SENSITIVITY ANALYSIS

PROJECTING ABSORPTION RATES

ADAM GREENFADER

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Absorption Price Supply Demand

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Table of Contents

The Goal of this Study .................................................... Pg. 4

General Assumptions ………………………………… Pg. 4

Market Research Sources .................................................... Pg. 5

Executive Summary .................................................... Pg. 6

Key Facts ………………………………… Pg. 6

The Market Area ……………………………………Pg. 9

The Site ………………….……………… Pg 11

Vehicular Circulation Analysis …………………………………….Pg 14

SWOT ANALYSIS ………………………………… Pg.19-23

Design recommendations ………………………………… Pg. 24-32

Housing Supply ………………………………….. Pg. 33-41

New Home Projects: Walk Ups ……………………………………Pg. 34-38

New Home Projects: Mid Rise ……………………………………Pg. 39-47

New Home Projects: Condominiums ……………………………………Pg. 48-51

Future Projects ……………………………………Pg. 52

Highest and Best Use ……………………………………Pg. 53

Price Point ……………………………………Pg. 56-57

Housing Demand & Supply ……………………………………Pg. 58-60

Absorption Rate ……………………………………Pg. 61

Conclusion ……………………………………Pg. 62

Projected Target Client Profile

The projected target client profile is a composition of key demographic and economic

metrics. The projected target client profile is intended to assist the development team build a

in accordance with the client’s demographic, psychographic and economic criteria.

TABLE 1

Average family income: $46,000-$95,000/annually

Average age: 35 years +

Children: 50% live with 1 child

15% with 2 children +

35% with 0

Profession: Service industry/Professional

Location of employment: 60% San Juan Area

20% Bayamón

5% Caguas

15% Other

Prior living arrangement : 15% live at home with family

50% owned detached unit

35% own walk-up

Buying Cycle: 35% 1st time home buyers

50% Move-up buyers

15% Move-down buyer

Sensitivity Analysis

The below noted sensitivity analysis demonstrates the financing costs of a typical $250,000 unit.

The scenario assumes a 100% financing option. You will note that the interest rate increase from

6% to 8% requires an additional monthly income of $1,000; or a total annual income from

approximately $67,000- 79,000. *

Price Point by Product Type

In choosing the correct elevator product type, the primary focus should be to not “price-out” the

consumer. As can be noted above, there is a notable increase in sales price per square foot for

Condominium products versus Mid-Rise buildings. Below you will find a graph with the

average price per square foot per product category.

This price difference is mainly due to added construction costs associated with infrastructure,

HVAC, subterranean parking, and specialized labor and machinery needed to build a

Condominium product. .

In a sub-urban market, where land costs are less expensive than in the city, the principal demand

is for an elevator product (with covered parking) at an affordable price. If the apartment is too

expensive he/she will most likely a) opt to buy an elevator product closer to the city b) not

qualify c) buy a single family home.

Thus being less expensive, a Mid-Rise building would be the logical choice for the proposed

project.

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$50

$100

$150

$200

$250

$300

$ SF

Walk-Up

Mid-Rise

Condominium

Apartment Size and Configurations

Based on the market comparables, the ideal apartment should have an open configuration.

The ideal product mix consists of three different model plans:

1) A two bedroom unit that ranges in size from 900 S.F. to 1, 100 S.F.

2) A three bedroom unit that range in size from 1,300 S.F. to 1, 500 S.F.

3) A penthouse and garden unit (with utility room with elevator access) that

range in size from 1,500 S.F. to 1, 800 S.F.

Price Point

Today, there are seven (7) Mid-Rise products in the Bayamón-Guaynabo Market Area. The

prices range from $176-$278 a square foot. The average price per square foot is $213. Based

on the location strengths of the proposed project, the price point today should be

approximately $205 SF.

Below, are three different scenarios for price point projections: Aggressive 10%,

Conservative 6%, and Stagnant.

Adjusted Price Point For Inflation Table

$205

$211 $217 $224 $217

$230 $244

$225

$248 $272

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$100

$150

$200

$250

$300

2007 2008 2009 2010

3% Growth

6 % Growth

10% Growth

Sales Price

Assuming a conservative $230 SF price point (adjusted for 2 years), the above noted Mid-

Rise apartments should have the following pricing mix:

1) 2 bedroom / 2.5 bath unit that ranges in price from $207,000. to $253,000.

2) 3 bedroom / 2.5 bath unit that ranges in price from $299,000 to $345,000.

3) Penthouse and garden unit that ranges in price from $345,000 to $414,000.

Housing Demand

The study Demand for Housing in Puerto Rico 2005-2009, prepared by the firm Estudios

Técnicos, Inc. for the Puerto Rico Bankers Association forecasts the demand for new housing

units during the 2005-2009 periods. The study projects the demand for housing by price bracket

for each island municipality. The study also prepares an aggregate by region and for the whole of

Puerto Rico.

