Apartment Project Feasibility Should Be Carefully Considered, Say Experts

Orlando, Fla.--Panelists at the NAHB Builders' Show say that the first step in developing apartments is to determine the feasibility of the project.

Orlando, Fla.— The most challenging first step in developing apartments is to determine the feasibility of the project, according to panelists at a multifamily educational session at the National Association of Home Builder’s (NAHB) International Builders’ Show held this week in Orlando, Fla.

“It is easy to build what you cannot afford to,” said the panel moderator Spencer Stuart, senior managing director at Legacy Partners Residential Development Inc. in Dallas.

The session, held yesterday on the opening day of the conference, was titled “How to Get Started in Developing Apartments: Part I: Feasibility.” Stuart says that assessing project feasibility is a complicated process but not “rocket science,” and he highly recommends that developers use checklists when submitting to the long process of determining whether the green light should be given for a particular project.

Developers first need to have a thorough knowledge of their markets, says Stuart. They should consider, for example, the demand for the product, the number of bedrooms, the amenities and the parking ratios that would be required by that demand.

Michael Puls, president of the multifamily market research firm Foley and Puls, says developers may require at least $500,000 in cash to start a multifamily project, and compares the development process to starting a $20 million to $40 million new business. Many apartment projects are not feasible, he warns.

Puls says the first consideration in any project feasibility analysis is the demand-and-supply mechanisms of the market. Location is important, but the question is whether the demand can be captured by the project. Not only job growth, but also household formations and in-migration are the components of demand, he says. Job growth may be weak, but in-migration may be strong.

And even if the project is of high quality, it could be easily overwhelmed by oversupply. For example, the Dallas-Fort Worth market supplied 40,000 multifamily units over a five-year period, Puls says. “If there is oversupply, your project is no longer feasible.”

Another key development consideration is the target population’s income levels, which is used in calculating the rents that can be charged. This data is obtainable from the Census Bureau. Stuart said the 30-percent rule is used in the apartment industry, but he said that is a mistake. Instead, developers should generally make the more conservative assumption that renters pay only 20 percent of their incomes in rent. And as incomes increase, renters pay an even lower percentage, say 15 percent, of their incomes in rent.

Daniel Markson, senior vice president-development, at the NRP Group LLC, advised the audience to remember in particular to include three expense items when analyzing project feasibility: taxes, insurance and utility costs. These costs can be underestimated, wrongly assumed in a facile way or even ignored. Water and sewer costs, he says, are really difficult to control for the property owner, and may only be headed up. Budgets can get “really, really damaged” by some of these costs,” he says.

Markson also discussed site analysis in feasibility studies. For example, a property that is backed up against higher-level topography or parking may suffer from water draining down into the building. Speakers noted community opposition could be a “wildcard” and the importance of making sure there are transmission stations nearby that will provide for cellphone reception in the area.

Apartment project sizes are ideally 200-400 units. Projects that are under 130 units will not be able to afford to hire two onsite staff members, Markson says. And Puls says operating expenses become even more economic above 300 units, but less so above 400 units.