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Guess Work Isn’t Good Enough

Originally written for the March 26 edition of the Shenandoah Valley Business Journal

Once upon a time, the most important influence in selecting a site for businesses, retail centers and new developments was described in one simple phrase: location, location, location. While location is still an essential consideration, increasing competition and a disjointed consumer marketplace have necessitated a change in site selection techniques. In a competitive environment, a simplistic adage is no longer sufficient.

Every site selection decision should be made based on a unique set of criteria related to the users’ needs including proximity to clients, building or lot size, population density, spending levels and a host of other factors while also attempting to minimize acquisition costs. Even when tools slightly more advanced than an old motto are utilized in the process, they often fall short. Traditional demographic profiles include valuable, but basic, information such as a population’s age, size, income levels and ethnicities. This data can lead to two major issues—not everyone sharing one common demographic trait is alike and consumers, shopping preferences, and households are not static.

Often, a decision is made on traditional notions, or worse, which location offers the “best” visibility or is in the “right” area. Sometimes these methods work, but many times they don’t and it leads to underperforming sites.

New demographic and psychographic models represent a radical departure from these traditional methods by allowing businesses and investors to select their sites based not only on location, but also on a comprehensive blend of factors including market potential, drive time analysis, and lifestyle characteristics. These tools deliver the market knowledge essential to making effective real estate decisions and they are employed by savvy brokers, businesses, and investors regularly to minimize mistakes, identify value, and improve the bottom line.

Instincts Are Great, But…

What if your business could reach more consumers on South Liberty than East Market for a fraction of the cost? One of the most practical applications of these new models lie within their capacity to help lower real estate acquisition costs. This can be accomplished by minimizing the need for assumptions about consumer behavior and market areas. To be sure, there is a place for gut instinct in commercial real estate, but that place should not be at the foundation of a decision making process.

Drive time analysis aids in the elimination of market assumptions by exposing potential customers in ways other methods cannot. Traditionally, site analysis considers demographic data within a political boundary or three, five and ten mile ring of a potential site. A drive time analysis accounts for natural and manmade boundaries, like rivers or a university, that may alter traffic flow and calculates data based on population characteristics within a certain driving distance of the site to create an accurate picture of the market area.

Drive time analysis coupled with market analysis such as a Market Potential Index, or MPI, further sharpens the focus on specific sites. The MPI measures site-area households’ consumer spending patterns and compares these to overall buying patterns in the U.S. An average MPI in any community across the U.S. is 100. Market demand is represented by a number above or below this average. The higher a site’s MPI number, the more the households in that area are likely to spend. Just in case you’re curious, the MPI for Olive Garden for the Harrisonburg market area is 145. Not that you needed that number to know our community wants to be treated like family.

MPI analyses can be performed broadly — for instance, measuring how much site households spend on clothing annually — or very specifically — such as how much consumers spend at a particular restaurant chain. The end result of these two tools is an understanding of which consumers can get to your site in a reasonable amount of time, what products they will purchase, and how much they are likely to spend once they get there.

From Traditional Demographics to Psychographics

While the market potential index and drive-time analysis explain who, what, when, and where– psychographics perform an equally valuable role by explaining the why.  These lifestyle segmentations categorize individuals based on their likely habits, shopping preferences, and overall demographic profiles by measuring activities, expenditures, and attitudes for consumers.  In other words, we learn what is unique about consumers in a region, city, or even a neighborhood. Applied to a specific site, they can create an understanding that helps users make their best real estate decisions contributing to more profitable businesses and helping to create thriving communities.

Once the domain of major retailers, these tools are now available for anyone. They can be deployed for virtually any user offering a wealth of knowledge about real estate locations, consumer behavior, and emerging trends. Guesswork doesn’t have to be good enough anymore.

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Tim Reamer is a Commercial Realtor based in Harrisonburg specializing net lease investment real estate, tenant representation, and general commercial representation.