Importance of a Market Feasibility Analysis

Houses with arrows - HM cropped

End users such as developers, syndicators and/or state agencies often hire professional market analysts to conduct a market feasibility analysis (market study) for a proposed development within a particular market.  But what is the need for, or importance of, a market study?  Further, and more importantly, what makes a good market study?

The need for, or importance of, a market study is quite simple.  This analysis is to provide a disinterested third party point of view for a given project based on the project’s competitive position within a particular market, while also determining the demand for the proposed project within that market.  Conversely, the components which make-up a good market study are more complex and can vary greatly depending upon the proposed project type.  However, there are several key components which every market study should include.

First and foremost, a Primary Market Area (PMA) must be established by the analyst, based on the proposed project’s location and project type.  This is the smallest geographic area from which the majority of support for a proposed project is expected to originate.  Accurately defining a project’s market area is crucial to providing an accurate and effective market study.  If an analyst defines a PMA which encompasses too large of an area, it is possible that demand for the proposed project will be overstated, which could result in the development of a project that is too large for a particular market.  Likewise, if an analyst is too conservative and defines a market area that encompasses too small of an area, it is possible that demand will be understated, potentially resulting in the development of a project that is too small and does not meet the needs of the market.  Inaccurately defining a PMA, primarily one that is too large could also result in the identification of inaccurate comparable properties.

Once a PMA has accurately been defined by an analyst, research of market trends should begin.  This includes, but is not limited to, identifying comparable/competitive properties, analyzing demographic and economic trends, conducting interviews with local stakeholders and identifying any comparable projects in the development pipeline within a given market.  The identification of comparable properties along with any comparable projects in the development pipeline is particularly important, as this along with the demographic trends will ultimately determine the type and size of product a particular market could realistically support.  The identification of accurate comparable properties will also help provide guidance in determining the competitive position of a project within a given market in terms of unit and project design, achievable rents and amenities offered.  This is particularly important during the early stages of development, as the identification of accurate comparable properties will ensure the developer does not leave out any key features being offered in a market, or include features that are not desired in a market.  In addition to analyzing the competitive position of a project within a market, it is also important that the impact a proposed project may have on existing comparable properties is considered.  In essence, a strong market will be able to support a new project without adversely impacting future occupancy rates among the existing comparable supply.

As indicated earlier, demographic and economic trends within a given market also play a crucial role in providing an accurate market study.  While overall demographic trends (population and household counts) are important components to a market study, more specific demographic trends should also be analyzed, based on the proposed product type.  For example, if the proposed development will target seniors or a specific special needs population (i.e. homeless, substance abuse, disabled, etc.), analysis of demographic trends within these demographic segments should be conducted, as often trends within such demographic segments differ from overall demographic trends within a market.  Economic trends such as business expansion, new business development and/or business closures/layoffs are also important factors to consider when conducting a market study, as economic growth often times will result in increased housing demand, while large-scale layoffs/closures could potentially result in a significant number of residents relocating to other areas, thus diminishing the need for housing in a given market.

If the market study being conducted is site specific (proposed site already determined), an on-site evaluation of the proposed site is also important, as this will reveal specific site attributes that could potentially impact marketability of a proposed development, both positively and negatively.  These include site accessibility, visibility, proximity to area services and an evaluation of surrounding land uses to determine the overall marketability of a proposed site.

Based on the key components discussed above, a market study should provide valuable insight to the end user in regards to the competitive position of a particular project, and more importantly, the need/demand for a particular project in a given market.  In conclusion, a competitive project is not always needed and a needed project is not always competitive; a good market study should be able to tell the story of what type of product is both needed and competitive within a given market.

How Tribal Housing Authorities Can Improve Telling the Story of Housing Needs

As part of the Low-Income Housing Tax Credit (LIHTC) program, applicants for Tax Credits are required to submit a variety of documents and reports to their state housing finance agency as part of the application process.  One element of the application process is a market feasibility study.  Market feasibility studies are reports that include such things as demographic, economic and housing data for a particular market.  These reports are typically conducted by qualified market analysts, who often must be approved to conduct such studies within the respective state.  While market studies include a variety of data from secondary sources such as the U.S. Census bureau, this secondary data often under reports pertinent data in rural markets, particularly in Indian Country.  Evidence of such under reporting on tribal reservations includes markets in which the tribal housing authority operates more rental units on the reservation than the number of renter-occupied housing units reported in the U.S. Census for the same reservation.  As a result, such under reporting often underestimates the actual number of households that suffer from such things as rent burden or over crowded housing situations.  This becomes important when state housing finance agencies assess data presented by the tribal housing authority or the market analyst who prepared a market feasibility study for the tribe.

 

However, tribes and tribal housing authorities can compensate for the shortcomings in secondary data sources by collecting, maintaining and sharing such data.  For example, many tribal housing authorities maintain wait lists for the next available housing units under the housing authority’s jurisdiction.  Often these lists vary in the level of details they contain and the frequency they are updated.  Because secondary data often fails to accurately account for the true depth of housing problems in Indian Country, detailed and current housing authority wait lists may often be the most compelling evidence a tribal housing authority has to make its case that there truly is a need for additional affordable housing on a particular reservation.

 

As tribal housing authorities move forward with the planning of their next affordable housing project, a component to that plan should be the collection of detailed wait list information for available housing.  Information regarding household sizes (number of residents in a unit), age of head of household and household income levels of those on the wait list are just some of the items that could become critical in presenting the case for the need for affordable housing.  For more information on housing needs and tribal housing related matters, please contact Patrick Bowen at Bowen National Research at patrickb@bowennational.com or 614-833-9300.