How To Structure And Evaluate Market Studies for Supportive Housing Projects Disclaimer: Corporation for Supportive Housing (CSH) is providing this information to assist interested organizations to develop a general understanding of the supportive housing development process. CSH is not rendering legal, accounting or other projectspecific advice. For expert assistance, please contact a qualified professional. What is a Market Study? In simple terms, a market study for a housing development is a study that examines the characteristics of present and anticipated supply and demand within certain geographical housing sub-sectors. These findings serve as the basis for projecting or estimating achievable unit pricing (i.e., rent levels) and absorption (the length of time it will take to lease up) of a project given specific assumptions. It differs from an appraisal, which is an opinion on the overall value of a property. While most market studies conform to an analysis of factors of housing supply and demand, they nevertheless come in many different forms. This point is very important for anyone involved in commissioning such a study. (Experienced consultants are usually hired to conduct market studies). Unlike appraisals, there is no tested legal standard for market studies, nor is there any regulation of the industry. For this reason, it is critical to communicate clearly and concisely what is required of a consultant hired to conduct a market study in a scope of services and carefully evaluate the credentials of the group or person undertaking the analysis (more on both of these points later). Why Conduct a Market Study? Market studies are recommended where a supportive housing project includes an unsubsidized or market housing component or have limited-term subsidies (e.g., 5-year Section 8). That is, any projects that rely on the housing market for initial rent-up or upon expiration of subsidies. Studies are also suggested in communities where the housing market is believed to be weak, and might pose problems for rent-up (or absorption. ) While there is often considered to be a presumptive demand for low-income housing, the housing mix, location, competition and limited incomes may dampen the demand for new projects. So it becomes important to analyze the housing market demand as part of the overall project underwriting in certain cases. In particular, projects utilizing Low-income Housing Tax Credits will be subject to market analysis, since the underwriting assumes critical timeframes for rent-up. Moreover, tax credit reviews will consider a worst case scenario where rental subsidies are not renewed, and rents need to be supported by the market. Additionally, the state s Qualified Allocation Plan (QAP) may require a market study, though this can sometimes be in the form of a generic market study for the entire city or county. A good market study should go beyond evaluating present and projected market support. It should also serve to assist in creating a more marketable development. Note: This document is included within the Development and Finance section of CSH s Toolkit for Developing and Operating Supportive Housing, which is available at www.csh.org/toolkit2. How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 1
Market Issues of Importance to Supportive Housing Projects The following is a discussion of market issues that are both common to many proposed housing developments, as well as unique in a number of important areas to supportive housing projects. 1. Target Markets: A fundamental requirement of any market evaluation of a supportive housing project is identifying who your target market is. Supportive housing projects serve the homeless or other similarly defined special needs populations, and in most cases, this is a population that has a fairly consistent profile in all markets. It gets slightly more complex, however, when designing a program for a mixed population base involving a market that is subject to housing choice (e.g. mixing working poor with people who are homeless). Yet, depending on a number of factors ranging from location, configuration of your project, specific housing needs unmet in the submarket, and even the mission of the sponsor of the development, this target market definition could change. As part of the profile of the target population, make sure to define clearly to the market study consultant the level and duration of any rental subsidy. One note of warning: While there is a strong temptation to find as many different target markets for your project as possible to enhance marketability, it is best to limit yourself to narrow definitions of the populations being served. 2. Source Market Definition: The next step is to quantify the demand or depth of the target market. This means determining the geographical boundaries for the source market. Market analysts depend on a number of factors to establish the Source Market Area (SMA), which is the geographic area from which the targeted tenants are expected to originate. These factors include access to site, locational and neighborhood characteristics, population being served, and previous experience with such projects. In some cases there could be more than one SMA depending on the market being served. In whatever manner the SMA is defined in a market study, ask that it be well articulated in the body of the report. Most of the flaws associated with housing market studies can be attributed to this one area. In most cases, the SMA is simply over inflated for the project being conceived. Be particularly cautious of any market study where the entire city serves as the SMA. This is particularly relevant with supportive housing projects involving working poor populations or other defined sub-markets that may not benefit presently or in the near future from project-based rental subsidy. In such cases, the logical source market boundaries may not be any larger than a single census tract. 