The 100% database
The solution is the 100% database. In order to determine
the depth of support for new development, it is crucial to identify support at all levels.
We have found that in most markets a continuum of housing exists, starting with
entry-level units, and moving to upscale units as units include more amenities and higher
rents. Tenants tend to move up the continuum as their financial status increases, or as
their space needs change through marriage, children, or other status changes.
Therefore, our field surveys identify all modern apartment
developments within the EMA to determine the depth of the market at all levels. Each
project is surveyed to determine rents, vacancies, amenity level and curbside appeal.
Because the EMA is supportive, the field survey details the existing market conditions
experienced by those tenants most likely to move into the proposed project.
Once the field survey is complete, we can then determine the condition of the market
and historical trends. Our analysis identifies the number of market-rate and government
subsidized units in the market and the vacancy rates by unit type (i.e., studio,
one-bedroom). We also identify historic 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.
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The Comparability Index
The Danter Company has developed a uniform rating system
for evaluating the competitive level of an apartment project. This system produces an
Amenity Index, which is used in our regression analysis to determine market-driven rent
and to set appropriate rents for proposed developments.
The system is based on rating projects on a standard scale (1 to 10) based on unit
amenities, project amenities, and aesthetic amenities (curbside appeal).
Each potential unit and project amenity has been assigned a point value. These point
values are totaled to determine the unit and project amenities total.
The curbside appeal is determined by our field analysts based on the condition of the
project. Projects that score highest in this area have extensive and quality landscaping,
well-maintained buildings, and neat grounds where trash, parking, and common areas are
well-maintained.
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Another analysis that is key to our eventual conclusions is the regression analysis.
Each apartment is rated based on its existing amenities and curbside appeal, with point
values assigned to each amenity. These factors are combined to create a project's Amenity
Index. Using this Amenity Index, we can plot each project by rent and Amenity Index to
determine market-driven rents at any amenity level (see Figure 1 on Page 4). This
regression analysis plays a key role in determining the supportability of a project.
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.
Determining Market Response
Once we have determined the condition of the market, we can then
determine how the market will respond to the proposed project. In order to do that,
we combine the full market data provided by our field study with
our experience studying a variety of markets.
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/down Support
As explained earlier, our research has indicated that the largest
component of support for new modern apartment development comes from existing apartment
development. Our 100% database allows us to quantify this support using an analysis of
step-up and step-down support.
Our research indicates that apartment tenants are willing to pay more, or "step
up" their rents, for an apartment that they consider to be 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 $100, but
most tenants are only willing to step up their rent up to $60. We identify the number of
units in the market with rents up to $60 below the proposed rents for the subject site.
This enables us to determine the depth of the step-up support. Then, we compare the number
of proposed units to the 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), then this is reflected in a higher expected absorption rate.
Naturally, an analysis of the competition's level of step-up support is also critical.
Next: Comparable Market Rent Analysis and Selected Comparables
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