ASSET MANAGEMENT

MARKETING AND LEASING

Know Your Market

BY DANA ENFINGER

AFFORDABLE HOUSING FINANCE • April 2008

AFFORDABLE HOUSING FINANCE talked to Rob Vogt, partner at VWB Research, a national real estate research firm based in Columbus, Ohio. Vogt has conducted and reviewed scores of market analyses for market-rate and low-income housing tax credit (LIHTC) properties. He discussed ways affordable owners can market their units and what he is observing from market studies in the Gulf Coast.

Q: What is helpful for affordable apartment owners and managers to consider when marketing their developments?

A: Affordable managers should market their properties a lot like market-rate companies would. Affordable owners have the challenge of finding people who meet certain income criteria, and when you begin to look at the actual income range that affordable Sec. 42 projects have to target, it’s a very narrow range. Not only do you have to be aggressive in trying to find those households, but you also have to be selective too.

Oftentimes those households that might meet the income requirements may have credit issues or a history of criminal activity. Managers have to be careful to get the tenant mix right. You don’t want that development to get a reputation, and then it doesn’t matter what you charge in terms of rents. Nobody wants to live there.

A market study is important to find out how selective you can be when choosing tenants. We compare the number of income-qualified households within a market area to the number of units at a proposed LIHTC property. We come up with a ratio. Typically, we’d like to see the ratio 5 percent or lower, 4.5 percent, 3.5 percent is good. As that percentage increases, you have to capture a larger share of households to support your project.

Say you are operating in a market where your ratio is 20 percent. That means that you have to take one out of every fifth person who walks in the door who are income-qualified, which means that you can’t be very selective. But if your ratio is 5 percent, then you can take one out of every 20 prospective tenants. Now you can be more selective.

It’s essential that affordable housing companies know how many households in their market area meet the income limits of their affordable developments.

Q: What are some specific ways operators and managers can market affordable apartments?

A: It’s surprising to me as we do market studies across the United States, the number of times we call management offices at affordable properties and find that no one answers the telephone. Management people aren’t there when they’ve indicated that they will be there. Good marketing is being able to answer the telephone during business hours. When you think about how selective management at affordable properties has to be in order to get quality tenants, you would think staff would be there.

Many of the marketing practices are the same as for a market-rate development. Have a good brochure. Play up amenities that other affordable apartments in the area might not have. I know of a property here in Ohio that includes a community room with Internet access.

Additionally, management needs to make it clear to prospective residents that the property is a LIHTC development. Most folks don’t understand the difference between tax credit properties and public housing. Let them know that there are income limits, but you don’t want to make it sound like it’s a government-subsidized project.

Having an online presence is absolutely essential. Just like prospective residents of market-rate apartments, they are forming impressions of your property, looking at your rents and location. They want instant answers to their questions too.

Q: What are some of your observations regarding affordable housing on the Gulf Coast from recent market studies?

A: We’ve noticed high occupancies in many of the near Gulf Coast markets that are 15 to 20 miles from the coast that weren’t directly impacted by the storms. For the most part, that housing is almost fully occupied—occupancies in the 97 percent to 99 percent range. That’s for both market-rate and affordable. Plus, rents have increased from 4 percent to 7 percent in the past two or three years. If you had told me that in coastal Mississippi, rent on a threebedroom unit would be $1,000, I’d say you were crazy. But that’s commonplace now. It’s a reflection of the need for housing.

The allocating agencies have done a very good job at allocating credits through the Gulf Opportunity Zone initiative. We have seen some of our Midwest clients going down to the Gulf Coast to build some of their affordable product, definitely a large influx of new LIHTC housing. My concern about the market is at what point do we begin to overbuild. How many folks are going to stay in the area they had moved to after Katrina? The household growth rate is expected to increase in many parts of the Gulf, and it should compensate for some of that. There is, though, a chance that we could seriously overbuild. I would caution anyone who is in that region building or who is responsible for allocating LIHTCs to keep a close watch on the market.

Q: You mentioned Midwest developers’ interest in the Gulf Coast. Are there serious opportunities for affordable developers to focus on the Midwest again? Perhaps to look at foreclosed properties?

A: The key to turning a foreclosed home into affordable housing is being able to acquire the property cheaply enough and put enough money into the rehab that would qualify it for LIHTC housing. According to one of our studies, 98 percent of the single-family tax credit properties in the Midwest were fully occupied. So maybe there is opportunity. Now you are going to have the added layer of compliance rules and getting a good tenant mix—that is, finding households who meet the income criteria and don’t have credit problems or criminal backgrounds. All of this would be very difficult to do.