3. Income Bandwidths: It is critical to assess the income thresholds or bandwidths of affordability for unsubsidized units. Quite simply, this is what your target population must earn to cover the operating and maintenance costs of the project. In most cases, an assumption of 30% of gross household income is used to establish the income threshold. Thus, if you have assigned a rent of $350 a month inclusive of utilities to a one bedroom unit in your program, household income must be $14,00 a year to cover rent ($350 x 12 months /.30 = $14,000). Therefore, your market for this unit is that part of the target market which earns above $14,000 and below income ceilings imposed by tax credits or other programs. In the case of supportive housing projects, unsubsidized rents are usually benchmarked at 30% of household income, which may be from entitlements or employment How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 2
sources. Given the varying levels of entitlements and median incomes nationally, the income bandwidth may be quite different from region to region. 4. Demographic/Economic Trends: Unless you have requested a limited market study, a market study should include a comprehensive evaluation of the demographic and economic trends affecting the local housing market associated with a proposed project. An evaluation of these trends is an essential part of the demand analysis of any housing study. In general, you would expect this component to cover and analyze trends and current estimates of population, household, age characteristics, income characteristics (including local trends on General Assistance, SSI and SSDI, if appropriate), economic profile, commuting patterns, employment trends, housing characteristics and building permit trends. It is important that the discussion of these trends be undertaken within the context of your specific project. Note also that this analysis needs to correspond to the defined Source Market Area. Moreover, be on the alert for boilerplate analysis, which is not uncommon when it comes to the demographic/economic analysis in market studies. A responsible analyst should interpret this research within the context of your specific project. 5. Analysis of Comparable Housing Products: Although an analysis of comparable housing products is a critical function of housing market studies, this data must be analyzed in the context of the rest of the analysis. The evaluation of comparables can be one of the most vexing issues in evaluating a market study. This is because most markets have few comparables for supportive housing, particularly those involving mixed populations. It is important to closely examine how comparables are used in the analysis. This is particularly the case if the market analysis is relying heavily on the performance of a limited number of projects. While selection of comparables is not a science, the report should adequately explain their relevance to the proposed development. If it is not clear, you should obtain written clarification (which can be made part of the report). You can help avoid problems with comparables by fully briefing the market consultant on the programmatic elements of the proposed supportive housing project. Often in fact, the Sponsor can be helpful in identifying good comparables in the area, due to the specialized knowledge of this type of housing. One point that should be emphasized is that rarely will standard public housing qualify as a comparable, although it is important to know the supply of such housing in the marketplace. Even in supportive housing developments involving 100% project-based subsidies, the appropriate comparables are generally rental projects with similar unit type and target served charging a base rent that is not tied to income. Finally, be prepared to challenge any project used in the conclusions of the market study that appears inappropriate or irrelevant or to identify others that were not included (either with or without explanation). 6. Objectives of Competitive Analysis: The major objective of the competitive analysis is to characterize and quantify the supply of competitive housing in the defined market. How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 3
Specifically, the study of the local housing market for supportive housing projects should be undertaken with the following objectives in mind: a) Define the geographic limits of the competitive market area. It may be the same as the Source Market Area, but not always. b) Determine the appropriate housing submarket(s) that will be the focus of the analysis; SRO housing, transient housing, rental housing, subsidized housing, mixedtenancy housing. c) Quantify available level of supply in each subsector analyzed within the CMA. d) Analyze projects in terms of size, building characteristics, age, unit mix and configuration, rental price structure, amenities and location. e) Analyze rental rate trends by unit and product type. f) Analyze recent trends in vacancy rates, rental rate escalation and lease-up characteristics in comparable projects. g) Identify any proposals (either approved, but not built or in planning stage)for new housing in the CMA that might impact on the marketability of proposed supportive housing development. 