Location Selection

Strategic Considerations in Trade Area Selection

In the realm of real estate brokerage, the essence of location analysis lies in identifying trade areas where there is demand for services not adequately met locally. Understanding the dynamics of trade areas is pivotal, with each tier—primary, secondary, and tertiary—playing a distinct role in shaping a brokerage’s customer base. 

It’s widely recognized that home buyers and sellers typically prefer working with local agents who possess intimate knowledge of the area. A local agent is typically defined as someone residing and operating within a 10-15 minute drive of the properties they manage. Since clients generally aren’t aware of an agent’s exact location, the brokerage’s office address serves as a heuristic—a mental shortcut—for clients to gauge the agent’s local presence.

Defining Trade Areas:

A brokerage’s primary trade area represents the central geographic region from which the majority, typically 60 to 80 percent, of its customers originate. Beyond this lies the secondary trade area, contributing approximately 20 to 30 percent of the customer base, followed by the tertiary trade area, which accounts for the remaining 0 to 10 percent of sales.

This means that 80% of a brokerage’s customer base should come from within the brokerage’s primary trade area.

Determining Trade Area Size:

The size of a brokerage’s trade area is contingent upon various factors, including the demographics of the target market, competitive landscape, and local economic dynamics. Although trade areas lack universal standardization, in my experience, the trade area typically spans a 20-minute drive radius from the brokerage’s location and must include a population large enough to support 80% of the brokerage’s sales. 

Impact of Commuting Patterns:

Commuting patterns play a pivotal role in shaping the boundaries of local economies. Unlike rigid administrative lines, these boundaries are fluid and are influenced by the movement of individuals to and from employment centers. Employment hubs function as magnets, drawing people towards them and delineating the extent of economic influence. 

Demographics:

Another critical consideration is demographics. It’s essential to identify the type of client base you aim to attract in order to ensure that your service offerings are aligned with the needs of the community. Are you targeting higher-end markets or more affordable condos? Opting for more affordable condos can be advantageous due to reduced competition. Real estate agents and brokerages often concentrate their efforts on expensive properties, leaving lower-end markets underserved. This creates a strategic opportunity for entering a less competitive market segment. 

Leveraging Market Data:

Utilizing tools like ESRI demographics empowers brokers to make informed decisions by providing insights into population characteristics, income levels, and psychographic variables. This data serves as a crucial foundation for gauging real estate demand and evaluating market potential.

Assessing the Available Market:

Within the 20-minute drive time of the brokerage location, it’s crucial to ensure an adequate pool of potential home sellers to sustain the agents affiliated with the brokerage. Determining the requisite number of sales for each agent to thrive is pivotal. For instance, in my market, an agent typically requires ten sales per year for viability. Given that 80% of an agent’s sales are expected to occur within the brokerage’s primary trade area, each agent should ideally have access to 8 available sales within this vicinity, constrained by the 20-minute drive time. 

Consequently, to support a brokerage with 100 agents, one must be situated within a market witnessing at least 800 sales annually (100 agents × 10 sales per year × 80% of sales within the trade area). This ensures the sustainability and viability of the brokerage model. You determine how many sales are in an area by looking at how many sales were within that area the previous year. If the area is growing rapidly, you can look at households being added and add those potential sales to your projections.

Competition: 

You need to assess how many brokerages already exist within the trade area. If the market is oversaturated, then you may wish to choose another location. This is because excess competition will cause the brokerages to compete, driving down brokerage fees and increasing agent attrition as the agents will move brokerages when better offers are presented to them.

In essence, the strategic selection of a brokerage’s trade area requires a nuanced understanding of commuting patterns, competition, demographics, and market dynamics. By meticulously assessing these factors and harnessing the power of market data, brokers can strategically position themselves to capitalize on untapped opportunities and drive sustainable growth.

Sample Brokerage Location Analysis

Your new location is at 1010—brokerage Way. Typically, an agent would like to be licensed within a 20-minute drive of their office and would attract clients within a 20-minute drive of the office. I ran a search of this area and located within a 20-minute drive; there is a population of 300,000 people living in 150,000 households. 

The median age of the occupant is 40 years old, with an average household size of 2 people. There were 12,000 property transactions within this subject area over the past 12 indicating that 8% of the properties turn over annually. The average sale price within your subject area is $1,000,000 across all property types.

Assuming a target of a minimum of 10 deals per year for each of the 50 agents you’re your goal would be to process 500 property transactions out of the office. To sustainably achieve 500 deals annually within the market, the brokerage would need to perform 4% of all transactions within the subject area, meaning you are seeking a 4% market share within that trade area. 

If the trade area has less than 1,200 agents operating within it, then you likely are well positioned from a competitive standpoint to move into the market. Conversely, if the trade area already has 2,500 agents, then there’s an average of 4.8 deals available annually per agent, making the market a little oversaturated. In this case, you’d need to ask yourself if your service offering is unique enough to beat the competition or if you’d be better off choosing a less competitive trade area. 

In the trade area, the populations are in terms of age, demographic profile, and background perspective, meaning that your focus should be on recruiting a highly diverse mix of agents.  

The housing profile shows that 80% of the occupants live in owned accommodation, meaning that the area is home to a high number of primary residents. This indicates that your training focus should be on residential agents. Alternatively, if the area has a high number of rental units that are not purpose-built, then you may have a high number of investors in the area. If that is the case, then your focus may be on training your agents on tenancy law and working with real estate investor clients.