Owners/Operators can not shift markets, but a market will have significant impact on the property. Market knowledge is a must.
Markets are shaped by four key factors:
1. Demographics: The composition of the population (age, income levels, education levels, job skills, wants and desires) is a major determination for markets and a business plan. Who is the customer?
2. Economy: What drives it? Strong jobs and growth with diversity does (no single job category should be greater than 20%). The economy needs to help, not hinder growth.
3. Government: Policies like business tax incentives or programs that drive relocation, employer migration and private development. Is the market accessible and does it have the needed infrastructure (roads, public transport, airports, etc.).
4. Amenities: What is there for people to do (sports, nature, amusement, etc.? People need to enjoy where they live, have productive things to do with their time, and you want things that attract visitors, thus creating jobs.
From an impact perspective, it is important to be cognizant of how location plays a role, both from an environmental and social perspective. Environmental challenges like weather, flood risk, solar potential are a few examples. Social dynamics will be more consistent from market to market. Issues such as affordability and education are present in every market, but not in every neighborhood.
As a real estate investor, recognizing how these elements shape a market will help you navigate through investment opportunities faster and seize ones that align with your goals and strategy.
Keep in mind that real estate is dynamic and subject to constant change. Be aware, or at minimum make sure you are inquiring both in the beginning and throughout the investment period. Because real estate is a long term hold investment, a business plan must consider what the market will be like in 3, 5, 7 even 10 years.
The key factors discussed are what drives constantly shifting market cycles. Market cycles are always present and can and will be different by market. Market cycles can also be macro in scale and coincide on a larger scale under large scale influences (e.g. 2008 housing crisis). In real estate there are four main cycles: recovery, expansion, hyper supply and recession as outlined below.
So how can you tell what cycle a market is in?
Using Data Analysis
We study trends of key metrics on an annual basis. Micro trends within a market are reviewed more frequently as that data is more prevelent and long term trends do not change monthly (not withstanding a major event). Let’s look at some key metrics and criteria we use:
- Population Growth (10 yr trend): +10% represents strong growth.
- Income Growth (20 yr trend): +34% is strong, healthy growth.
- House Value Growth (20 yr trend): +55% supports a strong housing market, which today creates rental demand.
- Job Growth (last 12 months): + 2%
- Crime Index: <500 (you also want to see a downward trend)
Our criteria will vary year to year, and we constantly revise our thresholds as influencing factors change. We also look at markets outside these criteria, where milder growth can be offset by more stability.
PRO TIP:
- We talk with the economic development department within cities to understand their vision and how we can be part of it and achieve mutual benefit. We learn where and how the policies are driving the economy and local market.
- We visit our markets and immerse ourselves. Driving around with our local team members in the morning, afternoon, and nighttime.
This is just a quick overview and sneak peek into understand real estate markets and even taking a try at evaluating a market yourself. But wait, how do we even get the data for this. Our secret… the internet. Some greats websites include: google, city-data and census.gov.
Someone who we think is amazing in this sector and that we follow and listen to religiously is Neal Bawa (the data scientist). Check out some of his resources here.
You now have the basics of real estate market analysis. Use this information to empower your decisions. Remember that knowledge is only power if we use that knowledge and execute.
