Prepared for the National Council of Housing Market Analysts By: Tyler Borowy (Prior & Associates) December 2022
The purpose of this White Paper is to be a resource to market analysts and other users of market studies and to provide more in-depth support to these and other practitioners when evaluating housing developments in rural areas.
The U.S. Census Bureau defines rural as “any population, housing, or territory not in an urban area.” As of the 2010 census, the U.S. Census Bureau defines urbanized areas as having a population of 50,000 or more and urban clusters as having a population of at least 2,500 and less than 50,000 and using the census tract in the initial phase of delineation. The U.S. Department of Agriculture (USDA) Economic Research Service (ERS) published an article outlining the nuances associated with defining rural areas and points out that definitions can be based on administrative, land-use and economic considerations, and that there are several concepts of “urban” boundaries that can result in different rural definitions.
The process for establishing if a market study is conducted in an urban versus rural area based on all possible definitions is beyond the scope of this paper, but providing a brief definition of rural is appropriate to determine if the methods described herein are applicable in the context of preparing and evaluating market studies. Practically speaking, most housing professionals know rural when they see it and the USDA’s Income and Property Eligibility Site is helpful for determining if a property is in a rural area.
This paper will discuss rural market study methodologies and provide guidance and best practices for housing professionals. Rural market studies should provide in-depth research and processes to:
- define a primary market area (PMA) that most accurately describes the geographic area that a proposed or existing housing community will attract tenants from;
- address longer than average drive times and the dynamics of a smaller, self-contained economy;
- determine if demand will originate beyond the PMA or from other sources inside the PMA; and
- examine affordability thresholds for the existing population to derive achievable rents.
Factors to Consider for Determining a Market Area
The Determining Market Area White Paper is a helpful and prerequisite resource, and one of the aims of this paper is to expand upon those best practices but with a specific focus on rural locations. The factors to consider when determining a market area apply to rural locations, but with additional explanation and guidance.
Market analysts and other users of market studies should be aware of the following factors and issues when determining rural PMAs:
- The interviews with local property managers and real estate professionals should thoroughly investigate the primary draw area for the subject property and help determine PMA boundaries. This is especially important for rehabilitation projects where the on-site manager should have information regarding tenant origination patterns and housing needs. Analysts can also ask management for a list of zip codes or communities from which most residents or applicants originate. Tenant applications, website inquiries, and existing resident information can be used to provide this data.
- Obtaining perspectives from local stakeholders is imperative. Talking to economic development officials, planners, mayors, town managers, housing authorities, major employers, and housing professionals can reveal a lot about demand for housing, housing preferences (number of bedrooms, features, size, etc.), the quality of housing, and where most tenants would likely originate from. It is also important to recognize potential biases and conflicts of interest of these stakeholders.
- Commuting patterns are different in rural areas. Drive times could be similar to those urban areas, but distances are greater and households have shopping and commuting patterns that differ from urban households. For example, residents in a small town may travel 30 to 60 minutes to a larger city for certain services and major shopping centers, but the households in the larger city are much less likely to move to a less developed rural area for housing.
- Rural market areas are often larger from a geographic standpoint because the availability of affordable and/or higher-quality housing could be restricted and households are willing to accept longer drive times for employment, shopping, and services.
- Commuting pattern and migration data available from OnTheMap, provided by the Center for Economic Studies, can help reveal if the population living in market area also works there, and vice versa.
- It is important to understand the regional and local economies, the major employers and if the major employers have any planned expansions or contractions. Research should also be done to determine if there are any changes to local laws or zoning regulations that could impact the supply of new housing in rural areas.
- Public school quality is often a push/pull factor for many households with school-aged children. This may not be an issue if school quality is equal across adjacent and nearby districts.
- Understanding the location of community services associated with shopping, groceries, healthcare, pharmacies, post offices, recreational opportunities, and other community attributes may also help establish market areas.
- Scattered site projects may require additional consideration, such as whether all sites draw tenants from the same geographic area or if a different unit of geography must be considered when evaluating this project type, especially if subject sites are in multiple counties.
