How To Evaluate a Market for Real Estate Investing
We’ve all heard that cliché saying in real estate, “location, location, location”. Despite it being over-used and often times written in all capitals on corny listing sheets, location is truly one of the most important components to real estate. Just as you would evaluate the numbers of an investment property, you must also evaluate the economics and demographics within the subject market itself. This blog article will outline some of the most important characteristics of choosing a market, and consider what makes a market desirable or undesirable for investors.
Many factors play a role in the health or stability of a market however; the three most important drivers are population, employment, and supply.
Population:
When analyzing or researching a market to invest in, you should first look at the population of the market itself. The population can give you a number of clues as to whether a market is desirable and what types of people are attracted to it.
How many people live in the metro area of the market?
First you want to understand the overall size of a specific market and the demographics of the population. Larger markets with denser populations typically attract more employers and therefore can be more stable and have stronger demand than smaller more rural markets.
What is the age break-down of that population?
Once you understand the overall size in comparison to other markets, the next step is understanding the percentage breakdown of the population by age. These age demographics help investors understand the types of people within the market. For example, if highest percentage of the population is over 65, you might be in good shape if you’re investing in retirement housing or senior living facilities, but you may struggle to attract younger members in the workforce or millennials.
At what rate is population growing or declining?
This point is fairly obvious, but you’ll want to be investing in a market that is growing in population, not declining. Supply and demand is one of the strongest economic drivers and if population is decreasing, you will have less demand for your property. In order to figure out if the population is growing or declining you’ll want to dig into the census numbers, because its not always obvious which markets are declining in population. For example, Chicago, one of the Nation’s most popular big cities had the highest declining population in the country for two consecutive years in 2015 and 2016.
Employment
As we witnessed in the aftermath of 2008, cities that were dependent on one industry for the majority of jobs, like Detroit with the auto industry, suffered substantial losses and record high vacancies. Markets that have a diverse array of industries and companies will have a better chance of surviving a down turn. Furthermore, when the economy is strong, more people will move to that market due to the abundance of diverse employment opportunities.
What industries are prevalent in the market and is there a strong variety?
If the major industries in a subject market are struggling on a national level, that could signal problems down the road if one of the major companies were to go out of business. Old mill-towns in New England and coal-mining towns throughout the South East and Midwest are some of the starkest examples of what can happen when one industry makes up too much of the employment base.
Which companies are in the top 10 largest employers within the market?
If any one or two companies have a disproportionately high percentage of the workforce, that company’s health or relocation could have a direct impact on vacancy and demand within the housing market. It’s also important to consider what are the demographics of the employees at these types of companies? Understanding those demographics will potentially help guide which types of housing will be more in demand.
Are the number of jobs growing?
In the same way we want to see population growing, we want to see an increase in the number of jobs being added each year. In an ideal scenario, job growth will be outpacing population growth so that more people will end up moving to the market to fill jobs. The overall health of a market’s economy as well as the business climate will determine whether new companies are moving to that market or existing companies are expanding within.
Supply
What does the current and future supply of housing units look like within the market?
Are new units being built?
Across the country we’re witnessing a construction boom, in some markets more than others. Understanding the number of units projected to be added in a given year helps to determine what the level of supply is going to be, but more importantly how new units could affect absorption. You will want to determine if there is enough demand for those new units to be leased or whether vacancy will increase as a result of the new supply.
Are units in the market geared toward low, middle, or high-income households?
Many markets across the country, particularly in fast growing cities are seeing a luxury apartment boom. The increasing supply of luxury apartments could increase vacancies and lower values of luxury multi-family assets. However, this same market could present a great opportunity for investors who buy or develop more affordable workforce or lower income housing as the supply of those assets may not be matching the demand.
Conclusion
The final key in determining good markets is understanding which markets are best for which investment strategies. It’s possible to invest successfully in any market in this country but not all strategies or asset classes will necessarily perform well. One market could be fantastic for luxury condo development while at the same time extremely challenging for buy and hold investors. Therefore, investors should take the time and effort to identify which markets are best for their investment strategy. Often times, investors gravitate towards their home market solely out of comfort, despite less than favorable conditions. It’s crucial to understand and verify the underlying data behind the market you invest in to have your greatest chance at see success. At the end of the day, a profitable property in a declining market may not stay profitable for long.
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