost is calculated as a percent of EBDITA/development cost. Financing assumptions are then incorporated into the analysis to determine a real return on investment.

Jill Bensley is president of Ojai, California-based JB Research, which performs feasibility studies for all types of retail and mixed-use projects. She can be reached by e-mail at jill@jbresearchco.com.