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A Guide for Real Estate Site Selection using Trade Area Analysis

March 15, 2021
by
Kate Blumberg

Location, location, location. You’ve likely heard this refrain many times when it comes to whether a property – be it for shopping, living, or working – succeeds or doesn’t. But picking a plot of land to develop or move into isn’t as simple as it may first seem. There are a number of variables to take into account, both geographic and demographic.

That’s why companies like Volta know that data-driven trade area analysis is key when determining where to set up shop. To elaborate, we’ll walk you through a site selection model driven by trade area analysis via the following sections:

  • What is real estate site selection & what does it involve?
  • How is retail site development related to trade area analysis?
  • 4 key stages to completing proper retail site selection
  • Commercial real estate site selection checklist: quick reference

We’ll start with a quick overview of what choosing a site entails for a business, and end with a commercial real estate site selection checklist that will give you some quick pointers to inform your strategy.

What is real estate site selection & what does it involve?

Real estate site selection is the process of picking a plot of land or existing structure for developing a new facility. It involves identifying the best real estate opportunities for new locations, ensuring that you choose a good location for your target audience and main demographics.

Any business or organization looking to expand undergoes some sort of site selection process, but it is particularly popular in retail and real estate. Commercial real estate is also a major site selection industry; oftentimes, developers have retailers as clients, or are developing commercial properties for investments (such as malls and shopping centers).

A related process is site deselection. This involves choosing store locations to move out of and/or shut down operations at. This may be necessary if changing geographic and demographic conditions around a store make it no longer attractive or profitable, or if scaling back your business or real estate investment as a whole is the only way to balance out an economic shortfall.

How is retail site development related to trade area analysis?

Trade area analysis provides a lot of context for your real estate site selection criteria. This helps you make an informed decision on whether a particular site will be economically viable for your business. Here are some things it can tell you:

  • Demographics – If you’re going to sell products or services in an area, you need to know if the people nearby actually want them and can afford them. Gathering data on their lifestyles and incomes (seeing where else they shop is one way to do this) will let you know.
  • Accessibility – Your store’s more likely to get customers if they can easily get there by walking, biking, driving, or taking public transit along nearby transportation routes. This is especially important for convenience stores and other types of businesses where the customer wants to be in and out quickly, so they will likely pick the most efficient option.
  • Competition – You also need to see if there are similar stores in the area that could take your business. You should stick to areas where there aren’t enough competitors to meet the demand for your type of business, and you can offer some sort of decisive advantage (bigger store, better inventory, lower prices) that your competitors don’t.

Also, remember that your own locations can be thought of as competitors in this sense. So make sure your stores are not located in such a way as to compete with each other over the same customers.

For even more upsides, see our article on the benefits of trade area analysis.

4 key stages to completing proper retail site selection

Now you have an idea of the work you need to do – and the data you need to do it – when selecting a site for your business. So it’s time to develop a plan. Every business is different, so the details may vary, but here are four general steps you’ll need to take when choosing a site for a retail business or real estate opportunity.

Stage 1: Decision to expand/close down

Making a decision to build up or demolish a store

Retail real estate site selection usually starts with one of two goals. One is to build stores in new areas to tap into additional market share. The other is to close down underperforming stores that may not be as profitable as they once were. Sometimes, you may even want to just move a store to a vacant location and accomplish both of these goals at once. In real estate, this means identifying areas with the best investment opportunities, and avoiding areas with the greatest risk.

Whether you are selecting or deselecting sites (or both), you’ll need to consider where the investment and business opportunities in your area are and aren’t. We’ll discuss how to do that in the next step.

Stage 2: Determine methodology

Methods of trade area analysis

There are a number of factors and methods involved in trade area analysis. Which ones you prioritize will depend on the type of business you’re running. 

Are you setting up shop in an area where the people living there actually want or need your business? Can the people you’ll likely be selling to afford your products or services, to the point where you can turn a profit? How accessible will your store be via local transportation routes? What other stores are in the area, and how likely will your store be competing with them over the same customers? These are some of the questions you should be considering during the real estate site selection process.

