MARKET STUDY
A market study examines the housing demand for your development, as well as how your development relates to the overall real-estate environment. A market study demonstrates the “market” for your development: Will there be consumers to live in it and will homes be offered at prices they can afford to pay? Many developers hire a third-party firm to complete a market analysis. In fact, it is a requirement of the Qualified Allocation Plan in Nevada to use a non-related third-party for your market study. While you will likely hire a consultant to undertake this study, it will be helpful to familiarize yourself with the key components of a market study and how it can strengthen your project. A market study also serves as a risk management tool for your development. It will help you understand project feasibility and highlight areas to refine your project concept for better alignment with local needs and market conditions.
UPFRONT CONSIDERATIONS
Market studies include common pieces of information and analysis. However, as you undertake your market study, there are two key considerations to account for upfront:
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Alignment with funder requirements – Most public and private funding sources require a market study and outline specific requirements for what to include in it. Prior to undertaking your market study, it is important to understand these requirements. For example, Market Studies submitted to the Nevada Housing Division must comply with Appendix A, Market Study Guide in the Qualified Allocation Plan (QAP).
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Alignment with your housing development model – A market study should be tailored to your housing development model. For instance, subsidized affordable housing may require more detailed analysis to ensure there will be enough households with incomes to qualify to live there and that your development model can sustain enough cash flow from rents or supplemental sources. Should these change, throughout the design process, you will need to adjust your market study. As per the Nevada Housing Division QAP, “The submitted application must match the Market Study regarding income, targeting, unit mix, unit sizes and rents. The application must provide an acceptable defense for any deviations in other matters.”
What is the difference between a market study & housing needs assessment?
A housing needs assessment is a broader and more comprehensive assessment of the housing needs and conditions in the community. Unlike a market study, however, a housing needs assessment is not focused on assessing the feasibility of a specific development or type of housing. While a housing needs assessment can inform multiple projects, you will need to conduct a market study for each new project you undertake. More on the Housing Needs Assessment can be found in Phase 1 Visioning.
ELEMENTS OF A MARKET STUDY
| Project description | This description should provide information about the building (total buildings, unit mix, utilities); intended residents; and project-specific information (construction dates, architectural plans). For development financed using LIHTC, this description should also include unit mix (i.e., bedroom size) by income; minimum and maximum income limits of intended occupants; and any project-based rental subsidies, including the number of units covered by the subsidy. |
| Location | Location will describe characteristics of the project’s site, including its size, shape, and topography; land use (when applicable); locational factors, such as overall accessibility to the site and nearby services and amenities; and any adverse conditions affecting the site. In total, this component aims to assess overall suitability for the project on the proposed site. Supporting information to describe the project’s location may include photographs or maps of the site. |
| Market area | The market area will be the primary geography used for market analysis (often referred to as the primary market area). This part of your market study will describe the primary market area for your project and surrounding jurisdictions for context as a secondary market area (such as city, county, or metropolitan area). A common geographic definition to use for a market area is the census tract (the U.S. census bureau’s approximation of a neighborhood). However, the scale and nature of the area where you plan to build will influence how to define your primary market area. For instance, on more rural lands, larger geographic units may be used. |
| Employment and economy | The employment and economy portion of your market study will examine overall economic health of the primary market area. Common measures include total jobs in the market area; labor force participation; wages by occupation; major employers; and recent or planned expansion of employment opportunities. In some communities, high unemployment and rates of poverty help to illustrate to potential funders the dire needs in your community. |
| Demographics | Demographics will describe the population in your primary market area (and any secondary market areas). This portion of your market study will highlight who lives in the market area in terms of household size and composition; age; tenure; and income and any historical population trends. This analysis can also more closely examine population characteristics of your proposed project. For development financed using LIHTC, this description should also include a more detailed breakdown of incomes among low-income households and data about housing problems, such as cost-burdened households; inadequate facilities; and overcrowding. |
| Competitive environment | This part of your market study will analyze the existing rental market in your primary market area. This analysis typically includes an inventory of existing rental housing stock; building activity, including new rental developments; and a comparison of your proposed project to other similar rental development (often referred to as comparable or “comps”). It also will examine rents and vacancy and absorption rates. For development financed using LIHTC, your market study should provide a list of existing affordable housing developments in the primary market area and more detailed information about rents (i.e., how your rent structure compares to existing, comparable subsidized properties) and vacancy (i.e., rates by household income and among units with and without project-based subsidies). |
| Demand analysis | A demand analysis establishes that there is demand for your development in the primary market area. This analysis would incorporate overall demand; number of income-qualified residents the development would serve; and penetration rate, which measures income-qualified residents relative to other competitive units (existing or proposed). For development financed using LIHTC, you will need a more detailed analysis of household incomes and incomes by bedroom size. Additionally, some state agencies require demand estimates that account for specific measures or methods, so consult your state’s QAP or agency staff to understand any specific needs for this part of your study. |
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Local perspectives on rental housing |
This component gathers and summarizes local stakeholders (local planning staff, housing staff, local leaders, representatives from the group or groups who will occupy your project) views of the local housing market and the role of your proposed project relative to demand and need for homes. In addition to helping you understand the market context, this part of your market study can also help you understand overall local support and any potential resources for your project. For development financed using LIHTC, you may want to do additional engagement of housing organizations and staff to understand impact of your project on the overall subsidized housing supply (including waitlists for it). |
Data Sources for Market Study
Federal agencies maintain data that can assist with the creation of a market study.
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US Census/American Community Survey - provides a range of annual data based on household surveys.
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Ribbon Demographics - fee-for-service housing market analysis and data services.
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ESRI - a provider of both software and data. ESRI has multiple platforms, including Community and Business Analyst products with built-in market analysis tools. There is a cost, but they provide a discount to nonprofits.
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Corelogic - fee-for-service company that provides detailed market data and comparable sites based on real estate transaction data and landlord surveys.
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CoStar - fee-for-service company that provides detailed market data and comparable sites based on real estate transaction data and landlord surveys.
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USDA - provides its own list of publicly available data sources that may be helpful in rural areas.
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Social Explorer - a fee-for-service online platform providing maps and data related to a range of topics.
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PolicyMap - a free online mapping platform that allows you to explore a range of built-in data and create your own maps.
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Opportunity 360 - a free service from Enterprise Community Partners that allows you to generate reports on neighborhood opportunities for any census tract in the country.
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National Housing Preservation Database - a free dataset displaying the locations and subsidy types for all federally-assisted housing developments across the country.
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Zillow Research - publishes free local data and rents, home prices and other factors.
ASSESSING FINANCIAL FEASIBILITY
Determining financial feasibility will help you understand the viability of your project. For a project to be considered viable, the cost of building and operating it must be less than or equal to the income and other funding you anticipate the project to generate or receive. Similar to your assessment of your internal capacity, an initial analysis of financial feasibility will help you determine what you have available and what gaps you need to fill.
To get a baseline understanding of what gaps exist, you may only need to complete “back of the envelope” (BOE) calculations. These calculations can inform the development model that you select as well as the funding sources you decide to pursue. These estimated calculations are not perfect, but they provide quick insight into anticipated cash flow and needs. The simple way to complete a BOE calculation is to estimate expected project income relative to estimated project costs. There are a few online calculators that can help you with this process:
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Grounded Solutions calculator captures more varied building types.
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Urban Institute calculator Limited to rental buildings that are either 50 units or 100 units.
Once you have done some basic financial feasibility, you will want to model the project in a pro-forma. More info on building a pro-forma is in the funding phase.