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The Real Estate Way to Wealth and Freedom - Jacob Ayers EPISODE 353, 13th November 2020
Market Metrics - Friday Fundamentals
00:00:00 00:11:14

Market Metrics - Friday Fundamentals

In our world today we’re seeing a shift in the way people work, commute, live, and much more. With these new trends, we’re seeing people move around the country, less tied to where they once were with many more people working from home than were just 8 months ago. Consequently, this has created new supply and demand imbalances in different markets. Once hot San Francisco has seen an exodus of white-collar tech workers leaving the city for lower cost of living locations. Where people once lived near downtown and large cities, they can now move to more rural locations. These are just a couple examples of shifts we’ve seen over the past 6 months.

We talked about some of these trends a couple of weeks ago and then followed that up with how to qualify deals in new markets. Let’s look at some metrics in analyzing markets for real estate investing.

By now you’ve heard the saying “the 3 most important factors in real estate are location, location, location”, which I largely agree with. In the world of real estate investing, the location of a property can be described by its market and submarket. A market can be thought of as a city or town, and the submarket as a specific part or neighborhood of that city.

CBRE publishes several different commercial real estate reports, in those they categorize markets into 3 tiers.

Tier 1

  • San Francisco
  • San Diego
  • Seattle
  • Chicago
  • Miami
  • New York City

Tier 2

  • Dallas / Ft. Worth
  • Houston
  • Denver
  •  Atlanta
  • Orlando
  • Philadelphia

Tier 3

  • Oklahoma City
  • Jacksonville
  • Charlotte
  • Cleveland
  • Kansas City
  • Nashville

So what makes a market better or worse than another? Sports teams, great parks, no traffic, cool coffee shops? Well, close but not quite. Evaluating markets as a real estate investor, we’re concerned with two main metrics – jobs and population. That’s what it all comes down to. Are there people who live in the market and have a job that allows them to pay rent? That’s what we’re focused on.

These two metrics – job growth and population grown – are indicators of a strong market. While we can never predict the future (i.e. – COVID-19), we can look at historical trends and project those into the future. Generally speaking, jobs bring people. After all, you don’t see a booming population in Antarctica. Knowing this, we can sometimes gauge population growth in a market by looking at what jobs are expected to grow or relocate to the market. Oftentimes, employers will announce new locations, headquarters, etc. and we can use this to assess the increased population those jobs will bring to the market.

Now digging a bit deeper and understanding that we want people and jobs in a market, we can next look at employment rates. Employment rates are simply a percentage of people employed or unemployed. Our nation’s unemployment rate is generally in the single-digit percentages, although that number spiked to double digits during the initial phase of COVID-19.

Now I want to bring something up here. There really is no such thing as one housing market or a national housing market. The same thing applies to these metrics. There isn’t one unemployment metric. Rather these metrics broken down by markets, or states at the very least are what we should be concerned with, more on a micro-scale. Just because the U.S. unemployment rate may be 7%, doesn’t mean that’s what it is in your specific market. It may be lower (great) or high (uh oh). The Bureau of Labor Statistics reports unemployment rates and breaks this data down by markets, or Metropolitan Statistic Areas (MSAs). A good example of an MSA is Dallas/Ft. Worth and principal cities that include Arlington, Plano, Garland, Irving, McKinney, Frisco, and others. DFW MSA makes up a single MSA of nearly 8 million people

Getting back to the unemployment rate. This number is manipulated in many ways (after all, the government reports it, so that shouldn’t be a surprise). Ken McElroy, an experienced real estate investor, recently did a YouTube video explaining the different ways unemployment rates are measured. That video is linked in the show notes if you want to check it out – I recommend it!

Lastly is the supply and demand. Remember our San Francisco example where we’re seeing an out-migration. Supply and demand is an important factor in looking at markets. If there are a low supply and high demand, then prices are driven upwards. If there is a high supply and low demand, then prices are driven downwards.

WeAreApartments.org is a great resource for high-level supply & demand data. They indicate that the country needs to build 328,000 new apartment homes each year until 2030 to meet demand. You can drill down on their website to a specific market and look at the supply and demand. Looking at Oklahoma City, for example, they indicate that nearly 1,000 new apartments are needed annually to keep up with demand. You can pair that demand with supply data from the US Census Bureau’s Building Permits Survey to determine how many new apartments are predicted to be built, and see if this supply is being outpaced or is outpacing the demand.

So that’s a summary of what metrics are important in analyzing a new market. Learn more about each of these metrics and how you can use them to make better investment decisions. Be data-driven in your approach to real estate investing. Peel back the layers of the numbers and really understand what’s going on in your markets and others.

I’ll end by mentioning that our nation is, and has been, facing an affordable housing crisis. Sure, across the nation we’re continuing to build new apartments and new homes, but these are largely unaffordable to the blue-collar workforce that drives our country. This is a market that continues to be underserved, and it’s an area where I’m focusing my efforts. That is workforce housing in the heartland of our nation. Housing for the median wage earner that is clean, safe, and affordable. If you want to learn more about where I’m investing, what types of properties I’m investing in, and connect further, you can learn more at AyersAcquisitions.com