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Market analysis goals, pitfalls, and red flags: What to look for in reviewing market studies on 50-plus housing. By Annie Gerard
Market research is a small line item in most development budgets,often less than one-tenth of the cost allocated to the architect.Done right, it's cheap insurance. Done wrong, it may doom aproject from day one.The value of market research lies in optimizing design andenabling the highest possible rents or sales prices. It can identify voidsthat translate to a strong development opportunity and reveal potentialchallenges (and, ideally, suggest creative solutions). It substantiatescritical pro forma assumptions on absorption, price premiums, andturnover or resale rates. Ideally, it will describe local marketing standardsand consumers' expectations, including any regional peculiarities thatmarketing people need to know.Bad market research does none of those things. Worse, it may encouragedevelopment of a 50-plus housing project destined to struggle from themoment it opens its doors because it's priced too high, has the wrong floor plan mix, lacks features or amenities offered by the competition, or has
such a shallow pool of prospective consumers that absorption will crawl.From a value standpoint, bad market research is worse than worthless.Here are some "red flags" to watch for:Primary Market Area [PMA] is too big (or misses the mark):Overstating the area from which most residents will be drawn creates faultyexpectations about market depth and thus how fast a given project will sellor lease. Look for a detailed and reasonable description of how the PMA wasdefined, including the effects of "address," (is the site in a move-up or movedownlocation?) driving patterns, and proximity to key services. If the PMAis wrong, chances are the market study conclusions will be too.Not enough filters used in demand evaluation: Age-qualified housingis subject to a wider range of filters (pre-requisites) than other housing.Prospective residents must meet the minimum age requirement; havesufficient income (or not too much income, in the case of affordable seniorhousing); be a good fit in terms of lifestyle, independence or frailty; and bewilling to move. If the "mesh" is too wide — say, addressing householders aged 55-plus (rather than 65-plus) for seniorapartments or 65-plus (rather than 75-plus) forassisted living — the demand / supply balanceand required capture rates will be way off.Too few (or wrong) filters: Fifty-plus housingis unique in having a non-occupant componentto demand. The pull exerted by adult childrenand grandchildren can translate to a significantadditive that shouldn't be overlooked. Thelikelihood of "importation" rises with frailty, but it applies across the spectrum.
Amongsenior apartments, importation often accountsfor 30 percent of units leased. Active adultpurchases are also tied to kids and grandkids;that's why the sophisticated research done byDel Webb isn't limited to households who meettheir core age target (62 to 63 average). Incomequalifiers should match real world standardstoo. Senior apartment renters typically payup to 50 percent of their income toward rent;the income qualifier for assisted living may legitimately approach 75 to 80 percent. Using poor comps: Comparables should be as close as possible to thesubject project in terms of product and positioning, not just geography.That said, geographic comparability is vital. Relying on projects located ina different submarket, whether better or worse, will distort conclusions onpricing and likely performance.Too few comps: Beware a market study with just a handful of comps.Without sufficient data points (or consumer research: see below), a pricingcurve won't be valid.Too many comps: Market studies that include every type of project, ofevery construction era, and of every market orientation — the "kitchensink" approach to supply analysis — can be problematic too. Studenthousing in college markets, for example, where "bundling" of householdsis common, is a lousy predictor of rents that seniors will pay. Ditto withtrying to arrive at supportable housing prices for active adult by relying heavily on entry-level comps.
Skimpy competitive data: If there's no detail on unit mix breakdown — especiallyhow many units of a given type have leased or sold — productrecommendations are likely to be weak.No consumer preference data: If a project is pioneering, or there are fewor no direct comparables, supply / demand analysis should be supplementedwith consumer research — either online surveys (now cheap and fast) orfocus groups (still the best way to drill down to product preferences). Good market research doesn't have to be expensive, just crystal clear.
Annie Gerard, CRE, CAASH, is a principal with AptMarket Research, an apartment market research andconsulting firm in Costa Mesa, Calif. that specializes in senior and affordable analysis (
www.aptmarketresearch.com). She is a founding director of the 50+ HousingCouncil of the Building Industry Association of Southern California (
www.50PlusHC.com). She may be contacted at
agerard@aptmarketresearch.com.
