Why Is a Feasibility Study Needed?
A feasibility study serves two different purposes. One, it’s needed for internal decision-making. Without a good grasp of the market, the financials and potential outcomes, solid decision-making is next to impossible. Two, investors and lenders will demand a detailed study to assure themselves that the developer has thought the project through adequately and knows deep down that it’s a viable project with sound data to back up those claims.
A feasibility study will give you a much better idea as to whether the project is even viable enough to move ahead. The soft costs associated with development are not insurmountable—but they’re definitely significant. You don’t want to be spending money on the predevelopment of a project before finding out if the project will be financially viable.
When completing initial due diligence, it is important to model the financial inflows (rent) and outflows (cost of land and construction).
You’re likely well aware that rent affects a pro forma more than any other single item Developing a building that maximizes rent and reduces your operating expenses in the main focus of any rental project. A feasibility study helps refine your plans and provides you with quantitative data which can be used to improve market knowledge and, most importantly, market rents.
The second aspect of a feasibility study is to determine how, or if, a project can get the needed financing. Typically, to arrange any financing through government programs, conventional financing, or even mezzanine financing, you’ll require a detailed feasibility study to satisfy a lender’s need to ascertain for themselves that you, the developer, have thought through the project and know, for sure, that it’s viable—and you have the data to prove it. That’s the reason, if you look at our end-to-end services, that a project’s feasibility study is done before financing.
If a developer decides to put financing in place before completing a feasibility study, they’ll likely get one done anyway just to have that extra measure of confidence.
The feasibility study is the foundation upon which everything is built—that includes marketing, utility configuration, unit choice and sizing, amenities and lease-up decisions. Getting the study done, thoroughly, is essential for success.
How We See the Big Picture
As you’ve seen, there are five basic questions that need answering regarding any apartment development. However, we’re going to rephrase them slightly to deepen the understanding of necessary concepts.
- Should I build?
- What makes a good rental site?
- What’s a “quick no”?
- Where should I be building?
- Which markets?
- What type of sites (the specifics)?
- What should I build?
- Who is my target renter and what do they want?
- What is the best unit mix and what sizes should they be?
- What are the amenity and parking needs?
- How much should I build?
- Should I consider phased development?
- What is the depth of the market (the demand)?
- Does the deal make sense?
- What rents can I charge?
- What are my expenses going to be?
- What is the cap rate?
Even though that’s a sizeable list of questions, many of them will have already been addressed, at least partially, by using our years of experience.
Our Wealth of Knowledge
We’ve been in the apartment development business for over 30 years. Over that time, we’ve accumulated a wealth of invaluable knowledge and experience.
All this helps us understand,
- Which markets are prime for development,
- What types of sites within those markets are prime for rental development,
- Who the potential renters are, and
- How to apply our resources and experience to find them
Once that’s clear, we can decide what unit mix and sizes work best for the potential renters based on local market conditions. For example, urban markets will demand a different mix and sizing than secondary markets. And those will be different again from tertiary markets.
Markets have different needs based on the existing demand for apartments, existing amenity offering and overall competition. More competitive markets require greater amenitization to attract qualified tenants.
There’s also the question of how much should be built. If you look at any large development site outside of the major markets, they likely could accommodate three of four buildings—a phased project. How long will it take to build all of those buildings? Should it all be rental space or is a mix of rental and retail more profitable? Remember, phased developments being their own challenges, the biggest of these being will the market support all those new units.
Financing must also be considered. Is investor support for the project something we need? When all the data is assembled into a pro forma, does a particular project still make sense? What about cap rates?
Want to know more?
Tell us about your project: https://svnrock.ca/multifamily-research-consultancy/feasibility-studies/
Visit our Apartment University: coming soon to https://learn.derek-lobo.com/pages/home-page-temporary
OR view our Apartment Developer University Recordings: http://svnrock.ca/adu-recordings-offer/