• A word with the experts
  • Managing the key points
  • Future trends
  • What should be included in a market study

When the economy began slowing in 2001, the long-simmering concern about the marketability of some tax credit project began getting far more attention from developers, investors and tax credit allocation agencies.
In recent years, there has been concern that tax credit projects were charging rents that were too close to market-rate projects and that in some communities, too many tax credit projects were being approved.

Those concerns began intensifying as unemployment rose and market-rate projects lost their ability to increase rents, and in some areas, saw rents decline, bringing them into closer competition with tax credit projects.

That’s one reason why developers and credit allocation agencies alike are putting much more importance on conducting markets studies as part of the project planning and tax credit allocation process. Many state agencies have required market studies for years, and in 2000, Congress passed legislation mandating that studies be done for every tax credit project as part of the credit allocation process.

A word with the experts

To help take the mystery out of what should be in the newly required reports and determine how the studies are changing, Affordable Housing Finance contacted several top analysts in the industry.

All the states are giving careful consideration to what are the essential ingredients in a report, said Richard Polton, a principal at Value Research Group, a Livingston, N.J., firm that conducts both market analysis and appraisals.

“We think there are three basic things that need to be addressed,” he said. “What’s the depth of the market? What’s the suitability of the proposed development and the site? What impact would the project have on the local market?”

Market studies are increasing in importance as projects face stiff competition for tax credits, and housing officials look to the reports to tell them what projects are the most viable. Analysts agree that studies have evolved from being a fairly generic look at a region into a detailed analysis that examines the condition of a particular real estate market and a development’s feasibility.

It is important to understand that a market analysis is different from an appraisal, said Robert Vogt, vice president of the Danter Co., a Columbus, Ohio, firm that conducts about 900 market studies a year.

An appraisal estimates the value of a property at a certain date while a market study determines the depth and condition of a real estate market and its ability to support a particular development.

Managing the key points

There are several key points in a market study, according to Vogt. “One of the first things is making sure the analyst has identified the correct market area,” he said. “If you miss that, just about everything is invalid.”

If too small of an area is used, the report may miss an important supporting component of the project. If too large of a region is considered, the study may include information from an area irrelevant to the project. For example, a project may be near a river. But, if that river has no crossing, information about the opposite side may have little bearing on the project.

A good field survey will also look at multifamily alternatives in the area, Vogt said. “Where are these people currently living?” he said. “What kind of rents are they paying? What kinds of amenities are in the projects? Are there other tax credit projects that your project may be competing with?”

A third key element in a good market study is looking at the site itself, he said. Analysts will look to see if there are any nearby land uses or other reasons that would make the development unattractive to residents.

Steve Shaw, a partner at Community Research Group in Okemos, Mich., said a good market study strikes a balance. “We don’t just focus on supply or demographics,” he said. “We look at four key areas: economic trends, demographic trends, the supply – what’s out there and what’s in the pipeline – and then demand.”

Although states differ in their requirements, there are some common elements, he said. States want to see an assessment of how the project will affect the immediate neighborhood, a commentary on comparative properties and an estimate of the demand for the project, Shaw explained.

Some states had been asking for market studies before the federal ruling, but for other states the market study is new. Washington implemented the requirement for the first time this year, and state officials took the step of requiring the studies to be done by licensed state appraisers. “I wanted people doing market studies who are familiar with our area,” said Margaret Sevy, director of the tax credit division for the Washington State Housing Finance Commission. She said she was pleased with the initial results.

There are several additional factors that a state allocating agency should consider, according to Polton. First, it is important to realize that what works in one state may not necessarily work in another. “The study should replicate local issues,” he said.

He said state agencies also should develop standards for a market study and establish a formal review process. Agencies also should make information available on existing tax credit projects so analysts can do a better job.

When hiring an analyst, there are two main scenarios. In some cases, a state agency selects from a list of qualified analysts and commissions the study, or the developer hires a qualified analyst who meets state standards. A study can cost between $2,500 and $7,500.

Future trends

One trend that might emerge is more states commissioning the studies or calling for them to be done in-house, said John Prior, president of Prior & Associates, a market analysis firm in Denver. States may choose this route to create more uniformity and consistency in the reports, he said.

When choosing an analyst, the best advice is to use a referral system, said Richard Barnett, president of the National Land Advisory Group, a market analysis firm in Columbus, Ohio. A good place to start is by asking lenders or the state agency for recommendations.

It’s good to get an analyst involved early in the process so he or she can offer advice on what information is needed and what the housing finance agency is looking for, added Polton.

He said a common mistake has been for analysts to assume that all affordable housing developments are the same. “Nothing could be further from the truth,” Polton said, explaining that they vary in size and serve different populations.

Another mistake has been to fill up studies with data that is too regional, added Julia LaVigne, also with Value Research Group. “Not enough attention is paid to the local conditions,” she said.

The experts expect market studies to become even more refined and analytical in the future. The reports are delving deeper into the details that can make or break a project and are no longer just sweeping views of a project and its general region.

Overall unit sizes, bedroom sizes and storage space are all factors that are becoming increasingly important, said the Danter Co.’s Vogt. The details are critical, he said, because projects are more complex with many serving special-needs residents or featuring a market-rate component.

Shaw agreed the researchers are spending more time translating and analyzing information and recognizing trends to help developers plan the best project for an area. For example, in Michigan and the northern areas, seniors housing is starting to have more two-bedroom units, possibly because tenants want extra space. “This has not caught on everywhere, yet,” Shaw said. “But, in the next couple of years we may be seeing a higher proportion of two-bedroom apartments for seniors.” This is information that a market analyst can share with the developer along with other critical data to produce desirable projects, Shaw said.

One change that is coming up is analysts and others will have access to new federal data. Results of the 2000 census are being released, and that will provide a benchmark for future studies, said James Woods, president of Woods Research, Inc., in Columbia, S.C.

In many areas, there is increasing concern about overbuilding. The low-income housing tax credit program has been around for 15 years, and many locales have a tax credit project. Housing officials are concerned about the effect a new project may have on existing affordable housing units, and that’s an issue that market studies need to address, Barnett said.

In the future, Barnett said, technology will play a greater role in the studies. “We have exposure to up-to-date economics and demographics we have not had,” he said. “We’re going to be expected to be as current as possible with that data.”

What should be included in a market study

The Housing Credit Task Force of the National Council of State Housing Agencies recommends that a market study be prepared by a market analyst who is unaffiliated with the developer and has experience with multifamily housing.

According to the task force, a market study should include:

  • A statement of the competence of the market analyst;
  • A description of the proposed site;
  • Demographic analysis of the number of households in the market area that are income eligible and can afford to pay the rent;
  • Geographic definition and analysis of the market area;
  • Analysis of household sizes and types in the market area;
  • A description of comparable developments in the market area;
  • A description of rent levels and vacancy rates of comparable properties;
  • Analysis of available operating expenses and turnover rates of comparable properties in the market area;
  • Projected operating funds and expenses; and
  • Expected market absorption of the proposed rental housing, including a description of the effect on the market area.