NCHMA has separate definitions of overall market demand and project specific demand Overall market demand is the total number of households in a defined market area that would potentially move into any new or renovated housing units. Market demand is not project specific and covers all renter households and income levels. Components of demand vary and can include household growth; turnover, those living in substandard conditions, rent over-burdened households, and demolished housing units.
Project specific demand is the total number of households in a defined market area that would potentially move into the proposed new or renovated housing units. These households must be of the appropriate age, income, tenure and size for the specific proposed development. The components used to estimate the demand for the specific project are similar to those used to estimate overall market-area demand.
An analysis of a proposed rental project should evaluate both overall market demand and project-specific demand. It should evaluate the demographic; employment, construction and absorption trends, as well as projected changes in supply and demand to determine how many units are needed to achieve market equilibrium. It also should determine if there is sufficient support within the proposed development’s market area to support the planned development, as well as any other comparable units in the development pipeline.
A project-specific demand analysis should estimate how many income-qualified renter households are within a planned development’s income range. The project-specific demand conclusion should not only address whether a market area has a sufficient number of income-qualified households to fill the proposed units. It also should address the impact of its proposed units on existing rental communities in the market area. In addition, it should consider how effectively a planned project can compete for tenants and address the planned development’s ability to achieve stabilization at its proposed rent levels.
Factors to Consider in Analyzing Demand
Household Growth: A market area must be able to provide sufficient units to accommodate both its existing households, newly forming households and in-migrating households. If the existing housing stock does not contain an adequate supply of units, the construction of new units is necessary to accommodate household increase.
Units in Pipeline: Projects that are planned or under construction will increase the existing supply and may affect market equilibrium. The units in the pipeline include the off-line units that will be renovated and returned to the market, as well as unstabilized project that are in lease-up.
Vacancy Rates: 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 strong demand estimates and properly positioned rents. Older developments may offer significant incentives to compete with a new rental property. Income qualified renters may be unwilling to pay more for higher quality housing.
Substandard Housing Conditions: The characteristics of a primary market area’s rental inventory can be a source of demand. Below average unit conditions or obsolete unit designs can produce a pent-up demand for new units to replace the older housing stock.
Unit Replacement: Units can be removed from the rental inventory for a number of reasons, including natural disaster, eminent domain, condemnation, abandonment, or demolition, unit consolidation, and conversion to non-residential use. Replacement of existing units can be a major cause for residential construction, especially in established communities with limited vacant land available for development.
Absorption Levels: A market area’s performance in adding and filling additional units is often a better gauge of its ability to accommodate additional units than household growth, especially in an area with a stable or declining population or an aging housing stock that does not satisfy needs or expectations of current residents.
Market Balance: Demand for new units comes from household growth as well as from pent-up demand due to a lack of available and affordable housing and/or substandard housing. Pent-up demand is often illustrated by very low vacancy rates. If the number of new units that are planned or under construction exceeds the PMA’s historic rental housing absorption levels or its projected levels of renter household growth, the completion of all the units in the development pipeline could temporarily oversaturate the market and lead to rising vacancy levels and declining rents
Market Segmentation: Household growth, job growth, and residential constriction do not necessarily occur evenly throughout all income ranges. The need for additional units can be limited to specific price ranges or market niches.
Number of Potential Income Qualified Households: The primary area, in nearly all cases, must contain a sufficient number of households who meet the occupancy restrictions of a proposed project. If it does not, the planned project will not succeed unless it can attract households from supplemental sources, such as homeowners or persons living outside the market area who would not otherwise move.
Unit Distribution: Demand, as measured by both the number of potential qualified renters as well as reported occupancy rates within the primary market area, can vary significantly by unit type.
AMI Distribution: A planned project may have a few units targeted to a very high or very low income groups. In such cases, measuring the number of income-qualified households within the entire target income band can severely overstate the number of potential income-qualified renters.
Turnover: Not all income qualified tenants will necessarily move into a project. An estimate of what percentage of tenants would actually move can give a more realistic estimate of how existing tenants will be moving to a different unit during a planned project’s lease-up period.
Affordability: LIHTC projects are targeted to low to moderate income households, but charge fixed rents. Unless a planned project has project-based rental assistance or a tenant has a Housing Choice Voucher, each tenant must have sufficient income to pay the proposed rents. In many cases, tenants who pay an excessive amount of their income for rent do not have enough income to occupy the planned project.
Housing Choice Vouchers: Can provide supplemental demand for units. Vouchers can allow otherwise non-income qualified tenants to occupy planned units, especially in communities where rents exceed Housing Payment Standards, units do not meet Housing Quality Standards, landlords do not participate in the voucher program, and/or housing authorities have unused vouchers.
Market Saturation: If the primary market area already has units that serve a large percentage of the planned project’s target income group, there may enough unserved households to fill another planned tax credit project without adverse impact on the occupancy levels of existing LIHTC projects.
Location: A site’s adjacent land uses, neighborhood characteristics and/or surrounding land uses may attract or prevent renters from moving to the site.
