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Danter Company Market Feasibility Methodology

This special article is based on the requests of many of our clients for a concise statement about our market feasibility methodology. This special report is designed to help all those involved with interpreting a market study understand our recommendations and the process we undergo to reach them.

At its most basic level, for any given proposed project and any specific market, the market feasibility study is designed to answer two basic questions:

  1. What is the current condition of the market?
  2. How will the market respond to the proposed project?

Market Condition

It All Starts with the Field Survey

At The Danter Company, we feel that the only way to determine the current condition of a market is to go there ourselves. Our methodologies are predicated on receiving complete and accurate primary information about a market.

The field survey is the most important component of any market study. That is why we employ a professional staff of field analysts whose primary job is to travel to the site and gather the critical information about each project in the market area.

All our professional staff members have received extensive training about market methodology and how to gather accurate market information. Each area project is visited and evaluated by our field analyst, usually posing as a prospective tenant. Our field analysts take pictures and collect brochures. (Our photographic database is the largest of its kind.) Should it pose difficult to pry information from management, our field analysts knock on tenant doors, count windows, count mailboxes, count cars, and read meters to get the data we need.

Each project is surveyed to determine unit mix, rents, vacancies, unit and project amenities, the year opened, floor area, utility information, the number of floors, tenant mix, and other information that might be necessary for a thorough analysis.

The Effective Market Area

The Danter Company has developed several key methodologies which work together with the field survey to give us a clear picture of any multifamily market. The most important of these methodologies are the Effective Market AreaSM (EMA) and the 100% database.

The first step in any market study is defining the market area, because not all market areas are alike. Several basic methods exist for determining the appropriate market area:

  • One common method is radial analysis. A series of concentric circles is drawn around the site at, for example, distances of 3, 5, and 10 miles. The areas within these circles are then analyzed. This method is usually employed for one reason--it is easy.
  • A second method, common in studies for governmental bodies, is to base market areas on boundaries between governmental units. In this method, county, township or city boundaries might become the boundaries of the market area. This, too is an easy solution since most secondary data are reported by political delineations.
  • A third methodology, developed by the Danter Company, is the Effective Market Area. The EMA is defined as the smallest geographical area from which a project can expect to generate 60% to 70% of its support. It is not easy, but it gives us a better reading of the true market area for a project.

When we determine an EMA for a specific site, we look at several factors, including geography, demographic analysis, mobility patterns, and area perceptions

Geographical factors-rivers, railroads, hills, and major freeways often define neighborhood boundaries. These factors, which can play a big part in where people move, are ignored in radial analyses. In fact, geographical factors are often more important than governmental boundaries, as market areas often cross county, township, or city borders.

Demographic factors-population and household trends, housing and income characteristics, differences in socioeconomic makeup of individual neighborhoods, and growth figures all are analyzed to help identify the EMA. Radial analyses cannot take all these characteristics into account, and often can skew a report by including neighborhoods of vastly differing socioeconomic makeup.

Mobility factors-interviews with area real estate professional and civic officials are combined with our past experience in determining mobility patterns. Mobility patterns within an area are predictable, and while individuals occasionally act counter to prevailing trends, mobility analysis can help pinpoint where the majority of tenants for a particular project are the most likely to come from. Radial analyses cannot make these distinctions.

Area perceptions-we conduct interviews with area officials, project managers, and real estate professionals to determine area perceptions and how they relate to the previous factors. These area perceptions, in conjunction with our past experience in hundreds of markets, help determine mobility patterns, a key component of any market feasibility study.

Our field work is critical to determining our EMA. We can determine a preliminary EMA before we send out our field analysts, but the interviews they conduct with area real estate professionals and apartment managers and the market trends they discover often cause our field analysts to revise the EMA to reflect market conditions

Our research indicates that tenants already residing in other modern apartments within the EMA are usually the largest single component of support for an apartment project. Typically, an apartment project can expect approximately 45% to 50% of its tenants from other apartments within the EMA. Adding support from within the EMA from new household formation, home ownership, or other non-modern rental properties, increases the total EMA support to 60% to 70%, depending on the demographic makeup of the EMA. Quantifying this support also allows us to accurately measure markets with limited (or no) modern apartment development.

