How to Analyze a Real Estate Market
Every real estate market is not created equal. The cliche saying, “location, location, location,” is so prevalent among the most notable investors in the industry today because it remains true. Where you invest can determine how a property performs and how profitable it is. The market can be the difference between whether or not a property weathers an economic downturn, and whether or not the property’s projected returns are met.
Besides the “name-brand” real estate markets, like Atlanta, Georgia, Raleigh, North Carolina, and Tampa, Florida, there are many good real estate markets in the US. But the question is, what makes these markets “good?” How can an investor determine whether or not a particular geographic location would make a suitable investment market?
Knowing what to look for in a real estate market isn’t just running numbers. It’s about identifying trends, and looking for evidence that supports the argument that the market is one that will continue to prosper in the future. That’s the question we’re tackling in today’s article.
What is a Real Estate Market?
A real estate market is a geographic area where a firm invests. A market can include a Metropolitan Statistical Area (MSA). The US Census Bureau defines an MSA as a geographical region with a relatively high population density at its core and close economic ties throughout the area. This market division is used to organize statistical data and it makes it easy for investors to collect data for a particular real estate market. MSAs tend to be large areas. An MSA has 50,000 or more people within its boundaries. Along with the larger MSA, submarkets are also important to pay attention to as a real estate investor. A submarket is a smaller area within a larger market, typically tied together by location, culture, industry, or other factors. MSA’s consist of multiple submarkets.
Not only is it important to analyze a market before you invest in a deal, but it’s also important to keep a pulse on the market during the property’s hold period. This will allow you to remain vigilant and prepared for any market fluctuations or changes that may occur.
To understand a real estate market adequately, you need to look at factors such as the economy, demographic trends, local supply and demand, and more.
What makes a good real estate market?
Common Asset Classes Within The Market
A market that is home to many banks and financial firms may be better suited for office space investors. A market that experiences heavy tourism may be better suited for hospitality-focused investors.
The Local Economy
The local economy plays a big role in how suitable an investment market is. Ask yourself,
What industries are prominent in the market?
Where are most of the jobs coming from?
Population growth is key to assessing the strength of a market. Population growth means that there will likely be increasing demand for your property. However, if people are leaving the market, this may be hinting at some negative aspects of the market.
Positive net migration is an important metric to pay attention to. This refers to there being more people entering a given market than there are people leaving it. This allows you to determine if the population in the market is growing, or if it is declining.
Migration and a growing population increases apartment demand and rental pricing.
A market where population growth is stagnant or declining limits how much you can increase
rents and occupy vacant units.
High levels of migration into a market is a major cause of natural appreciation. As a population increases, demand for units increases, and supply decreases. This allows investors to increase rental premiums, which increases the revenue the property generates and the overall value of the property.
Strong population growth means that the local municipalities will likely increase investments in the city’s infrastructure. This means improved roads, bridges, and sidewalks, which will likely attract even more people to the market. As infrastructure improves, job creation increases because of the improved working environment.
According to Wesley F. Peterson in The Role of Population in Economic Growth, a state that has high population growth is likely to have high job growth. This makes sense, because the more job opportunities there are in a given market, the more people will go to that market to benefit from those jobs.
Strong local employers result in a higher median household income among the renter population. These strong employers also bring people to the market from all over the country, as seen in Texas, Florida, and the Carolinas.
It’s important to pay attention to how much the population in a given market makes in income. If these people are to become residents at your property, you want to make sure they have enough income to pay rent and support your prospective rental increases.
As a general rule of thumb, a strong market will have a diversity of industries providing jobs to residents. A market like Orlando is heavily dependent on tourism, which can leave it vulnerable to economic changes or events like COVID. A market like Atlanta, GA is economically diverse, and its core industries are more stable. These include healthcare, financial services, and education, according to First National Realty Partners. The most economic diversity is typically found in major metropolitan areas, such as New York, Boston, Charlotte, and Atlanta.
A lack of economic diversity can be detrimental to a market and the community that lives in it. For example, when General Motors closed a manufacturing plant in Detroit, Michigan, unemployment skyrocketed. The market crashed and never fully recovered.
This emphasis on economic diversity should also apply to the submarket the property is in. What industries dominate the submarket, if any?
Strong Economic Anchors
An economic anchor is something that continues to drive the market. This can be a variety of things. It could be a major employer such as Amazon or Apple moving into the market. It could be a major university that provides demand for student housing and jobs for professors, researchers, and hospitality establishments catering to the student population. Weather in markets such as Florida drive people to live there, and a major airport (like in Atlanta) can bring many people to a market. Also, a market that serves as the capital of its state is also benefiting from the government jobs and other factors (such as Ralegh, NC).
A market that has multiple drivers is even stronger.
Landlord Friendly State
A landlord friendly state will have lenient eviction laws. This means that a non-paying resident won’t be able to squat in your unit without paying for multiple months before you can evict them.
The eviction laws can vary by state and even municipality, so make sure to do your research beforehand.
Taking a Closer Look
The factors listed above apply to the submarket as well. Taking this approach allows you to take a microscopic look at the surrounding area of your property. Real estate is contingent on the local area, and one property can be in a much different submarket than another ten minutes down the road.
This is why we take site visits at each of our properties, and we drive the neighborhood ourselves.
General Questions to Ask Yourself:
Can you see the property from the road? Proximity to a major road is very beneficial for a property, as it can drive potential tenants to the property with little marketing effort.
What conditions are the roads in? This gives you an idea of how well the local authorities take care of the area surrounding the property.
The Property’s Location
What is around the property? Does it seem to be in an underdeveloped area? Are properties nearby worn down? Or, is it in the path of progress? Do you see development going on nearby? Are houses being flipped in the area?
Look at nearby, similar properties in the area. Are they implementing a similar business plan as yours?
Comparables allow you to confirm that the price you are paying for the property makes sense.
They can also help you identify what other investors have had success doing in the market.
A good comp will have similar zoning, size, condition and year of construction, and be in close proximity to the subject property.
Keeping up to date with what’s going on in any given market is essential, but it’s especially critical in today’s ever changing multifamily market. By tracking key metrics such as population growth and rent growth trends, you can prepare yourself with an educated projected outlook on the future.
Operators should not purchase a deal without completing a thorough analysis of the market. The process of researching the MSA, the submarket, and the local economy can be time consuming, but it is an essential part of ensuring that risk is mitigated. Ignoring key market fundamentals that contribute to how profitable a deal can be will result in severe misjudgments in the underwriting of a property.
The market a real estate asset is located is the most important aspect of an investment opportunity aside from the sponsor themselves. Therefore, it’s important to conduct thorough due diligence on the market, and ensure that it’s a place you’d want to invest your own and your investors’ capital into.