Market studies

Critical tool for successful projects

by Glenn Petherick

Today's soft apartment markets underscore the importance of solid market studies to the success of new low-income housing developments.

Yet there remains confusion about market studies, suggesting the need for basic information: What is a market study? What should it cover? How much does one cost? What should a developer look for in a competent market analyst? And, finally, what changes are occurring in the field?

A market study is a written assessment of whether a particular real estate project-such as a housing tax credit development-is suitable for a given market area and is likely to succeed. This conclusion is based on analysis of collected pertinent data and information on the project, site, surrounding neighborhood, competing projects, local demographics, economy, and employment. It differs from an appraisal, which is a written estimate of a project's value.

A common element of a market study is the "capture rate." This is the estimated minimum percentage of income-qualified renter households-potential residents-living in the defined market area that the project must attract to achieve rent-up and stabilized occupancy in a specified "absorption period." But the capture rate is only one part of a comprehensive market analysis, and the analyst may need to adjust his or her initial capture rate based on the findings from field interviews and research.

Market studies are important for several reasons. First, they help state housing credit agencies, syndicators, investors and lenders decide how to best allocate their limited resources (credits, equity, debt) among competing projects.

Second, good market studies can help developers identify niche market and product opportunities and refine their projects to better suit the market. "You should match your product to the market," advised market analyst Douglas Koch, president of Housing Advisors, Inc., in Newton, Mass.

A market study is vital in all housing markets - soft, strong and in-between - in order to determine suitability and to identify potential trouble spots, said market analyst Robert Vogt, of Vogt, Williams & Bowen, LLC, based in Columbus, Ohio. This analysis, he explained, can determine whether the project's "rent advantage" (the gap between the projected tax credit rents and higher, local market-rate rents) will be large enough to assure expeditious rent-up, whether the unit layout and design is appropriate to the marketplace, whether there are sufficient income-qualified households in the market area, and whether there are any competing developments in the pipeline that could hurt the project.

Analysts caution against siting projects based on perceived market strength alone. "Just as there can be bad projects in good areas, so too can there be good projects in bad areas," said Bud Clarke, director of the investment valuation group at housing credit syndicator/debt provider MMA Financial, LLC, in Boston.

"In soft markets there are still niches to be found," said Koch. "And there still are good developers who have always been able to tap those niches. Rather than summarily dismiss them, you have to study how the product matches the particular submarket."

Clarke said everyone in the industry has an obligation to assure that resources are committed to sound projects that will promote affordability and other positive purposes. But he added that a local market can become temporarily saturated in housing credit projects, due to overbuilding, increased joblessness or other woes. This makes the need for a market study and the use of a competent market analyst critical, Clarke explained.

What should a top quality market study contain?

Although a 2000 statutory change requires an independent market study for every housing credit project, a lack of legislative and regulatory guidance has prompted diverse implementation by state housing credit agencies.

Agencies differ in what they require in a market study, in their minimum qualifications (if any) for preparers, in whether the analyst is selected by the developer or agency, and in when the study is required (at the time the application is made, or after credits are reserved).

Compounding the problem has been a lack of standards in the market analysis industry.

But now, a new organization, the National Council of Affordable Housing Market Analysts (NCAHMA), is trying to change that. An autonomous council within the National Housing & Rehabilitation Association, the group will adopt two final sets of uniform standards at a market study summit conference to be held Sept. 24 and 25 in Chicago.

One set of standards defines core terms used in market studies (for instance, market area, capture rate, penetration rate, gross rent, mixed-income property).

The second is a set of guidelines for the recommended content of a market study for tax credit and other affordable projects. Vogt said the guidelines provide a checklist (67 line items) of the things that should be included and addressed in a comprehensive market study. Among these are:

• A description of the project, including the number, size and mix of units; amenities; project type (for instance, family or seniors); proposed rents; and other characteristics.
• A description of the site and neighborhood, including photos.
• A description of the defined market area for the project, with justification of the specific boundaries.
• Estimates of the current and projected future number of income-qualified renter households in the market area, the capture rate, and the housing demand.
• Data and information on the local economy and employment.
• Data and information on existing and pipeline "comparable" rental properties near the proposed project.
• A statement about the analyst's qualifications and certification that the person has no financial interest in the property.

The NCAHMA standards are intended to promote greater uniformity in market studies, make it easier for users to understand and compare market studies, and enhance the professionalism of the industry. In addition to the standards, NCAHMA is trying to develop a professional designation for qualified market analysts, a certification statement for market studies, and an industry oversight/monitoring regime.

Turnaround time, typical cost

A market study typically takes three to five weeks and costs $4,500 to $10,000.

In addition to the client's deadline, other factors that can affect the cost of a market study include (1) whether there are any special state agency requirements that will add time and expense; (2) whether the analyst is already familiar with the market; (3) the depth and breadth of the local market (whether there are a large number of comparable properties the analyst will need to identify and investigate); and (4) the complexity of the assignment. A more complex assignment, for example, might entail analyzing a HOPE VI project that will have public housing, tax credit, and market-rate units.

Picking a good analyst

Vogt and Koch said developers should look for several things when searching for a highly qualified market analyst. These include:

• Extensive experience preparing market studies for various property types.
• The ability to work with the developer through all stages of the development process, from the "primary conception stage" to application and beyond.
• A good understanding of the housing credit program and other federal/state programs the project will utilize.
• An explanation by the analyst of the methodology to be used in determining the market area and selection of comparable properties.
• Discussion about the performance of past market studies, including whether the analyst has had any prior projects that failed or didn't meet expectations, and the reasons for these failures or underperformance. "It gives you some good insight into the knowledge and experience of that market analyst," said Vogt.
• Evidence of the analyst's continuing professional education.
  References: Developers should check with other developers who've used the analyst for similar projects.

  Glenn Petherick is director of communications of the National Housing & Rehabilitation Association in Washington, D.C., and editor of The Tax Credit Advisor newsletter.

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