In my experience as a consultant developers with a new rental building either in the planning stages or under construction almost always ask three important questions. Their first question is almost always “What rents can we get?” Rents make up the bulk of revenues and if rents aren’t high enough then the proposed project might not make sense financially. The next question is “How fast can we lease up?” This is important because the quicker new rentals are absorbed into the housing supply the sooner the building will begin generating revenue. The third question, most of the time, is “What types of renters should we target?”
In the following series of posts (three in all) I will attempt to answer these questions. The first two questions are relatively straightforward to answer, since achievable rents can usually be identified by studying other rental buildings and market data, while absorption can be estimated by comparing successful lease-ups and by using demographic and housing statistics to gauge depth-of-market. The third question about target renter types is the trickiest to answer, for reasons I will explain when I get to it.
I’m not going to try to cover each topic comprehensively—for that I’d need to write tens of thousands of words, plus gather and analyze a huge amount of data. Instead, what I’m going to do is to discuss different ways of thinking about these topics, ways which will help you come up with your own answers to the three questions. If you disagree with the ways of thinking I discuss, then that’s good, that’s my goal.
Why do I like disagreement? I’ve noticed there’s been, to some extent at least, a convergence of ideas and a homogenization of thought over the past few years in the industry. In some ways that’s good since it means a body of shared knowledge is being formed, something which didn’t exist when I started in the industry over fifteen years ago. On the other hand, it also means that a lot of ideas and viewpoints have become received wisdom and pretty much taken for granted without much thought or reflection, or without any supporting data. I’m not suggesting the industry needs some ‘grand unifying theory’—the industry is too practical-minded for that. I’m suggesting instead that the industry would benefit from “sitting down and thinking about things” more than it does, focusing on some key questions, and coming up with answers based on data and observation, not based on received wisdom or instinct or by layering assumptions on top of assumptions.