Presentation on theme: "Robert Lefenfeld Managing Principal Real Property Research Group, Inc."— Presentation transcript:
1 FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection” Robert LefenfeldManaging PrincipalReal Property Research Group, Inc.Southeast Mortgage Advisory CouncilHilton Head, South CarolinaMay 29th 2013
2 Market Study Objectives Market Study CriteriaNational Council of Housing Market Analysts (NCHMA)MAP Guidelines
3 Role of Market Analyst and Appraiser in the MAP Process Market Study ObjectivesRole of Market Analyst and Appraiser in the MAP ProcessMarket Analyst evaluates balance of supply and demand for rental housingAppraiser is responsible for income (rent) and (operating) expenses.Based on Supply/Demand and income/expenses, Market Analyst is responsible for Absorption.7.5.A “The purpose of the market study is to assure that there is enough sustainable demand for additional units without adversely impacting the existing supply, so as to maintain a balanced overall market”
4 Elements of Market Analysis Market Study ObjectivesElements of Market AnalysisComponents of Market Study:Site Analysis and Market AreaEconomic ContextDemographic ContextSupply ContextFindings and Conclusions:Balance of Supply and DemandAffordabilityProduct Positioning in terms of offering and pricing
5 Site Analysis Questions? Site and Market AreaSite Analysis Questions?What is setting of site?What is characteristics of general area?What are transportation linkages?What improvements are anticipated in area?How is the area served by amenities?Schools?Perceptions of CrimeConsiderations for non-residential land uses?7.5.C.4 Project location in terms of neighborhood and any other locational considerations.
6 Conducting a Site Analysis Site and Market AreaConducting a Site AnalysisIs the site suitable for development as rental housing?Surrounding land uses compatible with housing?Neighborhood adequately served by facilities and services?Is it accessible by car and public transportation?Planned changes in the area that may compromise its suitability in the future?
7 Amenity Analysis should cover: Site and Market AreaAmenity Analysis should cover:Convenience ShoppingComparison ShoppingRecreationEntertainmentMedicalMass TransitSchoolsLibraryPublic Transportation (Bus, subway)
8 Site and Market Area Future Improvements Transportation - State Consolidated Transportation ProgramsOther Improvements – County/City Capital Improvement BudgetProposed public transportation serviceImportant to understand how community is developing; Impact on Household Growth.
9 Site and Market Area Market Area A housing market area is the contiguous area within which households compete for available housing, andwithin which your project will compete for qualified renters.7.5.D Housing Market Area is the geographic area in which units with similar characteristics are in equal competition
10 Impact of Market Area Definition Site and Market AreaImpact of Market Area DefinitionPopulation and Household CountsGeneral DemographicsDemand AnalysisSupply AnalysisCompetitive StockAttainable Rents
11 Factors used to define a market area: Site and Market AreaFactors used to define a market area:Location of Competitive PropertiesAccessibilityNatural BoundariesHousing Product CharacteristicsMarket PerceptionsCommuting PatternsTarget MarketJurisdictional BoundariesLocal Agency Service BoundariesNon-geographic FactorsData availability
12 Is this a good market area? Site and Market AreaIs this a good market area?
13 How about this market area? Site and Market AreaHow about this market area?
14 Does this seem reasonable? Site and Market AreaDoes this seem reasonable?
15 Secondary Market Areas Site and Market AreaSecondary Market AreasLess relevant to rental than retailSecondary source of buyers/rentersTypically assumed as bonus demand over and above demand derived by Primary Market AreaOften a comparison geography to the Primary Market Area
16 Economic Context Environment in which project will be operating At Place Employment TrendsLabor Force and Unemployment RatesMajor Employers – Contractions or ExpansionsCommuting Patterns7.5.E.1 A discussion of current economic conditions and employment characteristics
17 Economic Context Define the Local Economy Larger than the market areaJurisdictions with functional integrationMetropolitan AreasCountiesCities
19 Economic Context At Place Employment Quarterly Census of Employment and Wages (QCEW) Data is from the employer reporting of employees covered under the unemployment insurance program.It counts only filled jobs, whether full or part-time, temporary or permanent, by place of work. Individuals holding more than one job are counted for each job.Major exclusions from UI coverage include self-employed workers, most agricultural workers on small farms, all members of the Armed Forces, elected officials in most states, most employees of railroads, some domestic workers, most student workers at schools, and employees of certain small nonprofit organizations.
