1. Seek a “Hurt Me” Analysis
“They say that diamonds are forever. The same can be said about market studies—at least for most affordable housing developments,” says developer R. Lee Harris, president and CEO of Cohen-Esrey, a real estate firm in Overland Park, Kan. The long-term implications of decisions made based upon market study data can be make or break for a project. Thus, extreme care must be taken to procure the most in-depth study possible. “I advocate a ‘hurt me’ market analysis,” Harris says. “I know developers who work hard to get a market study to support their project. Instead I suggest the opposite tack.We want to see all of the ugliness, warts, and imperfections that are revealed by the process of deep-dive-research on a market.”
2. Have a Scope of Work in Mind
Whenever you are considering any market, make sure you know what you are going to need from the market analyst, adds Cash Gill, vice president of Gill Group, a firm that specializes in valuation and market feasibility analysis. By having a scope of work in mind or creating one in the beginning with a market study provider, you can reduce turnaround times, fees, and overall stress on yourself and the provider. Whether you just have a basic area of a certain town and need the analyst to provide location, number of units, unit mix, rents, amenities, target population, and everything else from the ground up or if you just need the analyst to determine if the development will work, it is beneficial to know this from the start.
3. Define the Market Area
One of the first areas where mistakes are often made is in defining the market area for a project. “We want to see this area shrunk to realistic proportions,” Harris says. “It really doesn’t matter whether the community is large or small, people just aren’t going to drive long distances to work, nor are they inclined to relocate within the larger expanse of a market area.” He offers an example: In a rural community with a population of 7,000, it’s generally unrealistic to think that someone in a town of 2,500 just 10 miles away will move to the larger community. Thus, the market area for a new project in that community of 7,000 should be restricted to the city limits for study purposes. Likewise, in a larger market of several hundreds of thousands, the market area should probably be defined to include the immediate neighborhood as well as those corridors to major employers where residents might work. But expecting that a resident will drive more than three to five miles is probably too aggressive of an assumption, according to Harris.
4. Understand the Supply Analysis
Often a market study will focus on substandard housing in the area. And developers may believe that this presents an opportunity to fill their new project, says Harris. The problem comes in the rent differential that exists between a ramshackle single-family house and a new LIHTC product. If a substandard single-family home is being rented for $250 per month and LIHTC rent on a new project is $495, it’s going to be tough to convince someone living on a fixed income that it’s worth paying another $245 for better quality housing. “The advice here is to look very carefully at this differential, and if it’s more than $75 to $100, don’t count on filling a property with renters from this housing stock,” Harris says.
5. Be Prepared for Changes
In the states with low-income housing tax credit (LIHTC) programs that allow a developer to hire their own analyst, the developer can often work with the analyst to make key changes that would maximize a development’s demand and make a LIHTC application more competitive. “If reducing rents $5 to $10 per unit, adjusting the unit mix, or changing the amenities will put the development in a stronger position, analysts will usually work with you to determine what items you can actually change versus those set it stone. Doing this will allow for a development it is maximally competitive and still feasible,” says Gill.
Read about 5 Ways to Achieve a Smooth Deal Closing, 5 Ways to Overcome NIMBYism, and 5 Ways to Create a Better Community Room.
