FHA Multifamily Underwriting Training “How to Avoid a HUD Market Rejection” Robert Lefenfeld Managing Principal Real Property Research Group, Inc. Southeast Mortgage Advisory Council Hilton Head, South Carolina May 29th 2013

Market Study Objectives Market Study Criteria National Council of Housing Market Analysts (NCHMA) WWW.Housingonline.org MAP Guidelines

Role of Market Analyst and Appraiser in the MAP Process Market Study Objectives Role of Market Analyst and Appraiser in the MAP Process Market Analyst evaluates balance of supply and demand for rental housing Appraiser 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”

Elements of Market Analysis Market Study Objectives Elements of Market Analysis Components of Market Study: Site Analysis and Market Area Economic Context Demographic Context Supply Context Findings and Conclusions: Balance of Supply and Demand Affordability Product Positioning in terms of offering and pricing

Site Analysis Questions? Site and Market Area Site 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 Crime Considerations for non-residential land uses? 7.5.C.4 Project location in terms of neighborhood and any other locational considerations.

Conducting a Site Analysis Site and Market Area Conducting a Site Analysis Is 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?

Amenity Analysis should cover: Site and Market Area Amenity Analysis should cover: Convenience Shopping Comparison Shopping Recreation Entertainment Medical Mass Transit Schools Library Public Transportation (Bus, subway)

Site and Market Area Future Improvements Transportation - State Consolidated Transportation Programs Other Improvements – County/City Capital Improvement Budget Proposed public transportation service Important to understand how community is developing; Impact on Household Growth.

Site and Market Area Market Area A housing market area is the contiguous area within which households compete for available housing, and within 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

Impact of Market Area Definition Site and Market Area Impact of Market Area Definition Population and Household Counts General Demographics Demand Analysis Supply Analysis Competitive Stock Attainable Rents

Factors used to define a market area: Site and Market Area Factors used to define a market area: Location of Competitive Properties Accessibility Natural Boundaries Housing Product Characteristics Market Perceptions Commuting Patterns Target Market Jurisdictional Boundaries Local Agency Service Boundaries Non-geographic Factors Data availability

Is this a good market area? Site and Market Area Is this a good market area?

How about this market area? Site and Market Area How about this market area?

Does this seem reasonable? Site and Market Area Does this seem reasonable?

Secondary Market Areas Site and Market Area Secondary Market Areas Less relevant to rental than retail Secondary source of buyers/renters Typically assumed as bonus demand over and above demand derived by Primary Market Area Often a comparison geography to the Primary Market Area

Economic Context Environment in which project will be operating At Place Employment Trends Labor Force and Unemployment Rates Major Employers – Contractions or Expansions Commuting Patterns 7.5.E.1 A discussion of current economic conditions and employment characteristics

Economic Context Define the Local Economy Larger than the market area Jurisdictions with functional integration Metropolitan Areas Counties Cities

Economic Context Unemployment Rates

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.

Change In At Place Employment Economic Context Change In At Place Employment

At-Place Employment by Sector Economic Context At-Place Employment by Sector

Long Term Change in Employment by Sector Economic Context Long Term Change in Employment by Sector

Short Term Change in Employment by Sector Economic Context Short Term Change in Employment by Sector

Economic Context Economic Forecast Location of Major Employers Location; Size of Workforce; Prospects for future growth or reduction Economic Expansions Any planned expansions in the Market; i.e., BRAC, New Plants. Is household growth increasing demand for services Economic Disruptions Major Layoffs or Closing; Vulnerable Sectors of Economy Wage Trends Are wages increasing or decreasing? Location of Major Employers

Demographic Context Demographic Context Overall Trends Projection Process Demographic Analysis 7.5.E.2 A thorough discussion of past and anticipated future trends in the demographic character of the housing market.

Demographic Context Baby Boom Generation

Trends in U.S. Rentership Rate Demographic Context Trends in U.S. Rentership Rate

Predictions, Forecasts, Prophecy Demographic Context Predictions, Forecasts, Prophecy A 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.

