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Comparable Market Rent and Setting Appropriate Rent for Multifamily Development

The Danter Company’s methodology for determining comparable market rent is unique within the industry in that it is based on a scientific regression analysis of all conventional apartments within a market area, as opposed to analysis of selected comparables.

This special report is intended to help our clients understand these critical differences and why we believe that they help us to prepare the most accurate market feasibility analyses in the industry.

Part 1 of 4

Comparable market rent— the rent that a unit with a given level of amenities can be expected to achieve based on prevailing market conditions— is one of the most critical components of a market feasibility study.

Project rents based on a comparable market rent set too high can slow absorption and can affect not only initial absorption, but rent increases expected by the pro forma in later years. Project rents based on comparable market rents set too low lose potential income every month from tenants who would pay more for their units.

At The Danter Company, we are convinced that the only valid method of determining accurate comparable market rent is the combination of the Effective Market AreaSM, the 100% database , and regression analysis.

The Effective Market Area

The first step in determining appropriate comparable market rent is determining the appropriate market area. Setting a proper market area is critical because all the conclusions are based on detailed analysis of the market area. Incorrect market areas can lead to inaccurate conclusions and potential problems. The Danter Company identifies the Effective Market AreaSM (EMA), defined as the smallest geographical area from which a project can expect to generate 60% to 70% of its support. When we determine an EMA, we look at four key factors: 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.

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 account for these characteristics, and can skew a report by including neighborhoods of vastly differing socioeconomic makeup.

Mobility factors—interviews with area real estate professionals, leasing agents and civic officials are combined with our past experience in determining mobility patterns. Mobility patterns 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 interview area officials and real estate professionals to determine area perceptions. Area perceptions also help determine mobility patterns and the appropriateness of the development for its site.

A Mobility Primer


Radial Mobility (above) consists of people moving farther from the central city in the same direction. A family who lives northeast is most likely to move farther northeast.

Lateral mobility (above) consists of mobility not conforming to the radial model. It is less common and housing developments that must depend on lateral mobility for most of their support must market aggressively to counter established radial trends.

Part 2 - The 100% Database and Regresion Analysis  

 

   

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