Businesses and organizations looking to expand their real estate must undergo a detailed site selection process. Commercial real estate is one of the major site selection industries, either developing land directly or investing in commercial properties for clients. Where developers and investors choose to locate their businesses depends heavily on the results of site selection efforts.
Here we’ll outline the steps involved in site selection and why it matters to real estate developers. First, let’s begin by answering a basic question: what is site selection anyway?
What is Real Estate Site Selection?
Real estate site selection is a process of gathering and analyzing data about an existing structure or a raw plot of land to discover the best real estate opportunities. Choosing the right location for a home, business, or new development will have a direct effect on outcomes.
For example, a restaurant owner finds a plot of land at what seems like a great price. But after learning more about the property, demographics in the area, and traffic, it turns out that the land might be better suited for another purpose. If the restaurant owner decided to forgo site selection steps to determine the potential of the area, they might have ended up investing in a money pit rather than building a profitable business.
The Importance of Site Selection
Site selection is crucial for real estate developers and property investment firms. Trade area analysis offers investors vital context about a potential property, its infrastructure, its potential, and its limitations. Without it, it is nearly impossible to know whether or not a site will be a good match for a particular business or developer.
Site selection is often viewed as a one-and-done activity, but site selection is a process that involves numerous factors that can change at any time. The rise of eCommerce is an excellent example of the importance of real estate site selection.
According to the U.S. Department of Commerce, eCommerce grew 14% in 2021. This year, eCommerce accounts for 14.5% of all sales. This represents a drastic change in retail markets, particularly when it comes to brick-and-mortar stores. A commercial investor that mainly focuses on retail stores will need to take into consideration these changes to the market. Since people are doing more shopping online, the physical location of a retail store will need to have plenty of demographic research and traffic data to be certain that people will visit the location offline.
Another example of the importance of the site selection process is insurance. Each location will have different factors that insurance agencies will take into consideration before offering commercial or homeowners insurance. Some of these factors could cause those rates to be even more costly. Good site selection may also include calculating home insurance rates in an area with similar features and demographics to understand which markets developers should focus on.
Finally, site selection plays a major role in identifying the competition in a certain area. If there are other organizations in the area similar to a client, then their business might not meet its full potential since customers will be shared between them, reducing revenues for both parties. On the other hand, if there are not enough similar businesses in the area, there may be a reason. Perhaps there is no interest, there is limited traffic, or maybe no one can see the signage from the highway.
Steps in Real Estate Site Selection
Finding the perfect place to set up shop requires a step-by-step site selection process to ensure that your client’s needs are met. Plus, it’ll help make a more profitable selection decision. Here’s how:
1. Assess the client’s needs
First, identify the client’s must-haves to determine the amount of space that is necessary and other non-negotiables. This will help narrow down the search and make it easier to find the best place for the client. Find out everything, location, type of business, location needs, frontage requirements, and anything else that the client must have.
2. Perform a market analysis
Once the client’s needs are established, it’s time to perform a market analysis. This is where brokers will research the market and find available options that meet the client’s criteria. It’s also important to gather as much information about the area as possible to avoid wasting any of the client’s time during the following steps.
3. Take a tour
Now it’s time to take the client on a tour. Set up appointments with the landlord so that the client can have all their questions answered in real time. This is also a good time to work with property managers and designers to find out more about the potential uses of each location. Ask clients to be as specific as possible so that their needs can be identified before negotiations start.
4. Analyze and negotiate
Once a location is decided on, it’s time to analyze the area and be sure that the site will be a profitable location for investors. This is the stage where a market trade analysis and site evaluation should be performed to discover information about the demographics in the area and any competitors that would limit the amount of growth. Expectations should be set, and negotiations made based on the results of the analytics.
According to the US Small Business Association (SBA), here are some areas that should be addressed at this point in the real estate site selection process:
- Business expenses
- Zoning ordinances (local)
- Government incentives
- State and local taxes
Relay all pertinent information to the client so that they can make a qualified decision about the most ideal location for their business or development.
5. Contract execution
Now is the time for brokers to draw up contracts and work out all the details and negotiations before execution. After this point, the rest is up to the client. Build out, leasing, property management, and the finer details are transferred to developers and business owners, and it’s up to the real estate brokerage to maintain accurate contract records to meet compliance and practice contract management.
Site selection is a long process that involves multiple parties working towards the same goal: finding the ideal location for a new business development opportunity. Choosing the right location can make or break a business. But with these tips, brokers can help clients make informed decisions about where to build their next business location.
FAQs
What factors should be considered before site selection?
There are four main factors that should be considered before site selection in real estate:
Accessibility
The location must be easy to access, or else visitors will have a difficult time locating and navigating to the location. For example, places near major roads that are served by public transportation are often a good sign for commercial real estate investors.
Competitors
If the location will serve a commercial purpose, then it’s also important to factor in the competition. Are there stores nearby that indicate there is a market for your business? Are there any businesses in the area that offer the same products and services? These are questions that business owners have to consider before settling on a location.
Parking
Let’s say the location is easy to get to and there seems to be an opening in the market for your brand, but is there any place for visitors to park once they get there? Parking availability is an important factor for most commercial areas unless the location is in a densely populated city such as New York or Chicago with heavy foot traffic.
Cost
Before setting on a location, site selection research can help developers gain a better understanding of the total cost involved with building on the parcel. For example, will the land need to be leveled, is the area prone to earthquakes, will it be easy to tie into power and water, how much curb appeal needs to be added, the cost of maintaining the land and property, including utilities and upkeep, and many other questions will need to be answered before investors hand over the cash.
What is the importance of site selection?
Site selection is important because it provides context about a property location that will affect a site’s profitability and the price that an investor is willing to pay.
What are the steps involved in the site selection process?
There are 5 overarching steps in the site selection process for commercial real estate development.
- Assess the client’s needs
- Perform a market analysis
- Take a tour
- Analyze and negotiate
- Contract execution
How do developers choose location?
Here are some common questions that developers ask during the site selection process:
- How large is the property?
- Is there suitable access?
- Will there be road frontage?
- How easy is it to see the location from the road?
- What is the surrounding infrastructure?
- Are there any competing businesses in the area?
- Is it possible to build better access roads?
- Are there any zoning requirements?
- What site work will be involved?
- How much demo will be involved?
- Are utilities available?
- Will the land need to be graded?
The answers to these questions and many more help developers decide if a real estate investment will be worth it in the long run.
