# How to forecast demand in multifamily in a certain area?

4 Replies

I come from a background in single family residential new construction.  We typically use a metric called Months of Inventory to forecast demand for product in a certain price segment in a certain area.  History has taught us that 3-6 months of inventory will result in normal sales, less than 3 months of inventory will result in quick sales, and more than 6 months of inventory will result in slow sales.

Months of inventory is calculated by taking the current number of listings divided by the number of sales in the previous twelve months.

An example would be:

There are currently 24 homes listed in Anytown, USA in the \$250,000 - \$300,000 price point.  There have been 96 sales in the previous twelve months in that price bracket.

Months of inventory = 24 / 96 = .25 years = 3 months of inventory (we would expect brisk sales if we build a new home in this market at that price point)

Is there a similar metric for multifamily rentals?  If not, what do seasoned investors use to forecast demand?

Originally posted by @Mike Smith :

I come from a background in single family residential new construction.  We typically use a metric called Months of Inventory to forecast demand for product in a certain price segment in a certain area.  History has taught us that 3-6 months of inventory will result in normal sales, less than 3 months of inventory will result in quick sales, and more than 6 months of inventory will result in slow sales.

Months of inventory is calculated by taking the current number of listings divided by the number of sales in the previous twelve months.

An example would be:

There are currently 24 homes listed in Anytown, USA in the \$250,000 - \$300,000 price point.  There have been 96 sales in the previous twelve months in that price bracket.

Months of inventory = 24 / 96 = .25 years = 3 months of inventory (we would expect brisk sales if we build a new home in this market at that price point)

Is there a similar metric for multifamily rentals?  If not, what do seasoned investors use to forecast demand?

There are lots of free resources that track supply and demand data like CBRE, MFN, Housing wire, Zillow etc. You can google that question and find lots of data and reports but your question was what do the Pros use? Some use expensive paid services, they call property managers and owners in the market and research apartment listings to determine vacancies and demand.

Occupancy trends, building trends and population growth trends. Combine those and you know what is happening.

If a market is at 95% occupancy and 5,000 units are being delivered in 2020, yet the population is expected to grow by 10,000 people, then we have a balanced market. If any of those scales tip, then we are out of balance and will have either supply issues or demand issues.

OK, that makes sense @Todd Dexheimer .  I've add others just tell me to look at occupancy, which is a difficult to use at high occupancy levels when I'm looking to add a substantial number of new units to the inventory.

@Mike Smith , I agree with Todd's analysis to see if there is demand for new supply.

The next step would be to see if the market can afford new supply.  I.e. if average incomes in the area are \$50,000/yr, and rents are \$1,000/mo, vacancy will be low (again assuming Todd's assumptions).  But if you need to charge \$2,500/mo for your new units, then you will likely struggle to hit market occupancy, since you need incomes of about \$90k to support these rents.