Market Feasibility and Appraisals (Part 4)

Part 1 - How Does an Appraisal Work?
Part 2 - Determining the Market
Part 3 - The 100% Database and Step-up Support

Comparable Market Rent Analysis

A second important consideration in determining the projected absorption rate is the comparable market rent The regression analysis (see below) 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 rate.

Figure 1: Regression Analysis Graph

Often, based on the comparable market rent analysis, the step-up support analysis, an examination of competitive projects, and our own experience, we recommend changes in a project that will make it more responsive to the market (and thus more profitable, increasing rent and absorption and decreasing turnover).

For example, we sometimes 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 suggest ways the amenity package can be fine-tuned to respond to the market and give a project competitive advantage. Also, we often review site plans to help identify premiums for which a renter will pay more (i.e., views, end-units, fireplaces, garages, carports).

We believe that the market study should be one of the most important steps in the development process. A market feasibility study not only predicts the absorption rate, but can also present methods of fine-tuning the product to achieve greater success in 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.

Q: Why Doesn't The Danter Company Use Selected Comparables for Market Feasibility?

We realize many companies continue to use selected comparables for market feasibility. Selected comparables are appropriate as one approach for determining market value, but they do not determine

market support. This is the primary reason that we have developed a fully documentable methodology specifically for determining market feasibility. When applied to market feasibility, the methodology of selected comparables has several flaws.

First, the Danter Company method identifies the market status at all pricing and amenity levels. Selected comparables can only examine the market at certain price or amenity levels, and then only with a sample.

Second, many markets are filled with larger, older projects that are functionally obsolete, having little closet or storage space, small bedrooms, and generally lacking modern floor plans and design features. The performance of these projects cannot be compared with any accuracy with the potential performance of a well-designed project with modern design.

Third, poor selection of selected comparables can give a false picture of the market, making it subject to sampling errors. If one or two of the selected comparables are poorly managed in a good market, it can look as if the whole market were performing poorly. Conversely, well-managed selected comparables in a poorly-performing market can make a market seem better than it is.

Fourth, often selected comparables from outside a project's EMA are used. Using such projects is misleading because they draw from a different tenant base with different socioeconomic characteristics. What works on the east side of town might not work on the west side , and poorly chosen selected comparables give a false picture.