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Using Gap Analysis In Defining CRE Project Requirements


Gap AnalysisFrequently conducted by developers to determine the feasibility of adding space to a market, doing a gap analysis can also help you understand the conditions in the markets you occupy as a commercial real estate tenant. Having a sense of market conditions allows you to make better decisions and which spaces to keep and which to vacate, as well as giving you some insight into your landlord's negotiating position when you are looking at new space or negotiating renewals on existing spaces.

A basic gap analysis measures the difference between supply and demand. For a given time, market and property type, calculate what the tenant demand is for space, measured in square feet. Subtract the number of available square feet on the market to find the gap. If it is a negative number, the market is over-saturated with space, indicating that it is a good time for you to negotiate for space as a tenant. If the number is positive, you're in a landlord's market where there is a shortage of space and can expect to be in a weaker negotiating position.

Gap analyses can go much farther than just calculating a positive or negative number, too. An aggregate market area gap analysis spans multiple areas, letting you compare them to find out which markets have positive gaps or negative gaps. You can do this to rank markets and decide where it is most advantageous to open a new location. For example, if you are looking to open locations in Tulsa, Spokane and Tuscaloosa, and the only city with a negative gap is Spokane, it makes sense to open your location in Spokane first. That way, you're taking advantage of a market where you have more negotiating power while hoping that developers overbuild in Tulsa and Tuscaloosa, creating a negative gap in the future. 

You can also use a gap analysis with different data to identify where you need to open locations. One popular tool is to do a retail gap analysis where you focus on customer spending trends instead of real estate occupancy, demand and absorption. If you know that consumers in a given area spend $10,000,000 on auto parts, but stores in the area only sell $7,000,000 worth of auto parts, there is a $3,000,000 gap caused by customers either leaving the area to buy from another store or buying online. This could indicate an opportunity to open another store. Conversely, if stores are selling $12,000,000 in furniture, but local customers are only buying $8,000,000 of it, the area could end up having sales decline if adjacent areas add furniture stores.

Gap analysis can be as simple or as complicated as you make it. Mastering the strategy behind it can help you make better decisions about how to deploy your corporate real estate budget. Once you've built your deployment plan, you can then use gap analysis to negotiate more successfully as well.

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