The 100% database

To determine the depth of support for new development, it is crucial to identify support at all rent and amenity levels. Most markets have a continuum of housing, starting with entry-level units, and moving to upscale units as units include more amenities and higher rents. Tenants move up the continuum as their financial status increases, or as their space needs change through marriage, children, or other socioeconomic status changes.

Our solution is the 100% database. In every market area we study, we visit 100% of the modern apartments to gather the primary information necessary to analyze the market accurately.

Our analysis identifies the number of market-rate and government subsidized units in the market and vacancy rates by unit type (i.e., studio, one-bedroom). We also identify construction trends by tracking the year of construction for each modern apartment development, and the vacancy rates by year of construction. As a result, we can identify whether vacancies in the market are related to the age of the product.

Also included is a distribution of rents and vacancies by unit type. Using this distribution, we can determine how one-bedroom or two-bedroom units are performing at any given pricing level. We can also identify price points in which opportunities for development exist.

Another key to our conclusions is the regression analysis. Each apartment is rated on its existing amenities and curbside appeal, with point values assigned to each amenity. These factors combine to create the Comparability Rating. We plot each project by rent and Comparability Rating to determine market-driven rents at any amenity level. This regression analysis plays a key role in determining the supportability of a project and establishing comparable market rents.

The 100% database gives us the ability to have expertise in every market we study. As a result, we can combine our interviews with "local experts" with the documented facts to provide a complete picture of a market at all levels based on primary information. Also, the 100% database process is the easiest for a reader to follow, because the data are presented in full. The question of which property is selected is eliminated.

Market Response

Once we have a 100% database from our field survey and the necessary secondary data, our project director, who has experience analyzing hundreds of markets (not only as an analyst, but also in the field), can then make recommendations regarding expected market response.

The key result of any market feasibility study is the absorption rate. The absorption rate is the measure of how many apartments we think the project will be able to lease after opening on a monthly basis. To determine the absorption rate, we look at many factors, the most critical of which are step-up and step-down support and a rent/value analysis.

Step-Up and Step-Down Support

As explained earlier, our research has indicated that the largest component of support for new modern apartment development comes from existing apartment tenants. Our 100% database allows us to quantify this support using an analysis of step-up and step-down support.

Our research has indicated that apartment tenants are willing to pay more, or "step up" their rents, for an apartment that they consider a value. The level of step-up support varies with different markets and the amenity level of the development. Tenants at the high end of the market may step up their monthly rent as much as $150, but most tenants are only willing to step up their rent up to $50.

We identify the number of units in the market with rents up to the step-up support level for the proposed rents for the subject site. This enables us to determine the depth of step-up support. Then, we compare the number of proposed units to the number of units of step-up support, and express this as a percentage. If this percentage is low (a small number of proposed units and a large number of units in the step-up support base), this is reflected in a higher expected absorption rate. Naturally, analyzing the competition's step-up support is also critical.

Comparable Rent Analysis

A second important consideration in determining the projected absorption rate is the Comparable Rent Analysis. The regression analysis is used to determine the market-driven rent for a project at any amenity level. Using this graph, we are able to determine the relative value of the proposed units. The relative value of the project is then reflected in our projected absorption.

Based on these analyses, we can recommend changes that allow a project to increase performance. For example, we can recommend rent adjustments to make a project more of a value, or to place it within a market niche experiencing less competition. We also review amenity packages, and can suggest ways to fine-tune for competitive advantage (or to head off possible disadvantages).

In Conclusion

We believe the market study is one of the most important steps in the development process. A quality study not only predicts absorption, but can fine-tune product to achieve greater success within the market. In addition, our policy of continued consulting until project finalization ensures that the market impact of all changes is fully evaluated and documented.

More about our studies

Glossary of Real Estate Research Terms

   

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