Market Study

What Is a Market Study?

A market study is a professional analysis of whether a proposed housing development will find enough renters or buyers. It asks a practical question: if this building opens with these units at these rents, will it fill up and stay full?

Lenders, investors, and public agencies rely on market studies before committing money. In affordable housing they are often mandatory. Federal law says a state may not allocate low-income housing tax credits unless “a comprehensive market study of the housing needs of low-income individuals in the area to be served” has been done. The study must be completed before the allocation, at the developer’s expense, by a disinterested party the state agency approves.

How a Market Study Works

Affordable housing market studies tend to follow a similar structure. Delaware’s requirements are one example:

• Define the market area. The analyst identifies the area from which most future residents are likely to come. Delaware’s checklist says this is typically 60% to 90% of them.
• Profile demand. Population and household trends, incomes, ages, jobs, and major employers. The analyst then counts households that would qualify for the proposed units’ income limits.
• Survey the competition. Rents, vacancy rates, waiting lists, and amenities at comparable existing and planned properties.
• Calculate net demand. Start with qualifying new and existing households, including renters who are cost-burdened or living in substandard housing. Then subtract competing supply. What is left is the unmet demand the project must capture.
• Estimate absorption. How many months the units should take to lease.

Delaware requires the study to be done within six months of the application. If the agency finds insufficient need or demand, the application is ineligible. Its checklist also defines a cost-overburdened renter as one paying more than 35% of gross income for gross rent, or 40% if elderly. That is a stricter test than the common 30% benchmark and illustrates how state rules can differ.

Market Study vs. Housing Needs Assessment

A market study evaluates one site and one proposed building. A housing needs assessment looks at a whole city, county, or state. It estimates how many homes, of what types and at what prices, the community lacks. A needs assessment can show a large overall shortage while a market study still finds that a particular site, rent level, or unit mix will not lease well.

Criticisms and Limitations

Market studies are only as good as their assumptions. Because the developer pays for the study, agencies set preparer standards to limit bias. Delaware, for example, requires a pre-approved, independent analyst with no financial interest in the project.