This map shows a market area in rural Texas and one in Houston. Both are scaled the same to show the geographic size difference. The Houston market area, while considerably smaller, has triple the population of the rural market.
This map shows a market area in rural Texas and one in Houston. Both are scaled the same to show the geographic size difference. The Houston market area, while considerably smaller, has triple the population of the rural market.

As far as the concept of urban versus rural is concerned, most in the housing industry have their own perception as to which is which.

“A substantial number of rural housing developments for which WNC has provided equity funds are in communities located more than an hour drive of a major urban or suburban hub,” says David Shafer, executive vice president of tax credit syndicator WNC & Associates, Inc. “Rural America consists of communities of 10,000 or less in population and not necessarily served by a major highway."

It is no surprise that Shafer's perception of what makes a community “rural” goes hand in hand with the U.S. Department of Agriculture Rural Development (RD) Handbook's definition of “rural.” As WNC is a major player in the industry with 40 years' experience with properties in these communities, he knows all too well the definition and how it applies to the properties he oversees.

On the other hand, developers and other users of affordable housing market studies have come to utilize the textbook definition of “urban”—any area with 50,000 persons per square mile and any adjacent area with 2,500 total population or 500-plus persons per square mile.

There are separate sets of guidelines for nearly every type of market study. Each deals with the market area approach for urban and rural markets in its own way.

“RD and the Department of Housing and Urban Development (HUD) have both tried to address issues in more remote and rural areas. I have not seen a set of solutions, but I do know both agencies continue to look at how to cost effectively meet housing needs in remote areas, where the market is thinnest and least able to meet that market demand," says Richard Price, a partner at law firm Nixon Peabody.

The market area

Whether the study is urban or rural, one of the most crucial elements in each is the market area. It is not only vital that the analyst determine an appropriate market area but that he or she also does an adequate job portraying it to the reader.

An urban study may have a primary market area (PMA) that is a multiple block area within a city, while the PMA in a rural study may be much larger to include the city itself, the county, or even multiple counties. The latter is typically with an extremely rural location and a very specialized property type.

Commute times also can be a factor in market studies. “There is a wide range of commute times for the typical rural housing community. However, my first thought is that someone that is incomeeligible to reside in a restricted development probably isn't able to drive 60 miles for employment. I would assume that commute distances would be less than 30 miles,” says Jason Maddox, executive vice president of MACO Development.

Those who regularly work in rural markets see these greater commute distances often. However, if a participant has had the bulk of his or her experience with urban markets and is considering investing in a rural market, it is possible that he or she would not expect to see a market area with a 30-minute drive time or one that covers a single or multiple counties.

The employment factor

Employment is another major factor that tends to affect the population growth or decline of urban and rural markets alike. The ability of developments to survive or thrive in different economic times is a very important issue.

There are a few urban markets that seem to be more or less impervious to catastrophic economic events. These markets may suffer, but it seems the pain is felt less and for a shorter period of time.

Aside from these, when there is a downturn in the overall economy such as the most recent one or, and maybe more important, when there is a local event that causes the economy of a market to shift downward, many urban cores and adjacent markets are greatly impacted.

An important thing to consider with rural markets is that the geographic footprint of the actual PMA may cover many small to medium-sized employers in different towns. Rural markets tend to not have one main source of employment, which can sometimes make these markets more impervious to this type of a population-reducing event.

“Throughout America today unemployment is a factor in both urban and rural communities. There is no doubt that a rural community that relies upon one or even two major employers is at a greater employment risk than a larger community with multiple key employers,” says Shafer. “During WNC's underwriting of a proposed investment, substantial analysis is performed on the rental market, employment opportunities, and the longterm economic viability of the property and the community."

As an example, if there is a 24-unit development in a town of 1,200 that is 30 miles from a more urban town of 75,000 people with a major manufacturing plant that employs 1,000 people, the rural property will be less affected than developments in closer proximity. In addition, it would be easier to recapture the smaller number of jobs for the rural property leading to fewer turnovers from job loss.

In the above scenario, the developments in closer proximity will likely depend on the one major plant to employ the bulk of their tenants. If the plant were to close, the tenants would likely have to compete with each other for the nearest job opportunities, move in with relatives, or relocate to an area with less competition. The urban user may not be as willing to commute to rural markets to find employment and still have the cost of living associated with more urban areas. Conversely, the rural property will not depend as heavily on the plant since it would be only one of many sources of employment for tenants who expect to travel 30 miles for a job.

The physical makeup of a project

Another major factor affecting the market areas between urban and rural are the types of structures that are built in each. As different tenant populations affect the size of the market area, so does the physical makeup of the development.

Potential tenants may come from a greater distance to live in a single-family home or a duplex than they would a garden or walk-up style apartment complex. In urban areas, tenants may follow similarly long commuting patterns to live in a high-rise. These types of projects tend to have larger market areas, but that is only the case if local perception supports it.

“With Volunteers of America, we are involved with building many of these types, from small 15-unit garden-style apartments in Wyoming to 250-unit high-rises in downtown Denver. The key isn't whether one type is best or not for a type of city or town, but what blends best with the existing, surrounding uses,” says Patrick Sheridan, senior vice president of housing development for Volunteers of America. “I would not recommend highrise construction, unless that is all you are surrounded by. Likewise, I would recommend low-rise for most suburban or rural settings. But as more deals attempt to be transit-oriented, land prices near transportation go up, requiring increased densities to keep projects affordable."

While the differences with urban and rural market studies can be narrowed down to market areas, commuting patterns, employment opportunities, and the like, it is important to note that rural market studies must be precise as even a small development can greatly impact a rural town.

As a lender that works in both rural and urban markets, Lancaster Pollard relies heavily on market studies to assess and properly articulate that risk to the credit enhancement agencies but also to the secondary market investor who will buy the securitized loan.

“We are very vigilant reviewers of market studies in rural markets because they are usually smaller markets with a small margin for error. If the market study misses the market in a rural area, there are very few alternatives and almost no chance that the project will be successful,” says Carl Wagner, senior vice president of Lancaster Pollard. “Market studies in rural areas should be and are more closely evaluated and analyzed to be sure the potential market risks are properly disclosed and mitigated.”

Cash Gill is vice president of Gill Group, as well as a board member and chairman of the Appraisal Subcommittee for the Council for Affordable Rural Housing; advisory board member for Tax Credit Advisor; designated member of the Appraisal Institute and the National Council of Affordable Housing Market Analysts; and a gubernatorial-appointed real estate appraiser commissioner.