Demographic Characteristics & Factors to Consider for Analyzing Rural Market Demand
From the NCHMA Demand and Capture Rate Methodologies White Paper, two factors stand out for rural market studies: substandard housing conditions and the need for unit replacement.
Replacement & Substandard Housing: Several factors often point to the need for replacement housing, or newer, higher-quality rental housing for the workforce and elderly. The American Community Survey (ACS) provides information on adequate kitchen, plumbing, and bath facilities that can be used as a proxy to gauge the conditions of existing housing stock. Additionally, substandard housing situations can be created by overcrowding or multigenerational housing situations, which are also a potential source for new household formations that are difficult to measure from traditional data sources. The age of the existing housing stock can often be used as a measure of possible replacement housing, particularly pre-1970s product that may have lead-based paint and/or show significant signs of deferred maintenance. Analysts should observe housing stock that is at or near the end of its useful life during site inspections and fieldwork, and comment on these observations in the supply analysis section of the market study.
Rent Overburden: Newer affordable housing can be a solution to addressing substandard housing issues and provide a respectable housing product for households living in obsolete housing with no affordable alternative. While rents in rural areas tend to be lower than urban areas, rent overburden can be exacerbated by the lack of quality housing, and low-income households face little opportunity for upward mobility if they occupy substandard housing and pay too much for it. The U.S. Department of Housing and Urban Development (HUD) defines rent overburden as those who pay more than 30 percent of their income for housing and may have difficulty affording necessities such as food, clothing, transportation, and medical care. Market analysts can examine ACS data to determine what percentage of the population is rent overburdened and use this information to illustrate existing or new sources demand for affordable rental housing.
Workforce: Employers in rural markets often bemoan housing conditions and list it as a top concern for attracting and retaining staff. Interviewing major employers and understanding the typical wages paid can help estimate rental price points. Additionally, personnel who have excessive commute times may be an indication of potential housing needs. Because only a few major employers in rural areas can have an outsized influence on employment and the economy as a whole, market studies should also include information and additional research related to overreliance on a specific industry or employer. This can be demonstrated by describing what percentage the major employer(s) have as a share of the overall employment. Any disruptions to major employers could affect future demand for housing.
Demographics: Oftentimes, slow or no new rental housing supply in a rural market causes stagnant or negative renter household growth. This should not be construed as a lack of demand. As substandard housing becomes more prevalent, households may relocate to areas with better housing. New rental housing can mitigate household and population decline, assuming that the economy is stable.
Capture Rates & Absorption: It is not uncommon for higher capture rates to be achievable in rural markets, particularly when there is no direct competition. Capture rates can also be overstated because they focus on renter households. It may be necessary to consider demand from multigenerational or overcrowded household situations, or from owners that would like to sell but have no viable rental alternative. Overall, there should be more tolerance for higher capture rates in rural markets and it may take longer to achieve market balance in a rural market, depending on the supply pipeline and subject size. Additionally, lease-up forecasts must be reasonable and justified. Voucher support may also be necessary for the project to stabilize if project-based subsidies are not in place.
Rental Supply & Competitive Environment
Market Study Comparables: Identifying and surveying comparable properties in rural areas can often be a challenge. In some cases, there are no traditional apartment complexes in the PMA. Therefore, the analyst should examine census data (gross rents, units in structure, number of bedrooms, etc.) to supplement what is often a very limited inventory of properties that an analyst can survey. An inventory and/or overview of non-conventional rentals (single-family homes, duplexes, mobile homes, etc.) is often helpful in demonstrating the affordability and availability of other rental alternatives when multifamily housing is lacking in the market. Multifamily communities from outside the PMA can be presented to provide regional context, but the market study should discuss the ability to achieve commensurate rents because comparables from well outside a rural market area are less appropriate for determining achievable rents.
When interviewing property managers at affordable communities, it is recommended that analysts ask questions about potential rent increases, as it is not uncommon to have rents at 50 and 60 percent of area median income (AMI) be the same and the property have a long wait list and low vacancy rate. Could they achieve higher rents and by how much? Analysts can ask if the maximum rents are attainable but should be aware that higher achievable rents may result in lower stabilized occupancy and absorption forecasts.