20 Change In At Place Employment Economic ContextChange In At Place Employment
21 At-Place Employment by Sector Economic ContextAt-Place Employment by Sector
22 Long Term Change in Employment by Sector Economic ContextLong Term Change in Employment by Sector
23 Short Term Change in Employment by Sector Economic ContextShort Term Change in Employment by Sector
24 Economic Context Economic Forecast Location of Major Employers Location; Size of Workforce; Prospects for future growth or reductionEconomic ExpansionsAny planned expansions in the Market; i.e., BRAC, New Plants. Is household growth increasing demand for servicesEconomic DisruptionsMajor Layoffs or Closing; Vulnerable Sectors of EconomyWage TrendsAre wages increasing or decreasing?Location of Major Employers
25 Demographic Context Demographic Context Overall Trends Projection ProcessDemographic Analysis7.5.E.2 A thorough discussion of past and anticipated future trends in the demographic character of the housing market.
27 Trends in U.S. Rentership Rate Demographic ContextTrends in U.S. Rentership Rate
28 Predictions, Forecasts, Prophecy Demographic ContextPredictions, Forecasts, ProphecyA PREDICTION is a foretelling of what one believes will happen.A PROPHECY is a PREDICTION under the influence of divine guidance.A FORECAST is an analytical relationship based on assumptions and political decisions that will influence the future growth of an area or region.
30 Influences and Assumptions that Guide Projection Process Demographic ContextInfluences and Assumptions that Guide Projection ProcessBirths and Deaths – Natural IncreaseMigration – Internal and ExternalNational Shift to Service Economy – Pre Great RecessionNatural Shift to ?? Economy – Post Recession – Only Meds, Eds and Feds??Older Labor Force – Semi RetirementEffect of Baby Boom, Semi-Retirement; Growing Number of Senior CitizansBaby Bust, Echo Boom - Decline in Household SizeBusiness Relocations and DeathsLocal Govt. Development Policy - Federal and State Economic PolicyLocal Govt. Development Patterns
31 Demographic Context Projection Sources Metropolitan Planning OrganizationsNational vendors (Nielsen, ESRI)Local GovernmentsState Data CentersU.S. Census BureauC-40 report2010 CensusAmerican Community Survey
32 Population and Household Trends Demographic ContextPopulation and Household Trends
33 Demographic Characteristics Demographic ContextDemographic CharacteristicsFamily type and proportion of one-person householdsOwner / Renter DistributionAge Distribution of PopulationPermanent RentersIncome Distribution by Tenure (Owners vs. Renters)33
34 Competitive Context Housing Stock Analysis of Rental Supply Inventory CharacteristicsRent and Vacancy TrendsConstruction and Absorption LevelsPipeline7.5.F Market study must include a comprehensive description of the current conditions of the rent market
35 Is rental market tight or soft? Competitive ContextIs rental market tight or soft?Evaluate stabilized vacancy rate and total vacancy rateAre concessions being offered? Why?Is the market overbuilt at one price position?Are some projects poorly positioned in the market (i.e. overreaching in rents)?Has there been a downturn in employment?
37 Detailed Rental Information Competitive ContextDetailed Rental InformationEvaluate stabilized vacancy rate and total vacancy rateAre concessions being offered? Why?Is the market overbuilt at one price position?Are some projects poorly positioned in the market (i.e. overreaching in rents)?Has there been a downturn in employment?Present reasonable current rent dataCompare net rents by unit type and by percent of income targeted onLook at total rent and per-square foot basis
38 Competitive Context Rental Price Position Look at pipeline Contact with municipal and/or country planning and zoning officials.Contact with Housing Finance Agency officials.Follow-up with developers to quantify delivery and price position.
39 Competitive Context Net Rent and Size Market Analysis should comment on reasonableness of rent.Not necessary to do rent grid.
40 Competitive Context Pipeline Local building/planning department(s) Other rental projects planned or under construction.Local building/planning department(s)Tax Credit AllocationsRegional Surveys7.5.G The market study must include separate estimates of the number of rental units currently under construction and number in planning during specified forecast period.
