chapter 6: Market Feasibility

Learning Objective: Users will understand how development feasibility is impacted by surrounding market conditions and gain the tools to support analyzing and demonstrating the market for their project.

Overview of market studies

A market study is an analysis of the demand for a proposed development in a defined market area that assesses alignment with other existing developments. A market study helps demonstrate that there are consumers who need your proposed development and at what price points those consumers would be able to pay.

Note that a market study is different from a housing needs assessment, as discussed in Chapter 3: Housing Development Models, Team, and Roles. A housing needs assessment is a more global and comprehensive assessment of the housing needs and conditions in the community. A market study is used to build an understanding of how your development on the selected site will fit into the community and what demands will be met. A new market study will need to be completed specific to each new development.

Lenders and other funding sources require market studies because they are a critical component of assembling financing and reducing perceptions of risk. For example, a market study is required by CHFA for all Housing Tax Credit applications.

The market study will evaluate the competitiveness of the proposed development and whether it is likely to be successful, so it is a key risk-management tool. Using these findings will better align your development with the market area’s needs and will lead to a refined project concept grounded by feasibility and practical considerations.

A market study that shows feasibility barriers doesn’t mean you need to abandon your development. Instead, it can help you improve your approach. For example, you could target a wider income range to increase your potential tenant base. There may also be findings that reveal the need for additional expertise or strategic partnerships to address unique challenges.

Note that for developments in rural or mountain areas, it is particularly important to have a high-quality market study completed. Because these areas have less dense populations, data availability and reliability can be a significant challenge for market analysts, so it is critical that developers utilize analysts who have experience with these issues.

Conducting Your market study

Market study process

It is important to understand any specific market study requirements from your funding sources. Variations in requirements can include the content, level of detail, and whether an outside consultant is required. CHFA has a Market Study Guide as an appendix to its Qualified Allocation Plan (QAP) that must be referenced for Housing Tax Credit-supported developments. Even if a market study isn’t required, it is beneficial to have, particularly if you are creating a new type of development.

Consultants who conduct market studies for urban areas may be able to complete them at a relatively low cost due to efficiencies of scale in paying for data access and process familiarity. In rural areas, market studies are often required for funding, but the cost is often higher due to the lack of data access. Section 4 funding and Community Housing Development Organization (CHDO) operating dollars can be used to help cover the cost. In addition, colleges and universities may be a free resource, as they use market studies as a real-world educational opportunity for students.

The following is a general sample market study selection process.

1. Procure a market study analyst. Some funders may require a market analyst from an approved list. For example, see this list from CHFA.[12]

2. Submit a Letter of Intent, if required by your funder. Submit a Letter of Engagement from your market study analyst, if required by your funder.

3. Review the completed market study and ensure that it aligns with your expectations and needs. Request any revisions that may be required.

4. Submit the completed market study, if required by your funder.

Market area definition

A market study will focus on a market area containing the proposed development site. In addition to the market area, other geographic scales will typically be included for comparison. For example, you will want to know if similar developments exist in your market area, as well as the broader jurisdiction and housing market. Similarly, you may want to evaluate the expected population growth in the market area and the region.

A common geographic definition to use for a market area is the census tract (the U.S. Census Bureau’s approximation of a neighborhood) in which the development will be located. However, some market studies use zip codes or other larger geographic units. The scale and nature of the region will influence this decision. A market area for a development in Denver might focus on a small section of the city; in a more rural part of the state, the market area might include the entire city.

Other factors that may be helpful to consider when defining your site and market area include:

• local neighborhood definitions;

• natural boundaries such as rivers, lakes, and canyons;

• major human-made boundaries such as major roads and railroad tracks;

• jurisdictional boundaries; and

• employment centers and central business district boundaries.

Key considerations

The development model that you choose will inform what level of detail, conditions, and indicators are required for a market study. Your market study should include the type of residents the development will target or special designations your development may have. These targeted populations are key subjects of investigation in a market study, since they will determine the pool of eligible renters or buyers. Targeted populations could include:

• formerly homeless individuals and families;

• older adults;

• persons with disabilities or special needs;

• single individuals, families, or multigenerational households;

• workforce segments, particularly if you are targeting specific occupations such as teachers; and

• people with specific income levels.

Based on the characteristics of the population to be served, most market studies will include a capture rate, which is the portion of the target population the development would need to “capture” to achieve occupancy. This might be expressed as a percentage or a ratio. For example, “…the development would need to capture five out of every 100 people in the market area who meet the criteria.” Although appropriate capture rates vary by location, if your market study indicates an unreasonable capture rate, you may need to broaden your tenant base to ensure sustainability. You may also want to check with your funders to learn if there are minimum thresholds.

Your market study should also describe what broader housing needs you want to address with your proposed development. It should account for existing or planned developments (often called “comparables” or “comps”) and organizations that meet the same or similar needs If you find such an organization, you could consider exploring a partnership.

In addition, your market study may consider how the site addresses racial and social equity and inclusion. For example, will the development re-invest in a community that has been disinvested or create affordable housing in an area of high opportunity? This may not be a standard component for your market analyst to include, so you may need to specifically request or plan to supplement yourself.

Elements of a market study

Useful data sources

Below are example data sources that may be used for a preliminary feasibility study. This includes sources that cover smaller rural areas that may not have reliable coverage from national datasets. Some of these data sources have associated fees.

• U.S. Census/American Community Survey – provides a range of annual data based on household surveys

• Ribbon Demographics – fee-for-service housing market analysis and data services

• ESRI – a provider of both software and data. ESRI has multiple platforms, including Community Analyst and Business Analyst products with built-in market analysis tools. There is a cost, but they provide a discount to nonprofits.

• Corelogic – fee-for-service company that provides detailed market data and comparable sites based on real estate transaction data and landlord surveys

• CoStar – fee-for-service company that provides detailed market data and comparable sites based on real estate transaction data and landlord surveys

• U.S. Department of Housing Urban Development Homelessness Point-In-Time Survey – provides data about local homeless populations. There are also local organizations such as the Metro Denver Homeless Initiative that may have more detailed data on this topic.

• USDA – provides its own list of publicly available data sources that may be helpful in rural areas

• Social Explorer – a fee-for-service online platform providing maps and data related to a range of topics

• PolicyMap – a free online mapping platform that allows you to explore a range of built-in data and create your own maps

• National Housing Preservation Database – a free dataset displaying the locations and subsidy types for all federally-assisted housing developments across the country

• Zillow Research – publishes free local data and rents, home prices, and other factors