A multifamily market study is a required component of almost every construction loan and equity raise for a new apartment development, lenders require it, equity investors expect it, and housing finance agencies demand it for affordable housing projects. The market study provides third-party support for the revenue assumptions in the pro forma: the projected rents, the absorption pace, and the occupancy trajectory.
What market studies are not is infallible. They are produced by market research firms with varying methodology quality, they are based on data that may be months old by the time the project opens, and they answer specific questions about aggregate market conditions without necessarily capturing the submarket dynamics that determine whether a specific project at a specific location will achieve the projected rents on the projected timeline.
Understanding how to read a market study, what it is telling you, what it is not telling you, and what questions to ask about its methodology, is essential for developers, lenders, and equity investors who are using it as a basis for underwriting decisions.
What a Market Study Contains
A standard multifamily market study has several components that appear in most credible reports.
Market area definition. The market area is the geographic boundary within which the study analyzes supply and demand. Most market studies use a primary market area (PMA), typically a five to seven minute drive-time radius from the subject property, and a secondary market area that extends further. The appropriateness of the PMA definition matters: a market area drawn too broadly will include supply that is not competitive with the subject property, understating the effective supply and overstating the demand.
Demographic and economic analysis. The study summarizes the market area’s population, household growth, income levels, and employment base. This section establishes the demand foundation, how many households are forming in the market area, what income levels those households represent, and whether the household formation trend is growing or declining.
Supply analysis. The study identifies the existing apartment supply in the market area, the total units, by product type, by submarket, and with historical occupancy and rent data. It also identifies the pipeline, projects under construction and projects in the planning or entitlement phase that will add supply to the market during the subject property’s absorption period.
Comparable property analysis. The most important section for underwriting purposes: the rent, occupancy, and amenity data for the properties that are directly competitive with the subject. The comparable properties should be comparable, similar product type, similar age, similar location characteristics, similar finish level. Comparables that are materially different from the subject in product quality or location are not useful benchmarks.
Demand and absorption analysis. The study estimates annual demand for new multifamily units in the market area and projects the absorption pace for the subject property, how quickly it will lease up and what occupancy trajectory it will follow from opening to stabilization.
What to Question in the Methodology
The comparable property selection. Are the comparables comparable? A market study that uses comps from a different submarket, or from properties with a substantially different finish specification, will produce rent conclusions that don’t reflect what the subject property will achieve. Ask specifically whether the comps are in the same or an adjacent submarket and whether their finish level is consistent with the subject’s specifications.
Pipeline treatment. The most consequential factor in absorption projections is the competitive pipeline, projects that will open around the same time as the subject and compete for the same tenant pool. A market study that treats the pipeline conservatively, assuming that planned projects will deliver as scheduled, that all competitive supply will open before the subject stabilizes, produces more conservative and more defensible absorption projections than one that discounts the pipeline. Ask specifically what pipeline projects were included, what delivery timeline was assumed for each, and whether any pipeline projects were excluded and why.
Survey methodology. Market studies that survey comparable properties by phone or web research rather than by in-person visit will miss concessions, actual effective rents (versus advertised asking rents), and the qualitative property conditions that affect competitive positioning. In markets where concessions are common, where a free month’s rent is available at most properties but not advertised, a market study that reports asking rents without adjusting for concessions will overstate effective market rents.
What a Market Study Won’t Tell You
Whether your specific location is competitive within the submarket. A market study reports market-area data and comparable property data, but it does not evaluate your property’s specific location characteristics, the quality of the street, the pedestrian environment, the proximity to amenities, the accessibility to transportation, relative to the comparables. A project with a technically similar location to its comps but with a less appealing pedestrian environment or less convenient access may achieve lower rents than the market study projects.
How much concession pressure exists in the market at lease-up. If your project opens into a market where three other projects also opened in the same six-month period, lease-up competition is real and concession pressure is likely. The market study may have projected this scenario, but the specific magnitude of the concession burden depends on the actual competitive dynamics at the time of lease-up, which the market study, produced months before opening, cannot fully anticipate.
Whether the market can absorb your project and all of the pipeline simultaneously. Aggregate demand and supply numbers can be in theoretical balance while specific submarkets are oversupplied because the demand and supply don’t match geographically or by product type.
The market study is an important tool in multifamily underwriting, it provides third-party data and analysis that supports the revenue assumptions in the pro forma. It is not a substitute for the developer’s own local market knowledge, submarket-level supply analysis, and judgment about whether the specific project in the specific location will perform as projected.
Innergy Integral provides these services in Phoenix, AZ and across our six-state footprint.
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