Market Studies Can Ensure Marketability and Project Success 

9 min read

Requirements and Robust Analysis

Market feasibility studies are not just a required step in federal and state financing programs, but an invaluable tool to ensure that affordable housing projects are marketable. Making the most of them can not only get that stamp of approval from regulators and investors but will ensure that the projects, once completed, fill up and stay full.  

While market studies help determine whether a project concept is marketable, they can also be used to help decide whether to allocate tax credits to a project, understand potential risks to a proposed project, determine impacts on a market, and how a project fits into the community’s housing needs or used to gain community support. 

“In short, market studies are necessary to allow the interested entities some level of comfort in supporting the financing, and ultimately the development, of a project,” Patrick Bowen, president of Ohio-based real estate market research firm Bowen National Research, says. The firm conducts work in all 50 states, the U.S. Virgin Islands, Puerto Rico and Guam, completing more than 500 studies a year.  

A well-done market study can ensure the success of a project. While virtually all market studies have elements that are standard, such as demographics, economics and housing inventory, many market studies have unique elements. The variations can depend on market study providers and market study recipients. 

In fact, organizations that are developing or financing a residential project can often request or require that certain information be provided in a study that they believe would help them understand project viability or vulnerability, Bowen says. Some examples of elements examined include existing competition or projects in the development pipeline or neighborhood crime, or local industry. If there’s concern these could impact the marketability of the subject project, users should request to have a robust analysis conducted on these areas of concern.  

“I think one of the most important things users of market studies should understand is that they have the opportunity with most market analysts to ask for specific work elements outside of standard work elements or those that may be required by a government entity,” Bowen says.   

These elements go beyond population studies or examining how many other developments are in the pipeline. It can also include elements, such as how many bedrooms are necessary to make a project feasible, and whether units should come with dishwashers, washers and dryers or other design elements. 

Preliminary Work 
Most analysts provide various levels of preliminary work, and developers can request preliminary work before commissioning a full market feasibility study, Bowen says. A preliminary assessment of the competing supply gives the developer a better understanding of any weaknesses in the market, such as vacancy issues or a large inventory of directly competing products in the development pipeline. 

“I have seen developers spend money on tax credit applications that get rejected based on certain market study metrics that exceed state agency thresholds, which could have been avoided with a good preliminary analysis,” Bowen says.   

Government Guidelines 
Jerri Bain, director of real estate lending at the Indiana Housing and Community Development Authority, looks at submitted market reports to determine things like if there really is a market for the proposed project, will the property lease out in a reasonable amount of time, will it be a success and is there enough income-eligible population in the area not only to fill it initially but keep it full.  

Bain also looks at where markets are getting overbuilt, if the population is increasing, and if the capture rate—the percentage of the income-eligible population it will take to fill a unit—is too high.  

I also look at the primary market area that the analysts pick,” Bain says. “Sometimes they seem way too large to me.” 

If Bain receives multiple applications in the same market and feels there isn’t a market for all of those projects, they use a third-party market analyst to get feedback.  

It’s important that developers see market reports as important tools for their project and not just a check-the-box item to submit to the state, Bain says. 

“We wish developers would read the market studies,” Bain says. “Sometimes the numbers are way out of whack.” 

Both Bain and Bowen stress the importance of looking at a market study and using recommendations to adjust the proposed project before submitting it to ensure its success. 

While market studies are required by most federal and state programs, there are differences between what the federal government would expect in a study versus the various state housing finance agencies around the country, Bowen says.   

Many states have their own unique requirements or methodologies. Even within the private sector, profit and nonprofit development groups and lenders often have their own market study standards that analysts must follow.   

Additionally, while the Department of Housing and Urban Development and state agencies have market study requirements, sharing a common scope of work elements, they all also have some requirements that are unique to them.  

  “While it is reasonable for a consumer to assume the market study provider understands and implements the corresponding market study requirements, I would suggest that users of market studies read the market study guidelines of the organization for which the study will be submitted,” Bowen says.    

Many states have lists of approved market analysts, Bowen says. Someone needing a market study for a specific state should check with that entity for a list of approved analysts.    

For example, Indiana has a list of approved market study providers broken down into three categories: (1) regular Low Income Housing Tax Credit; (2) permanent supportive housing; and (3) affordable assisted living, Bain says. There are additional market study requirements for the last two categories.   

“We tightened our market study requirements for the affordable assisted living facilities based on feedback from the developers and national operators, as well as our experience with this type of facility,” Bain says. “For permanent supportive housing, we require information from the latest point-in-time count.” 

In some states, like Alaska and North Carolina, housing finance authorities commission their own market studies for tax credit applications. State finance agencies or market analysts can advise on the market study process, including who is responsible for commissioning a market study. 

The utility of market studies doesn’t end with government program offices. Once a developer receives an award from the state, a syndicator will contact that developer to discuss the project and decide if it’s something they want to buy and sell to investors. That process includes, not only, going through the original market study but, oftentimes, most syndicators will order their own market study, says Bud Clarke, director of Investment Valuation at Boston Financial. Clarke and his group prepare and review market analyses on behalf of the syndicator.  

Clarke says that syndicators and investors want their own market studies – typically looking at markets under a similar yet more fiduciary lens than developers. Boston Financial has its own group of internal market analysts and has been doing market studies for the past 30 years.  

“In repeat developer and market instances, we use our market studies to evaluate markets and proposals relative to developers’ previous performance in markets,” Clarke says. “We want our own opinions based on the performance of our portfolios and accumulated experiences, and we want everything to be transparent to the data.” 

Not all markets are “slam dunks” and every market will be different with different issues. There should be mitigation strategies to issues spelled out in the market study, Clarke says. A market study should explain why a project is still feasible. For example, if a market has declining employment and population, and new demand is projected to be low. A project could still be feasible if the housing stock is in poor condition, and step-up demand is projected at reasonable rents, for both new construction and rehab. That should be spelled out in a market study. 

“A market study is like a quilt,” Clarke says. “You want to be able to run that thread between all the data and all the conclusions and know that it all makes sense and that everything holds together.” 

It’s the quantity and the quality of the data that makes a good market study, Clarke says. There needs to be enough data and analysis in a market study report for all users to be able to understand the market’s story and to see that the conclusions are supported by the data.  

“If I come across a market with issues, or a project that appears to be ill-conceived,” Clarke says, “I want to know what suggestions and conclusions are being proposed to mitigate the risks. At the right rents, expenses and various other underwriting inputs, most markets can be underwritten, assuming there are not any insurmountable structural issues that cannot be mitigated. That’s what you want to read in the market study. You want a good analysis that results in a credible story.”  

Sidebar: COVID Impacts
Since COVID-19 hit in early 2020, there has been a greater emphasis on market study users to understand rent and income growth of an area, and a need for a deeper understanding of local employment sectors that may be more vulnerable to an economic downturn says Patrick Bowen, president of Ohio-based real estate market research firm Bowen National Research.  

“This is especially true given the changes of where people work and live over the past few years,” Bowen says.  

There are also questions about how the Department of Housing and Urban Development will handle some of the challenges they’re facing due to the hiccup in the data that was created because of COVID, says Bud Clarke, director of Investment Valuation at Boston Financial. HUD collects income data in its American Community Survey and had to skip a year because of the pandemic. 

“There’s a working group with about ten of us,” Clarke says. “We’re working very closely with HUD and sharing our opinions.” 

The impact of the pandemic will take some time to unravel, including the effects of eviction moratoriums and when they are lifted.  

Nushin Huq is a Houston-based freelance journalist. She has worked as a reporter covering energy markets and regulation, business and government – both federal and state.