7. Locational, Neighborhood & Local Politics Considerations: The net effect of this analysis is to provide a better understanding of the proposed supportive housing project as compared to other housing alternatives available to the target market(s) in the local marketplace. Moreover, a good housing study will attempt to frame the proposed development within the larger context of the overall rental market in order to better evaluate potential market performance for the proposal. For example, if much of the rental housing in the CMA suffers from deferred maintenance and antiquated building systems, new construction will probably be well-received by the market. A locational analysis of the proposed supportive housing project is an important component of a market study, as location can have an enormous impact on the overall marketability of a project. Factors that can affect marketability include: Security, access to public transportation, proximity and convenience to services, adjacent land uses and projected improvements for the area. In some cases, it might be appropriate for a market study to evaluate the local or neighborhood climate for affordable housing. While understandably this would be a qualitative assessment based on interviews with selected representatives of the community, it provides a further understanding of not only the potential for future affordable housing supply, but also the level of resistance or support one could expect for the proposed development. Design considerations can play a pivotal role in determining marketability of a project, and most market studies fall short in considering this issue. Unfortunately, this could lead to an improper assessment of the market viability of a proposed supportive housing project. 8. Design & Amenity Considerations: Design considerations which can play a role in marketability include: Recreational areas, outside spaces, porches/patios, parking, video security systems, How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 4
front desk security coverage, and unit amenities that include air conditioning, quality appliances, pre-installed cable TV, as well as overall unit size. 9. Operating Cost Considerations: Although not directly affecting marketability, the operating costs of a project can predict its success or failure and can differ dramatically from location to location. It is important, therefore, to have your market analyst evaluate standard expense ratios for specific comparable projects in the market area (on $/unit basis) in order to confirm operating assumptions for the proposed development. Expect some resistance in this request, since this information is usually not readily available. Important cost considerations includes taxes, insurance, utilities and maintenance costs. 10. Market Study Conclusions: At a minimum, the conclusions of a market study must project achievable or supportable rental rates for the proposed development and expected absorption under alternative development scenarios. In some cases, there is little explanation of this opinion and how it relates to the findings of the study. When this happens, it is best to ask for a more detailed explanation in writing so that it can be included as an amendment to the report. Market Study Formats The following represent the various forms of a market study and when each type of format is appropriate: Letter of Opinion - Presented in letter format with or without supporting documentation in attached exhibits. In most cases, primary research is light, and overall analysis is selective. This format has the advantage of being the least expensive and represents a good option when early market verification of a development concept or design is desired. This format is not acceptable as a full market feasibility study for underwriting purposes. Marketability Study - This format can come under many different names including modified market study, preliminary market study, limited market study and of course, marketability study. Documentation is more complete and analysis more comprehensive than the letter of opinion format, but typically the scope of service is confined to analysis of the characteristics of housing supply. Such studies are often used to test development concepts or define appropriate target markets; in some cases a preliminary assessment of achievable rental rates and potential absorption characteristics is offered. Normally, this format is not acceptable as a full market feasibility study for underwriting purposes due to incomplete data on market demand, although occasionally this format has been used by public institutions providing affordable housing financing. This may be the format that is acceptable to State agencies administering Lowincome Housing Tax Credits, where a market study is required. Market Feasibility Study - The most complete form of the market study is the Market Feasibility Study, which is presented in report form and fully documented. This format covers the principle areas of all market studies: an analysis of potential demand, an analysis of competitive product, a How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 5