Another helpful tool is to find a successful store (usually your own, but sometimes someone else’s) and then note and analyze its geographic and demographic characteristics. Then you can look for locations with similar parameters and feel reasonably confident that a new store will succeed there.

If the property is an investment, you’ll want to consider the above as well. What markets will the location serve, and which businesses will be best suited for that area. This will be extremely important to help you find tenants for your real estate investments and the potential profitability of each. You can also mitigate risk by selecting locations that could serve a number of different industries and demographics. For example, office and retail real estate properties have very different designs and locations, which will dictate the opportunities you have for your investment.

Stage 3: Perform analysis

Analyzing the financial viability of nearby stores

Once you choose the metrics you want to measure, it’s time to get to work. Get the sales numbers. Do customer surveys. Use GIS software to calculate walk and drive times to your possible future store locations, and to your current store locations for comparison. Or buy pre-prepared location data packages from SafeGraph if you want to skip a lot of the heavy lifting.

After you’ve gathered the data, you need to decide on how you’re going to model it and put it into action. There are several different theories and techniques you can use, and many of them can be mapped out using real estate site selection software. But again, your choice will come down to the order in which you prioritize your metrics.

To use a previous example, walk/drive time will likely be more important to a convenience store, fast food restaurant, or other type of business where the customer will likely pick the easiest one to get to. As a real estate investment, walk/drive time, demographic, and mobility models are extremely useful to get an idea of the potential industries and populations your investment location can serve.

Stage 4: Execute on strategy

Actions needed to build a store or close one down

When you’ve made your final decision on a location, all that should be left is going through the motions. Purchase/lease/rent the land or building, get a building permit, do any necessary construction, and then start moving in your operations. From there, keep an eye on your new location to see if your strategy pays off.

If you’re closing down instead, make the necessary arrangements for paperwork, moving out your inventory, and deconstruction. With any luck, you’ll see some savings in your company’s next financial report.

Commercial real estate site selection checklist: quick reference

Commercial real estate site selection is a complex process with many different factors that you need to consider. To help make it a bit simpler, we’ve broken it down into seven essential steps:

A map with darts hitting a targeted area, accompanied by a checklist on a clipboard
  • Map out your current locations – Plot out your existing stores or properties on a map. See where there are places available to expand to, and also try to find areas where your stores may be too close together and competing for each other's business.
  • Consider competing and complementary businesses – Identify other businesses located near your stores. Think about how their market niches and performances may be impacting the success of your own stores. Some may be fighting over customers with you, while others may actually be helping to funnel more customers to you.
  • Know who your likely customers are – It’s important for location’s sake to know where people who shop at your stores live or come from in the surrounding area. But you should also pay attention to their lifestyles: where they shop and what other activities they like to do. Ask yourself: are your stores accessible to your likely customers, and are you selling what they actually want?
  • Add more context – Brainstorm some other factors that may affect your stores’ performances. For example, look at how close they are to nearby transportation routes, and how this might grow or shrink your customer base. Other aspects of surrounding geography may help or hinder your business, too. For example, placing a gardening store near a rural or suburban area, where people tend to have larger properties, will likely get you more business vs. locating in an urban area with limited open space.
  • Compare store performance in context – Look for patterns between the information you’ve collected and how your current stores are doing. Determine which factors are helping your businesses and which are hurting them.
  • Aim to replicate what works – Once you’ve identified which surrounding geographic and demographic characteristics are contributing to your stores’ success, look at your possible new locations for similar parameters. Even if some aspects are different, you can use your new location to test how well a store will do in a setting with those aspects.
  • Plan the size and shape of your store – How your stores are set up can be as important as where they’re located. Go back and look at the size and layout of your current stores, and think about these metrics in relation to your clientele. Stores should be big enough to accommodate your inventory and customers, but small enough that you’re not wasting space and possibly disorienting shoppers. You should also arrange your sections to make what visitors typically buy easily accessible.

Now you have a general idea of what’s involved in selecting a site for a real estate investment, an office space, retail store, or other commercial property. You’ve also seen how trade area analysis can play a critical role in the process. And your trade area analysis is only as good as the datasets you use. If you want the most accurate and comprehensive information on points of interest around the globe, check out SafeGraph’s datasets.

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