Real Estate is Local
-What market is the investment in? And not just what market, but what sub-market and what neighborhood? Real Estate is local and has almost 400 metropolitan statistical areas (MSA’s). Just because Dallas/Fort Worth is booming does not mean that every real estate investment in DFW is going to be a good one. You need to know specifics about the investments. What neighborhood is it in, what is the median income of this specific area, is there any new construction or development going on, does this specific area have issues with crime, what is the HISTORIC trends of vacancy and rent growth in this market, is there job and population growth, etc. Use the resources at the end to help you find the answers to some of these questions.
Growth
-Plain and simple, you want to invest in an area that is seeing growth. This is as simple as it sounds, use the resources page to find out whether or not that particular market is and has recently seen job, population, wage, rent and even occupancy growth. Now, do you need to see growth in 100% of these areas? Not necessarily, but the more the better. You want to see that the market is growing, not shrinking. Generally speaking, you also want to be in MSA’s that have a substantial population. If you go invest in a market with 30,000 people and it’s seen 10% population growth year over year that isn’t saying much. Make sure the market you invest in has good, sound economics.
Historical Data
-When looking at the assumptions made by the Sponsor be sure that historical data is being used. For example, if the market is on fire and is currently seeing rent growth of 5%, occupancy at 97% and CAP rates at re-sale at 5% does that mean it will always be like that? You better believe not! Assumptions need to take into consideration the HISTORICAL averages so that the investment can withstand a downturn in the market. In the same example above, if historical averages are rent growth of 1.5%, occupancy at 92% and CAP rates at re-sale at 7% and the Sponsor assumed the best case scenario then you better be prepared for a pretty sour outcome. Keep in mind that that in order for there to be an average, that means that there are times when the market is worse than that average. The longer the hold period of an investment the more conservative the assumptions should be and the more you will need to rely on historical data.
Job Diversity
-Not only will you need to look into job growth in the market and sub-market you plan to invest in, you should also be looking into the diversity of the job market. You do not want a market that is fully dependent on the success of one large company or industry. If a certain industry takes a hit there needs to be other industries within that market that are there to keep it from tanking. To be safe, there should be no more than 20% of a market that is made up of one industry and the diversity should be spread out into 3-5+ strong industries.
Net Absorption
-Net absorption is a measurement of the net change of the supply of commercial space in a given real estate market over a specific period of time. It is measured by deducting commercial space vacated by tenants and made available on the commercial space market from total space leased up.
-Is there overbuilding happening? If too many properties are being built then eventually there will not be enough people to fill all the available units in the specific market, which ultimately results in lower rents, higher vacancy and more competition. Building is a good thing, but there is such a thing as too much of a good thing.
Market Cycle
-All markets have cycles much like the economy as a whole. Since real estate is local and has nearly 400 MSA’s, each one is not in the same cycle as another. There are too many factors involved for each market to react the same way. Market cycles can be a tough thing to gauge and does not make or break a potential investment. The key is that there needs to be a solid business plan in place, and that business plan must take into consideration where the cycle currently is and where it is headed.
Resources
Below are some great places to get information and data about specific markets.
-Market Research – Free Resources
-City-data.com
-Census.gov
-Bestplaces.net
-Milken Best Cities Report
-CBRE
-Marcus & Millichap
-Yardi Matrix
-Ten-X
-American Fact Finder
-Market Research – Paid Subscriptions
-Co-star
-Neighborhood scout
-Local market monitor (LMM)
-Integra Realty Resources (IRR)
-NCREIF.org
-Resources – Rents
-Trulia.com
-Zillow.com
-Rentbits
-Rentometer
-Apartments.com
-Resources – Crime
-Trulia.com
-Crimereports.com
-Spotcrime.com
-Lexis Nexis