locational and neighborhood analysis and finally an opinion on projected rents and absorption characteristics. More complete market studies will also render an opinion and/or provide recommendations on design and program elements that will best enhance the marketability of the proposed project given specific development constraints. How to Evaluate Results of a Market Study In order to properly evaluate a market study for a supportive housing project, you need to read the entire report, not just the executive summary or conclusions. As you read the study, keep the following questions in mind. Did the consultant properly understand the assignment? In other words, did he/she properly identify and analyze the target market(s) for your development and evaluate relevant comparables. This goes back to the earlier warning to be extra diligent in communicating to your consultant the type of development being proposed and the market you hope to serve. Is the Market Study fully documented? A proper market study will have all the data used to support conclusions and opinion in the report in the form of charts or exhibits. This is particularly important for any primary research (field or phone research undertaken by the analyst). Is the research comprehensive and detailed enough? Occasionally you will find that the research is incomplete or weak in certain sections, which could lead to improper assessment of your development. Possibly an obvious comparable rental complex was not evaluated or data on the target market was incomplete. In such cases, be firm about requesting additional information or data that should serve as an amendment to the report. Also be on the alert for analysis doing double duty for both a market study and appraisal. While there is nothing inherently wrong with this type of research, typically the market data required for an appraisal is less developed than what you find in a full market study. Are the assumptions properly defined? Very few opinions on market value and absorption are given without assumptions. Read them carefully and be sure that they are reasonable and consistent with the type of development being planned. Do the conclusions/opinion follow logically from the research? One reason to read the entire report is to be able to answer this question. There should be a fairly logical progression of analysis that ultimately leads to the conclusion on projected market value and absorption characteristics. If not, ask the consultant to clarify the discrepancy. Market Study Punchlist Although the requirements of your market study may differ from project to project, use the following punchlist as a guide to determine if all the appropriate questions have been answered by the report. Does the Market Study answer the following questions: How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 6
What is the expected source area of expected demand? If more than one target market, does the same source area serve both markets? What is the competitive market area where your project would compete (this is often different from the source market area)? Who is (are) the target market(s)? What is the depth of market demand for your project as defined by target market(s)? What are the income characteristics and thresholds associated with your target market(s)? What are the market characteristics and location of potential competition? What are the future prospects for production of housing in the Subject Property market area that could potentially compete or impact marketability of your project? What is the impact of the subject location (both neighborhood and community) and proposed program and design on overall marketability? What are the cost and expense factors that impact operation of facilities in the subject market area? What is the achievable market value for the project and how does this relate to projected rents for the development? What is projected lease-up performance of the Subject Property within alternative development scenarios? Final Thoughts If possible, conduct the market study early in the development process when changes to the program, if necessary, can be accomplished more easily. Carefully scrutinize the qualifications of consultant undertaking the market study. Ask to see a sample report and check references, especially those of other non-profit sponsors. Try to work with a consultant who has knowledge or experience in marketing. A good market study will include recommendations on how to enhance lease-up of Subject Property. How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 7
Market Study Definitions Source Market Area (SMA) - Market Analysts will use a range of descriptions to describe this important geographical area including Primary Market Area, Market Source Area, or even Subject Property Market Area. Don t get confused with the vernacular. The important point is that all market studies will define the most logical geographical area where the majority of the tenant prospects are expected to originate from. Depending on target markets and program offered, a project could have more than one SMA. Competitive Market Area (CMA) - Like the SMA, the CMA will be referred to in reports by a number of different names. In basic terms, the CMA is that geographic area where the analyst expects most prospects for the Subject Property to consider housing alternatives. Depth of Market - An analysis to determine the potential number of households within the SMA that comply with the definition of a specific target market for a project. Normally, an assessment is made by the analyst as to what percentage of the prospects for the Subject Property could be expected from this SMA (generally 75% to 95%). Depth of Market is determined by the number of households in this pool relative to the number units being proposed by the supportive housing project. Marketability - This is a term used both qualitatively and quantitatively. As a study format, this is a market analysis approach that examines the market appeal of a given project to test development proposals or project appropriate target markets. In simple terms, marketability refers to the ability of a project to reach its intended market. Market Share - The portion of a source area s potential, e.g. the number of households within a specified target market, that can be attributed to a proposed facility; based on known market strength and property s position relative to comparable, competitive facilities. Market Penetration Analysis - A variation of the depth of market analysis which represents the share of the eligible target market that the Subject Property must capture to achieve full occupancy, assuming that all existing and planned competing facilities are operating at capacity. For most underwriting purposes, a market penetration rate of over 5% represents an aggressive development scenario. Thus, if you have 50 units and your eligible target market is 500 households, market penetration rate would equate to 10% (50 500). In this scenario, lowering the rent would be advisable in order to expand target market base. How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 8
