Reviewing the Project’s Marketability
Before investing in an affordable rental housing project, the PJ should secure and/or review a market study of the specific project under consideration. The market study describes the demand for the housing (including an assessment of the proposed rent structure) and competition for the proposed housing, the capture rate needed to maintain an occupied property, and the absorption rate expected for the project. A market study is required of projects that are funded with HOME FY 2012 funds, or later.
The PJ must review the market study carefully to evaluate the validity of the developer’s assumptions about the marketability of the project. Exhibit 2-2 summarizes the key elements of the market study. This evaluation is extremely important because if the project is unable to attract tenants to keep the building occupied, it will not remain financially viable and will be unable to provide affordable housing to the community. Failure of the project to provide affordable housing throughout the affordability period may result in HUD requiring the PJ to repay HOME funds.
For HOME-LIHTC projects, market studies are required as part of the owner’s tax credit application. The state typically provides detailed instructions for preparing the market study in the QAP. This sometimes includes specific qualifications for those that prepare the market study. The PJ should become familiar with the state’s requirements. If the state’s requirements are satisfactory, the PJ may want to adopt them or it might impose additional requirements of its own. If the state’s market study is sufficiently detailed to meet the PJ’s criteria, the PJ may elect to simply request a copy and conduct its own review of that study. If the state’s market study criteria are not as stringent as those adopted by the PJ, the PJ may wish to request a more detailed study.
Demand for the Housing
- How many potential renter households (target market) might want to live in the project?
- What unit features/amenities are desired by the target market?
- How much is the target market willing to pay?
- What existing rental properties will the target market consider?
- Are there other competing properties that are under construction, or proposed, that the target market would consider?
- What features (such as, unit size, number of bathrooms, appliances) and amenities (such as, parking, swimming pool, or laundry facilities) do the competing properties have?
Exhibit 2-2: Key Elements of the Market Study
- What share of renter households seeking housing of this type, in this location, and at this price range, need to be “captured” (i.e., leased) by the proposed property in order for it to succeed? (This capture rate is usually stated as a percentage.)
- Is the capture rate low enough to suggest that the property is likely to succeed and lease up quickly?
The PJ needs to understand its neighborhoods and housing markets to understand the capture rate. Generally, the capture rate may need to be higher for populations with a greater number of options than it would need to be for those who might have fewer options. For example, a property would need a low capture rate for a deeply subsidized apartment, whereas it might need a higher capture rate for a unit that will be rented at or near market.
- What is the number of units per week or month that the property can be expected to “absorb” (i.e., lease) once the property begins accepting residents? For example, if the property is 60 units, and the expected absorption rate is ten units per month, it should take six months for the property to lease up.
To determine if the project’s absorption rate is sufficient, the PJ should compare the absorption rate with how quickly the property must lease up in order to be financially successful. To continue the example, if the property is 60 units, and in order to succeed, the property must lease up in four months, an absorption rate of 15 units per month is needed.
NUMBER OF UNITS ABSORPTION RATE TIME REQUIRED FOR LEASE UP = (UNITS PER MONTH)
Consulting Services We Provide
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