41 Supply and Demand Key Questions Findings and ConclusionsSupply and Demand Key QuestionsOversupply of Pipeline Units?Will the market area need any additional units by the time the proposed project would be ready for occupancy?Enough income-qualified consumers (Capture Rate)?Potential oversupply of LIHTC units (Penetration Rate)?Need for more affordable units to accommodate growth and alleviate substandard housing conditions?7.5.H Demand Estimate and Study
42 Findings and Conclusions Net DemandDemandHousehold GrowthDemolitions% of Renter HouseholdsSupplyPipelineSubjectBalance of Demand and Supply7.5.H.1 Estimate of demand must be based on a calculation of incremental demand…42
44 Components of Inventory Change Findings and ConclusionsComponents of Inventory Change
45 Varied Rentership Rates Findings and ConclusionsVaried Rentership Rates
46 Varied Rentership Rates Findings and ConclusionsVaried Rentership Rates
47 Findings and Conclusions Varied Rentership Rates
48 Affordability Capture Rates - Definitions Findings and ConclusionsAffordability Capture Rates - DefinitionsCapture Rate“The percentage of age, size, and income qualified renter Households in the Primary Market Area that the property must capture to achieve the Stabilized Level of Occupancy. Funding agencies may require the use of other factors in the calculation of the capture rate.”Penetration Rate“The percentage of age and income qualified renter Households in the Primary Market Area that live in all existing and proposed properties (which are competitively priced to the subject) that must be captured to achieve the Stabilized Level of Occupancy.”7.5.H.3 demand estimate should identify the “effective demand pool with sufficient incomes…
49 Interpreting Capture Rates Findings and ConclusionsInterpreting Capture Rates5% Capture Rate (need to get 1 in every 20 eligible households)33% Capture Rate (need to get 1 in every eligible households)An acceptable capture rate only indicates sufficient demand to support the proposed number of units at the proposed income levels. It does not include an evaluation of the subject development versus the existing rental stock.Income-qualified households
50 Key Assumptions and Threshold Measurements Findings and ConclusionsKey Assumptions and Threshold MeasurementsThe appropriate income range for residents to qualify for the project must be establishedMaximum allowable income for the subject project is based on the household income necessary to qualify for the largest unit offered at the site. Real (Tax Credit) or Artificial.Minimum income required to live at the property is based on the lowest gross rent (including all utilities) offered at the subject site.Accepted ratio of rent to income is 35% for families and 40% for seniors. Sometimes 30% is minimum.May vary by state or situation
51 Tax Credit Rents and Incomes Findings and ConclusionsTax Credit Rents and Incomes
55 Capture and Penetration Rate Findings and ConclusionsCapture and Penetration Rate
56 Calculating Capture Rates & Demand Analysis Findings and ConclusionsCalculating Capture Rates & Demand AnalysisThere are no right or wrong capture ratesCapture/penetration rates must be considered within context of marketIn rural markets, be conservative; “don’t want to be wrong forever”Critical demand for several units does not mean sufficient demandSenior markets may consider support from homeowners
58 Other Factors Impacting Demand Findings and ConclusionsOther Factors Impacting DemandLocation—Surrounding land uses may attract or prevent renters from moving to the siteProposed Rents—Capture rates estimate the number of households able to pay the proposed rents, not the willingness to do soHousing Markets—Rental markets with high vacancy rates may reflect an oversupply of available housing. The overall health of the rental market may impact the ability of a proposed development to reach stabilization despite low capture rates
59 Findings and Conclusions Final ConclusionsFindingsEvaluation of SiteEvaluation of Economic TrendsEvaluation of Demographic TrendsEvaluation of Competitive EnvironmentNet DemandProduct EvaluationUnit DistributionUnit SizesFeatures and AmenitiesPrice Position(Appraiser does specific grids)Affordability
60 Projected Absorption Levels Findings and ConclusionsProjected Absorption LevelsHistoric Pattern of New Units Absorbed AnnuallyPerformance of Recently Completed ProjectsAdjust Estimate to Reflect Market ConditionsEconomic and Demographic ForecastsUnits in PipelineOccupancy Levels7.5.H.4 Study should also include an estimate of absorption period needed for the project to reach sustaining occupancy…
61 Impact on Existing Market Findings and ConclusionsImpact on Existing MarketWill the subject’s success have an adverse impact on the competitive market.Penetration AnalysisClustering of existing product at same price point.Introduction of new product at same price point.7.5.H.5 the market study must include an assessment of the impact the proposed project would have on existing rental developments
62 Questions? Robert Lefenfeld Managing Principal Real Property Research Group, Inc.