APPENDIX: SAMPLE SCOPE OF SERVICES FOR A MARKET STUDY FOR A SUPPORTIVE HOUSING PROJECT MARKET FEASIBILITY STUDY Scope: CONSULTANT shall conduct an analysis of the conceptual market feasibility of the PROJECT under specified development conditions. Upon completion of this analysis, CONSULTANT shall present the CLIENT with its findings and conclusions in the form of a MARKET FEASIBILITY STUDY ("STUDY"). The purpose of the report shall be: 1. To evaluate the market potential for the PROJECT as it relates to proposed target market(s). 2. To assess impact of Subject Property location and design program on future market viability of the PROJECT. 3. To evaluate the depth of market and absorption potential for the PROJECT for alternative target markets. 4. To project achievable price points for specific prototype units under alternative development scenarios. Format: Upon completion of this analysis, CONSULTANT shall present the CLIENT with a fully documented, written report of its findings and recommendations (hereinafter known as the "MARKET FEASIBILITY STUDY "). The MARKET FEASIBILITY STUDY shall be prepared in a form generally accepted for financial underwriting purposes. The MARKET FEASIBILITY STUDY shall be addressed to market conditions and development issues which pertain to the marketability of the PROJECT. PART ONE: MARKET RESEARCH AND ANALYSIS CONSULTANT shall conduct a detailed analysis of factors affecting the marketability of the PROJECT, to include the following: 1. Delineation of the probable geographic Source Market Area of the PROJECT in terms of residential unit demand for both actual proposed and alternative target markets. 2. Delineation of the probable geographic Competitive Market Area of the PROJECT in terms of residential unit supply, inclusive of transient housing. 3. Detailed analysis of demographic and socio-economic trends of the SMA to include: a. Employment and Labor force b. Households and Population How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 9
c. Income Trends, Rental Purchase Capacity & Distribution Trends d. Age and Gender Trends e. Commutation Trends f. Household Characteristics & Housing Production Trends 4. Analysis of general housing conditions in the Competitive Market Area for low to moderate income households. 5. Identification of pertinent existing and proposed rental and transient residential developments in the Competitive Market Area by location, price, occupancy, age, and structural characteristics. 6. Analysis of the current occupancy levels (or demand in the case of homeless shelters) among pertinent rental and transient residential developments in the Competitive Market Area by location and by location, price, age occupancy and structural characteristics. 7. Analysis of unit production and lease-up among pertinent rental residential developments in the Competitive Market Area by location and structural characteristics. 8. Analysis of rental market values and rental rate escalation trends among pertinent rental residential developments in the Competitive Market Area by location, structural characteristic and price function. 9. Survey of alternative forms of multi-family housing in the CMA including publicly-assisted housing, congregate housing, assisted care facilities, transitional housing by location, structural characteristics and price function. 10. Analysis of the potential market from holders of tenant-based Section 8 certificates as it might relate to alternative development scenarios. 11. Analysis of operating expense ratios for selected rental developments within the Competitive Market Area. 12. Detailed analysis of existing rental developments or affordable housing developments of relevance to the Subject Property found in the Competitive Market Area with particular attention to the following: a. Target Market Served b. Vacancy Trends c. Price Characteristics d. Product Characteristics How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 10
e. Funding Sources f. Local Market Environment PART TWO: SUBJECT PROPERTY ANALYSIS CONSULTANT shall analyze the PROJECT property as a location for a residential development under alternative development scenarios, with particular attention on the following: 1. Neighborhood characteristics 2. Local community resources 3. Transportation options 4. Local economic environment 5. Proposed Use PART THREE: CONCLUSIONS Upon completion of the above, CONSULTANT shall provide its professional opinion with respect to the following: 1. Development concept and market strategy as it relates to current proposal and alternative development scenarios. 2. Identification of target markets under alternative development scenarios. 3. Evaluation of market depth by product type and price for alternative target markets within the Primary Market Area over the next five years. 4. Anticipated market penetration and capture potential for specific target markets. 5. Projection of performance potential under alternative development scenarios. How to Structure and Evaluate Market Studies for Supportive Housing Projects March 2006 11