Blogs| How to Analyze Market Demand for LIHTC Properties
Written by
Priya Gupta
Published
Jul 2, 2025
Topics
LIHTC
Understanding market demand is critical for any Low-Income Housing Tax Credit (LIHTC) project. It’s not just about checking a box for compliance. Properly analyzing the LIHTC market demand ensures that projects are built where they are truly needed, can lease up successfully, and remain sustainable over the long term. For developers, investors, and agencies alike, this analysis directly influences funding approvals, risk mitigation, and overall project success.
Let’s break down exactly what goes into analyzing market demand for LIHTC properties and why it’s a foundation upon which every project must be built.
Market demand analysis is required under federal regulations for all LIHTC projects, but its importance goes beyond regulatory necessity. A well-prepared market study validates the essential needs that a project will meet, providing a realistic picture of who will live in the units, what rents they can afford, and whether the area can support the new development.
Without a thorough demand analysis, there’s a risk of overbuilding in saturated markets or mispricing units relative to tenant incomes. Both scenarios can result in slower lease-ups, higher vacancy rates, and weaker financial performance, which could jeopardize the project’s long-term viability.
For housing credit agencies, the market study serves as independent verification that the proposed development is desirable and feasible. Therefore, a credible demand study doesn’t just increase the chances of securing LIHTC allocations—it also strengthens the overall investment case for the project.
Analyzing market demand involves a structured process that combines demographic analysis, economic research, housing market surveys, and affordability assessments. It isn’t a guessing game; it’s rooted in solid, current data and requires a clear understanding of how low-income renters interact with the broader rental market.
The foundation of any demand analysis is defining the correct Primary Market Area (PMA). The PMA is the geographic area from which the majority of the tenants, typically at least 70%, will be drawn. It must be defined with logic and real-world factors such as commuting patterns, public transportation access, natural boundaries, and economic linkages.
For example, in dense urban environments like New York City, a borough often serves as the PMA because of how interconnected neighborhoods are through public transit systems. In suburban or rural areas, PMAs are drawn based on smaller, clearly understood communities rather than large arbitrary zones.
The Secondary Market Area includes the broader area from which additional tenants may come, but it cannot be used to inflate demand projections. Properly defining and justifying the PMA is critical, because an inaccurate market area can lead to a complete misread of supply, demand, and competition.
Reliable market studies lean on recognized data sources, including housing vacancy surveys, U.S. Census Bureau data, American Community Survey estimates, proprietary rental housing databases, and specialized local reports. Using outdated, selective, or incomplete data risks producing a flawed analysis that can lead to failed developments.
A strong study doesn’t just reference data; it interprets it carefully. Analysts compare historical trends with future projections, looking at factors like household formation rates, population growth or decline, employment trends, and local development pipelines.
Because demand is dynamic, studies also typically include a five-year forecast to capture near-future shifts that could affect the project’s leasing and absorption.
LIHTC market demand studies focus on several interconnected factors:
The combination of these factors provides a comprehensive picture of both existing needs and future LIHTC challenges.
An affordability analysis connects projected tenant incomes with proposed LIHTC rents. Analysts generally assume that families can afford to pay no more than 35% of their gross income on housing and elderly households no more than 40%. When rents align with local incomes, the project can effectively attract the right tenants, ensuring a vibrant community and avoiding costly missteps. It’s an exciting opportunity for growth and success!
Moreover, analysts must incorporate local policies like rental vouchers, utility allowances, and rent control frameworks where applicable. This ensures that the affordability assessment reflects true tenant costs, not just the nominal rent numbers.
The true measure of market feasibility is not gross demand—it’s net demand. Net demand is calculated by taking the total projected demand and subtracting the supply of existing comparable units that are vacant or expected to come online.
This step ensures that projections account for competition and available inventory, offering a realistic view of how many households will actually need and qualify for the proposed units. Capture rates and absorption periods can be severely overstated without net demand calculations, leading to disappointing project outcomes.
A strong market study not only identifies opportunities but also avoids common pitfalls that can mislead stakeholders. Red flags to watch out for include:
When any of these issues appear in a market study, funding agencies and investors are likely to scrutinize or outright reject the project application.
The current affordable housing market remains undersupplied despite evolving economic challenges. Rising construction costs, higher interest rates, and tighter financing conditions have not reduced the fundamental demand for LIHTC housing. If anything, these pressures have intensified the affordability crisis.
Vacancy rates for LIHTC properties remain exceptionally low across major markets, while rent burdens have continued to rise. Many cities are facing critical shortages of rental units affordable to households earning below 60% AMI. Median asking rents have pushed beyond the income thresholds of even moderate-income households, further squeezing lower-income renters.
At the same time, tax credit equity pricing has stabilized in 2024, providing developers with somewhat clearer expectations on project financing. However, the slow pace of new construction relative to demand ensures that LIHTC properties will remain in high demand for the foreseeable future.
Today’s housing agencies and investors expect market studies to be independent, data-driven, and easy to follow. Studies must collect and present data and build a logical, supported case for project feasibility. Analysts are expected to model their reports on recognized standards, like the National Council of Housing Market Analysts (NCHMA) guidelines, and explicitly connect findings to project viability.
The most respected market studies are transparent about assumptions, conservative in projections, and thorough in accounting for all factors affecting supply and demand. They don’t just summarize facts—they show a clear line of reasoning from data to conclusions, allowing stakeholders to confidently understand why the project will succeed.
Analyzing market demand for LIHTC properties is one of the most important steps in creating successful affordable housing. A deep, honest, and thorough analysis ensures that new developments are placed where they are most needed, priced appropriately, and financially viable over the long term.
In an environment of limited funding and persistent housing shortages, a strong market study isn’t optional; it’s essential for building projects that will truly make a difference.
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