Proposed Rents: Demand estimates indicate the number of households able to pay the proposed rents, not their willingness to do so. If the proposed rents are not properly positioned based on site location, project design, unit size, and amenities, income qualified households may not lease the proposed units.
Inappropriate Market Area: The size and socio-economic composition of a market area greatly influences demand calculations. A market area that is too large may overstate demand for a proposed development. Conversely, an unrealistically small market area may either understate or overstate demand for new product by underestimating the potential number of project residents or by excluding competitive existing or planned projects that are just outside the defined market area.
Sole Reliance on Capture Rates: A capture rate only measures the ratio of the total units proposed to the number of income qualified households in the market area. It does not consider whether the other existing or approved projects adequately serve the proposed project’s target income group. It also does not consider whether there is demand for additional units at the target rent and income levels.
Use of Threshold Criteria: While capture and penetration rates are certainly an important measure of the strength of proposed development, a determination of a project’s viability should not be based solely on one number. A low capture or penetration rate does not automatically equate to demand for the proposed development. Conversely, a higher capture rate or penetration may be acceptable if the project is properly positioned or the market area is experiencing or about to experience rapid growth.
Project Level Capture and/or Penetration Rates: For projects that have an uneven unit mix or AMI distribution, the use of aggregate capture or penetration rates can result in a misleadingly high estimate of the number of income qualified residents.
Limited number of units of a specific type or AMI level: Including a few units of a specific unit type or AMI level can allow a project to appeal to a broader income range. If the analysis does not consider whether there are sufficient households to fill each unit type at each proposed AMI or rent level, the demand conclusions may not be an accurate indicator of whether a project’s proposed unit mix and occupancy restrictions are suitable for the market area.
Reliance of rent over-burdened households as a measurement of demand: Rent overburden indicates that households do not have sufficient income to afford private rental housing. Rent over-burdened households are concentrated at the lowest income ranges. Unless a project has project-based rental assistance or rents at the lowest AMI levels, it will not necessarily attract tenants who have rent overburden.
Use of census data to measure substandard housing: Generally, state demand models that include the substandardness of the existing rental stock cover two components — units lacking complete plumbing and overcrowdedness. While these two factors may not completely capture the quality of the housing stock in a given market area, there is generally a correlation between the percentage of households residing in these housing units and the actual condition of a market area’s rental stock. Urban market areas will often have high substandard percentages, while emerging suburban and exurban markets have low substandard percentages.
Housing Choice Vouchers: The use of the availability of Housing Choice Vouchers or waiting lists for Housing Choice Vouchers is generally not an accurate measure of demand for a proposed rental community. The exception to this would be a proposed community with Project Based Rental Assistance and a long waiting list for such units.
Conclusions such as an extensive waiting list for Housing Choice Vouchers equates to significant demand for LIHTC units or that available Housing Choice Vouchers are a sign of oversupply of rental units are overly simplistic. Little correlation, if any, correlation exists between a Section 8 units and a 60 percent LIHTC units. Conversely, vouchers are often left unused due to a lack of available housing options.
At best, a discussion of Housing Choice Vouchers should be anecdotal.
No discussion of pipeline in demand analysis: The units that are planned or under construction can alter the market area’s rent and vacancy levels of different unit types. If the number of units within the market area’s development pipeline exceeds short term new construction needs, the market area may experience oversaturation, which might impair the market feasibility of the planned project.
Underperforming LIHTC projects: If LIHTC units, particularly those that have the same occupancy restrictions as the planned project, are experiencing higher vacancy rates that the overall market, there may be less demand for the planned project than indicated by a capture rate or penetration model.
Recommended Practices for Analyzing Demand
Capture Rate: Calculate the project’s overall capture rate, as well as the capture rate for each unit type by proposed income targeting.
Penetration Rate: Calculate the penetration rate. Discuss whether there are unserved income- and size-qualified households to fill another planned tax credit project without creating an adverse impact on the occupancy levels of existing LIHTC projects.
Anticipated Additions to Housing Stock: Project and explain any future changes in the housing stock within the market area.
Unit Replacement: Where applicable, discuss the impact of physical depreciation, obsolescence, or a declining demand for a particular unit type within the market area on the demand for the proposed project.
Absorption Levels: Define and justify the absorption period and absorption rate for the subject property. Relate the absorption forecast to market area’s historic ability to add and fill additional units, the performance of directly comparable properties, and the indicated capture and penetration rates.
Overall Market Demand: Discuss the additional number of units needed within the market area between the effective date of the report and the planned project’s anticipated completion date. The overall demand estimate should consider the market area’s existing vacancy levels, anticipated household growth rates, unit replacement needs, and project’s that are planned and under construction.
Housing Choice Vouchers: Evaluate need for voucher support or HUD contracts.
Market Balance: Evaluate a planned development’s impact on overall rental occupancy rates. This analysis should include all units, as well as those in the planned development’s target rent and income ranges.
Market Position: Discuss how effectively a planned development’s location, design, size, unit mix, and income distribution matches market area need. Recommend changes in project design, unit mix and occupancy restrictions to improve the planned development’s ability to attract and maintain tenants.