This is for the development guys/economists out here, particularly those specializing in suburban multifamily in secondary/tertiary markets.
How do you go about measuring depth of market and renter pool? Have you found a good way to quantify or estimate existing vs new demand? Essentially how do you gauge how many units is too many units?
Obviously you can hire a third party firm and get market studies done but those guys typically just tell you what you want to hear and don’t dive too deep on this topic.
Any analysis/lines of thinking/information sources would be appreciated.
Adding some sources I’ve found here so this post serves as a one stop, this is oddly a topic that has a lot and no information at once:
https://propertymetrics.com/blog/how-to-analyze-supply-and-demand-for-a…</a">https://propertymetrics.com/blog/how-to-analyze-supply-and-demand-for-a…
https://www.housingonline.com/councils/national-council-housing-market-…</a">https://www.housingonline.com/councils/national-council-housing-market-…
http://www.appraisalinstitute.org/assets/1/7/Level_C_Fundamental_Market…</a">http://www.appraisalinstitute.org/assets/1/7/Level_C_Fundamental_Market…
https://www.jchs.harvard.edu/sites/default/files/w07-7.pdf</a">https://www.jchs.harvard.edu/sites/default/files/w07-7.pdf
Simple answer: Vacancy rates and trends indicate current demand levels. Concessions, rent growth trends and net supply/absorption indicate momentum. Employment trends ( and absorption of office space etc.), macro trends and development pipeline of other property types indicates future demand.
Thank you for the concise summation and comments - in most markets it will not be black and white when it comes to concessions, lease up speed and asking rents as they are all functions of each other, i.e. most markets won’t have no concessions, high rents and fast lease up rates.
How do you balance these factors to get to a conclusion on what is a supply constrained or high demand market?
Agreed with below - pipeline is more important as an indicator of future supply, not demand (although it can be a sign of both).
You raise a good question - how does someone have confidence to build a large scale project without knowing who the occupiers will be. I am an analyst for a developer/owner/manager and have been frustrated by what looks like blind confidence sometimes when it comes to building in new markets. For the last five or so years we have only built in submarkets that have never had 50+ unit market rate rental communities. We've also been pretty successful in the process. In these types of markets, factors like supply, absorption and vacancy are essentially non-existent. We tend to look more at economic drivers like @pineappleicecream mentioned. This topic highlights the important of having a local partner who knows the market and can guide the product to meet the market needs - unit mix, amenity offering, unit finishes, unit pricing etc... In markets with more supply, a lot of this info is out there through Costar or Axiometrics but when supply is thin, I've seen more qualitative factors cited for demand than quantitative. Curious what others have experienced when building in market with minimal or no competitive inventory.
In markets that offer no concessions, high rents and fast lease up rates, I would argue it becomes more black and white than if that were not the case. Clearly those markets are strong and demand is very high. The answer is to compare the amount of jobs being added/population growth to the amount of housing in the development pipeline. Chances are, those markets are Demand driven especially given the length of our previous cycle. Although by definition, for vacancy rates to remain low, prices to grow and new absorption to be high, Demand must be exceeding supply so you could look at it both ways.
One way to forecast future demand is to look at the development pipeline in general and balance out multifamily (you could also add in SFR) with the construction of other property types. Figure out what the average net SF/employee ratio is in your particular market or use the general rules of thumb. If the forecasted employee count greatly exceeds supply, it is probably safe to build.