Demographic Context

Influences and Assumptions that Guide Projection Process Demographic Context Influences and Assumptions that Guide Projection Process Births and Deaths – Natural Increase Migration – Internal and External National Shift to Service Economy – Pre Great Recession Natural Shift to ?? Economy – Post Recession – Only Meds, Eds and Feds?? Older Labor Force – Semi Retirement Effect of Baby Boom, Semi-Retirement; Growing Number of Senior Citizans Baby Bust, Echo Boom - Decline in Household Size Business Relocations and Deaths Local Govt. Development Policy - Federal and State Economic Policy Local Govt. Development Patterns

Demographic Context Projection Sources Metropolitan Planning Organizations www.narc.org  National vendors (Nielsen, ESRI) Local Governments State Data Centers U.S. Census Bureau C-40 report 2010 Census American Community Survey

Population and Household Trends Demographic Context Population and Household Trends

Demographic Characteristics Demographic Context Demographic Characteristics Family type and proportion of one-person households Owner / Renter Distribution Age Distribution of Population Permanent Renters Income Distribution by Tenure (Owners vs. Renters) 33

Competitive Context Housing Stock Analysis of Rental Supply Inventory Characteristics Rent and Vacancy Trends Construction and Absorption Levels Pipeline 7.5.F Market study must include a comprehensive description of the current conditions of the rent market

Is rental market tight or soft? Competitive Context Is rental market tight or soft? Evaluate stabilized vacancy rate and total vacancy rate Are 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?

Competitive Context Rental Summary

Detailed Rental Information Competitive Context Detailed Rental Information Evaluate stabilized vacancy rate and total vacancy rate Are 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 data Compare net rents by unit type and by percent of income targeted on Look at total rent and per-square foot basis

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.

Competitive Context Net Rent and Size Market Analysis should comment on reasonableness of rent. Not necessary to do rent grid.

Competitive Context Pipeline Local building/planning department(s) Other rental projects planned or under construction. Local building/planning department(s) Tax Credit Allocations Regional Surveys 7.5.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.

Supply and Demand Key Questions Findings and Conclusions Supply and Demand Key Questions Oversupply 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

Findings and Conclusions Net Demand Demand Household Growth Demolitions % of Renter Households Supply Pipeline Subject Balance of Demand and Supply 7.5.H.1 Estimate of demand must be based on a calculation of incremental demand… 42

Findings and Conclusions Net Demand

Components of Inventory Change Findings and Conclusions Components of Inventory Change

Varied Rentership Rates Findings and Conclusions Varied Rentership Rates

Varied Rentership Rates Findings and Conclusions Varied Rentership Rates

Findings and Conclusions Varied Rentership Rates

Affordability Capture Rates - Definitions Findings and Conclusions Affordability Capture Rates - Definitions Capture 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…

Interpreting Capture Rates Findings and Conclusions Interpreting Capture Rates 5% Capture Rate (need to get 1 in every 20 eligible households) 33% Capture Rate (need to get 1 in every 3 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

Key Assumptions and Threshold Measurements Findings and Conclusions Key Assumptions and Threshold Measurements The appropriate income range for residents to qualify for the project must be established Maximum 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

Tax Credit Rents and Incomes Findings and Conclusions Tax Credit Rents and Incomes

Affordability @ 35% Rent Burden Findings and Conclusions Affordability @ 35% Rent Burden

Affordability @ 30% Rent Burden Findings and Conclusions Affordability @ 30% Rent Burden

Findings and Conclusions Affordability @ 120% AMI

Capture and Penetration Rate Findings and Conclusions Capture and Penetration Rate

Calculating Capture Rates & Demand Analysis Findings and Conclusions Calculating Capture Rates & Demand Analysis There are no right or wrong capture rates Capture/penetration rates must be considered within context of market In rural markets, be conservative; “don’t want to be wrong forever” Critical demand for several units does not mean sufficient demand Senior markets may consider support from homeowners

Interpreting Capture & Penetration Rates Findings and Conclusions Interpreting Capture & Penetration Rates Rural Markets Danger Zone Capture Rate Best Opportunity Urban Markets Penetration Rate

Other Factors Impacting Demand Findings and Conclusions Other Factors Impacting Demand Location—Surrounding land uses may attract or prevent renters from moving to the site Proposed Rents—Capture rates estimate the number of households able to pay the proposed rents, not the willingness to do so Housing 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

Findings and Conclusions Final Conclusions Findings Evaluation of Site Evaluation of Economic Trends Evaluation of Demographic Trends Evaluation of Competitive Environment Net Demand Product Evaluation Unit Distribution Unit Sizes Features and Amenities Price Position (Appraiser does specific grids) Affordability

Projected Absorption Levels Findings and Conclusions Projected Absorption Levels Historic Pattern of New Units Absorbed Annually Performance of Recently Completed Projects Adjust Estimate to Reflect Market Conditions Economic and Demographic Forecasts Units in Pipeline Occupancy Levels 7.5.H.4 Study should also include an estimate of absorption period needed for the project to reach sustaining occupancy…

Impact on Existing Market Findings and Conclusions Impact on Existing Market Will the subject’s success have an adverse impact on the competitive market. Penetration Analysis Clustering 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

Questions? Robert Lefenfeld Managing Principal Real Property Research Group, Inc. 410.772.1004 Bob@RPRG.net