There are a few factors to look for when researching a potential market for investing in real estate. While an in depth market analysis would require dozens of different metrics and factors to scrutinize, in my opinion there are four basic factors that really determine whether a potential market is investable. These factors are population growth, income growth, job growth and economic diversity.
Population growth is often a function of job growth but sometimes cities with warm climates, or are just attractive places to live will grow over time. Examples of such cities would be Austin, Texas or Nashville, Tennessee. Even though those markets have experienced job growth, many people would choose to live in those cities for reasons other than work. Cities that have a lot to offer whether it’s outdoor activity, climate, or just overall beauty/scenery usually receive a strong influx of population over time. This leads to demand increasing for space, whether it be livable space or commercial space, thus lowering vacancy and driving up rents which increases the value of properties over time. Retail properties and residential properties will usually experience the highest growth if the population is increasing.
Job growth is also a key factor to a healthy and growing market. If a corporation decides to either relocate or becomes much larger in a given market and thus starts hiring more people, employment will increase and thus the need for more space, particularly office and industrial space. Job growth also has the effect of increasing the population as more people will move to a city and thus drive up the need for space. If a city happens to have a large employer relocate or start a new office in a city, and the city happens to have a shortage of real estate, it can lead to a very long and lengthy boom cycle. Rent growth can be extremely high for five to ten years until supply catches up to demand. This takes a while as buildings can take years to build due to permitting and construction time. Vacancy will be extremely low, demand will be very high, leading to robust rent growth and thus much higher property values. Not only will rent growth lead to higher values, but cap rates will likely compress giving owners of commercial space an added boost.
Income growth is another key factor in a market. Incomes have to be increasing over time otherwise rents will have to level off at some point. Residential and retail real estate will really thrive if income is growing at a healthy pace. If an individual or household’s income grows, that gives them more disposable income, thus leading to more retail expenditures be it goods and services or restaurants. Income growth will also lead to rent growth assuming the city doesn’t have an overbuild of rental properties. Income growth won’t have as much of an effect on office or industrial, but is an important factor in retail and residential real estate, particularly retail.
The final basic factor that is really important is a city’s economic diversity. This just means that there are many different industries in a city that not only provide goods for that city but also export them to other economies. Economic diversity also means there are many different companies that don’t correlate much to each other. A city like Chicago, Illinois has many different companies and industries with no single company or industry taking up a large percentage of the economy. Conversely, a city such as Flint, Michigan had a high concentration of their economy in the auto industry. When the auto industry ran into trouble, so did the city’s real estate market. Many jobs and people have left Flint leading to lots of vacant space and declining rents leading to much lower property values.
When researching a real estate market, make sure these factors are positive and increasing. Small fortunes have been made buying real estate in under built markets when these factors were increasing. Even paying a slightly higher price in a thriving market will lead to better outcomes over time than buying a cheap piece of commercial real estate in a declining market. Just remember population growth, job growth, income growth and economic diversity are key factors to focus on when studying a potential market.