One of the most important parts of due diligence is undertaking a thorough market analysis of the property and the surrounding area.
The first step in any analysis starts with determining the trade area, or the geographic area from which a community generates its business.
Defining the trade area makes it possible to determine the amount of customers who have shopped within its boundaries during a one-year period. It is calculated by dividing the geographic area’s retail sales by the per capita retail sales for the state.
There are several ways to determine the boundaries of trade areas, but one unique way is by using a focus group composed of consumers from the community in which you are evaluating. By asking consumers about their shopping patterns within the area, you’ll not only get a good idea of competing trade areas, but you’ll ask gain a deeper understanding of why consumers choose certain trade areas over others.
CREATE A QUESTIONNAIRE
Write a questionnaire that asks consumers to list the places they shop at for various goods.
Be sure to include a wide range of products:
- furniture,
- cars,
- lumber,
- books and
- sporting goods.
Also include an option to indicate how far they would be willing to drive in order to obtain the item.
Explain to the group that each category can have more than one answer. They should also fill out the questionnaire according to their own personal habits, as well as the general habits of those in their community.
DISTRIBUTE A MAP
Give everyone a map that they can use to help them define their preferred trade area. They can do this by drawing a circle around the boundaries of the area where they purchase the goods listed on the questionnaire. Alternatively, they can use dots to mark the stores where they buy the products listed on the questionnaire.
GET GROUP FEEDBACK
After everyone fills out the questionnaire and the map, spend time as a group discussing the results. Accept all answers; in this exercise, there is no right or wrong answer. It’s also useful to give everyone a chance to explain why they chose certain places over others, particularly if their choice took them out of the trade area.
With this information, you can now define your trade area, as well as the major trade areas that compete with the trade area you are evaluating.
As a bonus, this method is also an excellent way of identifying where new customers might be obtained for marketing a new commercial income property.
