Trade Area Analysis: What, Why & How?

Commercial real estate professionals working in retail know that it’s a highly competitive market. But how can you stay ahead of your competitors, and achieve success?

The answer lies in doing as much homework as possible when making important decisions like choosing a new retail development to invest in, or finding a perfect-fit tenant, for example.

One useful method for gathering market research data is to perform a trade area analysis of a selected location. You can do this using an online Geographic Information Systems (GIS) tool, which gives you access to an in-depth level of statistics and trends around trade patterns, location accessibility, foot traffic, and consumer affordability.  

What is a Trade Area Analysis?

To understand a trade area analysis, let’s first define a ‘trade area’.

A trade area is a geographic area which identifies where customers live and how far they are likely to travel to a particular business or location.

It is also sometimes referred to as a catchment area.

Some of the information you might be looking for relating to trade areas as part of your analysis might include:

1. Drive time

Drive time trade areas shows how long it takes to get to and from a location. Drive time data can be broken down into transportation type and time of day.

On top of distance, other factors are also considered such as traffic, high accident zones and areas where road construction may be causing delays.

Drive Time Trade Area relative to Starbucks using AlphaMap
Drive Time Trade Area relative to Starbucks using AlphaMap

2. Radius Rings

Radius ring trade areas are usually shown as concentric circles with the radius specifying the distances from the chosen location (for example one mile). Measuring radius rings around a property enables you to identify customers by proximity.

If the property is in a densely populated city, you might use a small radius (one mile). In less densely populated areas, you may need a larger radius, like five miles.  

Radius Rings Trade Area relative to Starbucks using AlphaMap
Radius Rings Trade Area relative to Starbucks using AlphaMap

3. True trade

True trade areas use tracked mobile location data which shows where customers live, work and shop, and for how long. You can use true trade areas to see how far customers are prepared to travel to certain retail stores.

Boutique stores might attract customers from a further distance as people are willing to travel for something unique, but supermarkets are much more localized, attracting only customers in close proximity.

True Trade Area relative to Starbucks using AlphaMap
True Trade Area relative to Starbucks using AlphaMap

Why Perform a Trade Area Analysis?

By analyzing the trade area statistics of a certain location, you’ll gain insights into the local residential population such as demographic information, consumer behavior, products purchased, foot traffic, and cross-visitation data (which identifies other stores visited on the same trip).

These insights can help you with some key real estate decisions, including:

Site Selection

In retail, a trade area analysis is commonly used as part of a site selection process. You gain access to demographic data and trends which inform whether the store will be a good fit in the proposed location. For site selection you’ll use trade areas to help you with tasks like:

  • Investigating the accessibility of a location
  • Exploring how far the local population will travel to a destination store
  • Understanding who your customers are, what they like to purchase and what they can afford
  • Understanding times of high trade patterns in a location  

Competitor Analysis

A trade area analysis can gauge potential competition in a selected location. This is important for evaluating market saturation, potential overlap, and identifying voids in the market.

Ideal Tenant Selection

Having a good tenant mix is important for retail success. A trade analysis can show which stores are already in an area, and which tenants would make a good tenant combination in a shopping mall, for example.  

Marketing

In today’s information-overloaded world, highly personalized marketing is what gets customers’ attention. Knowing which customers are visiting a store, and at what times, helps marketers to plan their campaigns accordingly.  

How to Perform a Trade Area Analysis

A trade area analysis usually starts with defining the trade or catchment area. You do this by finding your location on a map and calculating either the mile radius from the location (radius ring method), how long it takes customers to drive to your store (drive time method), or using mobile visitation data (true trade method).  

In each of these focus trade areas you’d calculate the number of retail stores of the same type and you’d hunt down demographic data relating to the area which might include total population, households, household income, and consumer spend.

This data helps you analyze market conditions and forecast what you might expect to earn from your store if it were placed in that location, among other things. If you were doing this manually, you might have to drive around the area to note all the stores and see how busy they are. It would be time-consuming and not particularly accurate.

Fortunately, performing a trade area analysis is much easier in today’s technological world, with the use of GIS analytics. There are several tools on the market that provide access to accurate, in-depth trade data about a chosen location.

All you have to do is login, find your location, define your trade area (whether it be through drive time, radius rings or true trade), and then view the related demographic data. You can easily view the other stores in the local area, and compare foot traffic of different locations.  

Not only is this process quick, and easily accessible to all types of real estate professionals (and not just high-level analysts), but the sheer amount of data available means higher accuracy, and therefore a competitive edge.  

Example: Finding an Ideal Location

Jim is a commercial property broker working with his client Planet Fitness who is looking to open a new gym in Austin, Texas. For a Planet Fitness gym to be successful, it needs to be in a location with  

  • A population between 21 and 54 years old within a three-mile radius  
  • Be easily accessible to public transport
  • Consumer spend in the ‘Health’ category should be between $500 and $800

Jim does a trade area analysis using an online tool, refining it based on his client’s criteria and finds the perfect location on Pleasant Valley Road. Based on this data, the gym opens a new branch in the new location and turns out to be a success.

Final Thoughts on Why Performing a Trade Area Analysis is Essential

If you are involved in commercial real estate industry and dealing with retail property, a trade area analysis is a useful tool to inform many key decisions like choosing a perfect location for a store, understanding customer behavior and typical spending, finding the ideal tenant mix, as well as store planning.  

Furthermore, trade area data is easily accessible via online GIS analytics tools. It’s simply a tool that discerning commercial real estate professionals can’t afford not to use if they want to stay competitive.

Performing a Trade Area Analysis Using AlphaMap

If you’re using AlphaMap’s trade analysis tool, you can follow these easy steps:

- Select your property location on the map
- Scroll down the list on the left-hand side of the screen
- Click ‘Radius Rings Trade Area’ or  ‘Drive Time Trade Area’ or ‘True Trade Area’  
- Scroll down to view demographic and benchmarking data
- Analyze the results

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