Rental communities developed through the Rural Development (RD) program are common in rural areas. Some provide Rental Assistance (RA) for all units and others only for some units. In these cases, the analyst should obtain basic and note rents, and ask how many tenants pay these rents. The basic and note rents can be referenced against AMI rent limits for the county and indicate prevailing price points for income-restricted housing.
Alternative Housing: The market study must include a strong buy versus rent analysis. Many rural markets have very affordable for-sale homes that represent a viable alternative to rentals, although such homes may be lower quality or not meet renters’ needs. The analyst should include a summary or descriptive table that categorizes year built/renovated, size, bedrooms, baths, interior features, upgrades, and other information to present how for-sale options compare to the subject property.
Calculating Achievable Rents
Comparable Selection: It is possible that there are no true comparable multifamily projects in the PMA and it is often necessary to use single-family rentals or small multiple dwellings as comparables. The analyst should speak with rental property managers who manage multiple properties and/or realtors who manage properties to obtain rent, vacancy, unit size, and other housing information. It is sometimes possible to obtain the overall vacancy rate and rent by unit type for a professionally managed portfolio of rental properties.
Non-PMA Comparables: It may also be necessary to survey comparable properties outside the PMA to gain insights related to tenant draw areas and rents. Adjustments can be made for location differences by examining median income, gross rents, and home value differences, but analysts should not necessarily consider such properties competitive with the subject. Analysts should indicate why specific comparables were used and provide detailed justification for their consideration in the market study if they are outside the PMA. If there are rental properties in the PMA that are not used in the market study, then the analyst should also provide a summary of these projects (location, age, unit types, sizes, condition, etc.) and explain why they are not good comparables. Even if they are not comparable to the subject, the analyst should demonstrate the characteristics, condition, and design of existing housing stock for the end-user with a summary and, if necessary, photographs.
Market Advantage Issues: New affordable developments often establish a rural areas rents. It is not uncommon to observe rents at affordable properties that are similar to or above market-rate rents due to quality, condition, design attributes, and amenities. The ten percent market advantage rule is often not applicable because of these differences. There is often limited supply for market-rate apartment housing and, therefore, the highest concluded affordable rents may equal the achievable market rents. However, it should not be assumed that a new rental product entering the market can automatically attain rents higher than prevailing amounts. There is often a threshold or price point that tenants are willing or able to pay and, ultimately, the achievable rents must be grounded by this concept. The capture rate and penetration rate analyses, discussion of quantitative adjustments used to derive achievable market rents, and highest surveyed rents at comparable properties should inform the maximum achievable price points.
Potential Red Flags
- The analyst should not automatically default to a place or county as the PMA. Questions to consider are: Is the subject in the corner of the county? Is the place (city, township, etc.) oddly shaped, whereby the demographic data used to estimate demand leaves out unincorporated lands or townships with relevant potential household demand?
- A county or town may be the true primary draw area for a rural multifamily project. However, the analyst should have ample evidence demonstrating that this is the case. If the subject property is not in the county’s principal commerce center, using the entire county or including larger and more populous town(s) could overstate demand.
- Rural areas close to state boundaries can present unique challenges for delineating a market area. There may be evidence that tenants cross state lines for shopping or services, but the same may not be true for housing needs.
- Natural or manmade features must be considered. Rivers and few bridges, or railroads and few crossings, could significantly increase drive times and affect PMA boundaries. Crossing significant geographic boundaries, such as rivers, mountain ranges or railroad tracks, to include areas in the PMA that are not easily accessible or a true draw area for the subject property can result in overstated demand forecasts.
- Using non-competitive comparables from larger towns or cities outside the PMA to derive achievable affordable and market rents without an explanation of why they are considered or how they are utilized in the analysis.
Other factors that should be considered but are beyond the scope of this project include the importance of understanding the target market. For example, a market study for a farmworker rental project will have different considerations than an age-restricted development. A permanent supportive housing property in a rural area will need even greater research regarding the availability of services and identifying sources of demand.
When conducting market studies in rural areas, many of the NCHMA-adopted methodologies for determining market areas, selecting comparables and determining rents still apply, but with the need to better evaluate and understand economic conditions, available housing choices, and the existing housing environment.