When looking at an investment, one of the first items you want to analyze is the market. Everyone says real estate is about “Location, Location, Location,” and from that perspective, there are two major items we need to evaluate: the overall market and the asset submarket.
From an overall market perspective, we will take a look at five things to consider when evaluating a real estate market: Population, Unemployment, Industry Diversification, Proximity to an MSA, and Climate. There are a lot of expensive data sources; however, we will focus on the free ones.
Population
Why is population important for Real Estate market evaluation?
The first aspect of a market we will take a look at is Population growth. Population growth is important because new people coming to an area usually means that they will need housing or services (storage, retail, warehousing, etc.). Since we are investing in Real estate, we are basically the providers of the housing or service. If the population is shrinking, there is usually a larger inventory available, which leads to lower occupancy rates and lower rents. Neither of those conditions is good for the long-term viability of an investment. So the first thing we look for is whether people are moving to the area or they are moving away.
How to find population data?
Your sponsor likely already has included some of this information in their marketing materials, but you want to verify that yourself as well. The base source for this information is the US Census; however, the data display and organization on their website leaves a lot to be desired. One of the more user-friendly data views is the “Quick Facts” view available on the US Census website.
A favorite spot for data for us is FRED (Federal Reserve Economic Data) FRED clearly states the data sources, and you can easily visualize the data directly or configure it to show you the data as they change year over year. This makes it easy to quickly understand the trends instead of doing math in your head.
To make it simple if you are looking at a particular MSA or county, you can start from this top-level and browse down to your state and county. Then you will see all relevant data available on the website. The best part – they have way more data than just population.
Another option is to use the Bureau of Economic Analysis website. Their data visualization is much easier to navigate and, as a bonus, can give you the Population and income by either MSA. You can start browsing from here: https://apps.bea.gov/iTable/?reqid=70 , select “Personal income and employment by county and metropolitan area” , then “County and MSA personal income summary: personal income, population, per capita personal income”. From here select your options and voila!
With all this said, we have found that often you can just quickly turn to your favorite search engine and type in “population growth XYZ.” You should get enough articles to confirm the population growth.
This leads us to the second market evaluation item – Job growth and Industry Diversification.
Unemployment
Why is unemployment important for Real Estate market evaluation?
Unemployment is important because it can indicate the job health of the area and, therefore, the ability of the population to pay rent, utilize services, or buy a home. Investing in an area with higher unemployment might lead to uncollected rents, reduced occupancy, more evictions, and overall worse investment performance. The unemployment rate alone, however, cannot immediately indicate that an investment is not good. It might be that the whole country is in a recession, so the macro impacts will be felt everywhere. So take the unemployment rate as part of the analysis but ensure that you are taking into account the overall economic trends.
How to find unemployment data?
The source for this data is the US Bureau of Labor Statistics (Economy at a Glance). If you are looking for some of the top MSA areas, you can start with Economic Summaries. It gives an excellent overview of the area, including:
- Unemployment rates (compared to US and some of the counties)
- Average weekly wages
- Over the year, change in employment
- YoY change in CPI for select categories
- And more
You can also use FRED to dive into the unemployment and GDP data.
Now that we got through Unemployment, let’s move to Industry Diversification.
Industry Diversification
Why is Industry Diversification important for Real Estate market evaluation?
You will hear people say, “Do not put all of your eggs in one basket.” This is why we invest in real estate in the first place as a diversification from stocks and other investment vehicles. This is also why we love syndications, so you can spread your risk across multiple asset types and locations. And this is also why it is important for the market itself to have diversification – limiting risk. If a market is very heavy in a particular industry, a sudden turn of the economy in that sector can completely change a city. This is why the majority of big cities put a conscious effort into industry diversification and why you should care about it as part of your market evaluation.
How to find industry data?
Unfortunately, there is no good overall source to give you industry diversity data; however, you can always try searching for Industry diversity + the name of the city/metro area you are considering. Oftentimes the individual city’s economic development departments will put out data or articles on industry diversification or new companies moving to the city.
Proximity to an MSA
Why is Proximity to an MSA important for Real Estate market evaluation?
We will discuss asset location more in a future article; however, if the asset is not located within an MSA, you might want to ensure that you take a look at the surrounding areas. Being close to an MSA gives a lot more opportunities for employment and access to amenities like international airports, shopping, etc. Personally, if you are starting out, we recommend sticking to assets that are closer or in an MSA area, but deals can be had anywhere.
How to find proximity data?
This involves some google maps browsing. Simply go to the location in Google Maps and do a few driving estimates to larger cities you see in the area.
Climate
Why is climate important for Real Estate market evaluation?
Even without getting into a discussion about climate change, you do have to consider the climate of an investment. Should you be worried about hurricanes or tornadoes, big freezes, and damages based on lack of utilities or more maintenance because of proximity to water? These are some of the factors that might impact your choice of investment or, at the very least, push you to consider if the expanses presented by a sponsor are realistic.
How to find climate data?
A cool website with outlines of natural disaster exposure is Augurisk, where you can browse by county what risks might be experienced by that county. You should always request information on flood zoning and other hazards, as some of the assets might be uninsurable, or insurance might be cost-prohibitive.
Other resources
Do not be afraid to search for the information you are interested in by just typing something like “unemployment rate Dallas” in a search engine. You will likely get the result as an extract or within the first few results.
If you are looking at a particular state, county, or city, it is possible that the state already has an economic or demographic report on its website.
Other resources:
- Marcus and Millichap 2023 U.S. Multifamily Investment Forecast
- Milken Institute – Top performing cities 2022
- Milken Institute – Community Explorer
- PWC – Emerging Trends in Real Estate
Conclusion
We hope this overview of five things to consider when evaluating a real estate syndication investment is helpful. Happy analyzing!
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