The primary elements in the forecasting model are projections of household formation and

household income by municipality. The effective demand is then divided into two categories:

regular market demand (that which can be met by private developers) and assisted demand (that

which needs some form of government assistance.)

Total Annual Demand

9,618 47%

11,022 53% Market Demand

Subsidy

Housing Demand: San Juan Region

For the entire island of Puerto Rico, total housing demand for the five year period (2005-2009) is

99,800 units. In the regular market category, effective demand is projected to be at 9,618 units

annually or 47.5%. For the San Juan Region which includes Guaynabo and Bayamón, the

total demand projection is 15,631 for the five year period or 3,126 units per year.

Housing Demand By Product

In the Construction & Sales Activity Report, Estudios Técnicos, Inc. surveyed sale activity data

by housing unit type. During the second quarter of 2006, a total of 3,620 housing units sold in

Puerto Rico. Single family units accounted for 71% of the total units sold, walk-ups units

represented 10.1%, high-rise condominium units 11.5% and other types of housing (townhouses,

villas, mixed) 7.3%.

Housing Demand By Product *

Housing Demand By Product San Juan Region

Notwithstanding the natural spatial limitations of the island, single family homes remain the

preferred housing type dominating all regions except for San Juan and Guaynabo. In San Juan

and Guaynabo, multi-family units (Walk-Ups, Mid-Rise, Condominiums), are the leader in the

market consisting of approximately 80% of all units sold.

71%

10%

12%

7%

Single Family

Walk-Ups

Condominiums

other

Using the weighted average from the sale activity in the San Juan Region, it can be inferred that

the market demand of multi-family housing (Walk-Ups, Mid-Rise, and Condominiums), units in

the $300,000 and over price is in a ratio of approximately 20% of the total units absorbed.

Based on the annual total market demand estimated for the 2005-2009 period, 3126 units per

year, it can be inferred that the San Juan Region could demand 625 Multi-family units per year in

the $300,000 and over price range ( 3126 * 20%). This would translate into

a potential market demand of 3,125 units ( 5 year period) .

Housing Supply

According to The study Demand for Housing in Puerto Rico 2005-2009, there is a supply of

2,624 units in the San Juan Region. This data confirms our findings as noted in the above Future

Projects table. The units accounted in the supply chain are only those units available and planned

as of the 2nd

quarter of 2007.

The new units needed minus the total available and planned supply results in the residual

demand (See table below).

5 Year period Per Year

Demand 3125 625 Supply 2624 525 Residual Demand 501 100

Based on the inferred demand estimate there is a projected unattended Multi-family housing

demand in the San Juan Region of 501 units over the 2005-2009 period or approximately 100

units per year for properties in the $300,000 and over price range.

Absorption Rate

This market analysis assumes that the project will be finished in the winter of 2009, or twenty-

four months after the effective date of this report. The available supply should be absorbed in

just over four (4) years (2,624 available units / 625 units per year = 4.2 years). As of the

estimated project completion date 1,374 of the available and planned supply will still remain in

the market (2,624 available units – 1,250 units demanded in 2 years).

Based on the market demand of 625 units per year, it was assumed that new units will be

developed to cater to this market. Assuming 500 unaccounted units enter this market along with

the subject project, a total of 2,070 units (the proposed project 196 units plus the assumed 500

new units and 1,374 of existing inventory) will cater to the $300,000 and over price range as of

the proposed completion date.

The proposed project should have a capture rate of nearly 9.4%. This is assuming it commands

an equal market share to its percentage of the total supply (196 units of the proposed project /

1,374 assumed total available units + 500 new units + 196 units).

Based on the estimated market capture rate and the annual market demand of 625 units per year

for the $300,000 and over market, the proposed project’s absorption rate should approximate 58

units per year (9.4% x 625).

The above noted absorption rate would conclude total project sell out by approximately 3.3

years (average sell out of 58 units per year).

Conclusion

The proposed project’s location is very promising. Although located physically in Bayamón,

it is for all intents and purposes considered “Guayabon”. As can be noted in the circulation

analysis, the site is very accessible to Bayamón, Guaynabo, Caguas and San Juan.

The site’s topography is mountainous. The highest and best use is to build multi-family

homes, preferably with an elevator. This should allow for the least site development costs

and maximum density.

The unit mix should consider the first home market with 2/2 and 3/2 home models with 1,

100 S.F. and 1,400 S.F. respectively.

The empty nester and single family target market should represent a majority of home

buyers. The target market will most likely need to sell their homes in order to buy at the

proposed project. The project’s competitive advantage should be to provide a comfortable

unit with all the amenities of a luxury condominium; elevator, security, covered parking, high

bath to bed ratio, and closet space.

Assuming a conservative $230 SF price point (adjusted for 2 years), the above noted Mid-

Rise apartments should range in price from $253,000 to $322,000. The penthouse units

should average $379,000.

The supply of inventory is projected to dwindle within the next 24 four months from 3,125 to

2,070 units in the San Juan Market Region. The proposed project should capture 9.4% of this

supply and sell out in approximately 3.3 years (average sell out of 58 units per year).