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…
https://www.housingonline.com/councils/national-council-housing-market-…
http://www.appraisalinstitute.org/assets/1/7/Level_C_Fundamental_Market…
https://www.jchs.harvard.edu/sites/default/files/w07-7.pdf
Multifamily development person here: change in demographics and employment growth/composition are probably the biggest demand drivers when it comes to multifamily regardless of market size or suburban/city type.
Generally more firms hiring in the area likely means net influx of working-age people moving into the area, meaning more people looking to either rent or buy. So there's your new renter demand. A good proxy would be the number of online job postings sorted by location -- a lot of job postings means potentially a lot of new demand. Reading the local business journal will also give a good feel of what the job / real estate market is like in the area. If you hear a lot of local residents complaining about how expensive homes are, then the renter pool is probably growing and/or large.
Renter demand also interacts with housing affordability and availability -- if home ownership is considered expensive/limited in supply relative to rental apartments, then you will have a more persistent and deeper renter pool.
How many units is too many units? When rent growth starts slowing then there's probably too many units for the market to absorb. A free and easy proxy is to just go on rental listing sites like Zillow, apartments.com, craigslist and see how many units are available and what the concessions are like. If you see a lot of available units sitting vacant for months then there are probably too many units. If rent is rising then the market can still absorb more supply. If concessions start increasing or rent growth slows or flattens then there's probably going to be too many units in the present or near future.
To add on: the current leasing market isn't a perfect proxy because the supply of apartments is quite lumpy and can be quite lagged in response to demand -- real estate development is such a drawn out process and it takes months or years to respond to demand. Hence the boom and bust nature of real estate development.
Thanks - Not OP but very helpful.
So in these markets where there is virtually no employment growth across the board (i'm sure there are sectors that are seeing growth, but generally speaking...), how do you gauge demand?
How would/do you approach markets that are more supply constrained where the focus needs to be on existing demand and renter pool? Occupancy levels and concessions of competitors are a good indication but how would you determine pent up demand not driven by outside growth?
Look at the lease-ups in the area, how quickly did it stabilize and are properties increasing rents. I work in a growing market so perhaps we don't look at this enough but following new retail development has been our company's philosophy "Follow the Teeter." Grocery stores do extensive demo research and people like living next to retail. Most suburban MF will be 200-300 units so the question is what building type makes since (Garden, 4-story Elevator, Midrise)
Curious, how do you find lease up data?
Call the property managers. My bosses are old school and you would be surprised what you learn if you just ask nicely. Also try the local investment sales brokers most produce a pipeline report that can offer some guidance too.
Appreciate the respond and thoughts.
Out of curiosity what represents a strong lease up/absorption speed in your markets? How many units per month would you consider qualifies a supply constrained market?
I was taught that 24 units a month is the target. Its a holdover from garden apartments (24-unit buildings) and the idea that logistically signing up more just doesn't happen with tours, credit checks, etc. The goal is to the lease-up before you have to get the initial tenants to renew. (24 units * 12 months = 240 units) Otherwise, you are "competing against yourself," and have units that never fill.
I get the feeling you are trying to find some metrics to lean on but in reality, developers are going to max out units based on the rent the market can pay vs the cost to building more units.
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.
Pipeline does not indicate demand. It indicates others expectations of demand.
Oops mean to say future demand/supply. Good Catch. Although if we make the assumption that multifamily developers are efficient in predicting future demand, the original erroneous statement could still be true ;)
Edit: I realized that I was not erroneous in my original statement. In my original statement, I mentioned development pipeline of other property types. For example, 1MM square feet of Class A office coming to a suburban town would likely indicate future demand since future employees would need a place to live (especially nearby). Development pipeline of MF indicates future supply.
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.
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