Market Feasibility and Appraisals (Part 2)
Part 1 - How Does an
Q: How Does a Market Feasibility Study
A market feasibility study determines the depth
and condition of a particular real estate market and its ability
to support a particular development.
The key concern of a market feasibility study for multifamily
development is a project's ultimate marketability. Therefore,
the market feasibility study must determine the following:
- What is the current condition of the market?
- How will the market respond to the proposed project?
Determining Market Condition
To determine current market condition, Danter and Associates has
developed several key methodologies which work together 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 is defining the extent of 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. In this method, 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, particularly common in studies for
governmental bodies, is to base market areas on boundaries
between governmental units. In such a 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 Danter and Associates, 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 as easy, but we think it gives us a
better reading of the true market area for a project.
When we determine an EMA for a project, we look at several
factors, including geography, demographic analysis, mobility
patterns, and area perceptions.
Geographical factors—rivers, railroads,
freeways, hills, and major arteries often define neighborhood
boundaries. Such geographical factors, which can play a big part
in where people move, are ignored in radial analyses. In
addition, geographical factors can often be 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, as can analyses based on governmental
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 and real estate professionals to determine area
perceptions and how they relate to the previous factors. Area
perceptions are important in helping determine mobility
patterns, a key component of any market feasibility study.
Our research indicates tenants already living in an apartment
within the EMA are the largest single component of support for
an apartment project. Typically, an apartment project can expect
between 45% and 50% of its tenants from other apartments within
the EMA. Add support from within the EMA from new household
formation, current home owners, or other rental properties, and
the total EMA support increases to 60% to 70%, depending on the
demographics of the EMA.
As a result, our EMA is a Supportive EMA and not a
Competitive EMA. A Competitive EMA would consist of the projects
most likely to compete with a proposed project for support.
Therefore, a Competitive EMA is likely to include projects with
a similar price point or amenity level to the proposed project,
or perhaps even projects from outside the Supportive EMA.
However, since the Competitive EMA includes only similar
projects, it is only a subset of the Supportive EMA. Analyses
using a Competitive EMA only examine a portion of the market at
one pricing level, and then perhaps not all similar projects.
Next: The 100% Database and
Determining Market Response