Handbook for Real Estate Market Analysis

Having a real estate market analysis strategy is an important part of real estate investing. Knowing which metrics to look at and how to use online tools and in-person visits can help you decide if a deal is right for you. This guide covers the best practices for conducting a real estate market analysis based on my experience syndicating over $1 billion in apartments in multiple markets in the US.

But it’s important to note that while identifying a strong real estate market is important, it isn’t a guarantee of success. Something you hear a lot in real estate investing is, “Location, location, location. The location is the most important factor that determines the success of a deal. You make money buying in the right area and lose money buying in the wrong one.”

While I get the sentiment, this is only partially true.

Yes, you can lose money buying properties in the wrong real estate market. But you can lose money buying in the right real estate market, too. Your investment team is far more relevant to the success of the deal than the real estate market. An apartment syndicator can buy a deal in the hottest real estate market in the country but lose their passive investors’ money by overpaying, failing to implement the business plan, making incorrect underwriting assumptions, or for any other number of reasons. At the same time, another apartment syndicator can buy a deal in a real estate market that is horrible on paper and double their passive investors’ capital if that is what they specialize in, and they can find deals and buy at steep discounts.

With that said, all other things being equal, you will likely make more money investing in a good real estate market than in a bad one. As a result, apartment syndicators should spend a lot of time on real estate market analysis—both prior to and after investing.

The best strategy for real estate market analysis is a combination of online and in-person analysis. Here is a quick rundown of the ideal approach:

Online real estate market analysis: Review the established or up-and-coming real estate markets across the US and narrow them down to a handful of markets. Then, perform a more in-depth analysis of these markets. This includes doing a lot of online research, reviewing commercial real estate reports, analyzing raw demographic and economic data, and catching up on local news (both general and business news).

In-person real estate market analysis: Visit the market in-person for a boots-on-the-ground analysis. Drive around the real estate market, looking for the best neighborhoods, visiting properties, and meeting with local commercial real estate professionals.

Based on your online and in-person real estate market analysis, select one or two real estate markets to target.

Apartment syndicators should follow this approach both when selecting a real estate market for the first time and when they are ready to expand. But what metrics should they be looking at during their online and in-person real estate analysis?

What is the right real estate market to target?

The real estate market you target shouldn’t be a metropolitan statistical area (MSA) nor a city. Instead, you should be targeting a submarket within an MSA or city. A neighborhood within a submarket is even better. Data on the entire city or MSA can be misleading due to the amount of territory included in the information, so the more specific the area the better.

For example, the population of New York City is over 8 million, and its footprint is nearly 500 square miles. It is broken into five boroughs, each with hundreds of neighborhoods. A few neighborhoods will align with the overall market statistics of the entire city, but most will be either better or worse. The only way to know for certain is to analyze the neighborhood.

Therefore, the best practice for a real estate market analysis is to focus your online research on finding the best MSAs and cities in the US, as well as the best submarkets within the large MSA or city. Then, focus your in-person, boots-on-the-ground efforts on finding the best neighborhoods in those top submarkets.

Finding the Nation’s Top Real Estate Markets

A best practice I use with my private apartment syndicator clients is to select seven real estate markets to analyze. I always recommend that at least three are real estate markets they are already familiar with, two are within driving distance, and two are considered “top market.”

The first two categories are self-explanatory, but how do you find the “top markets?” A best practice is to leverage the market analysis of the top commercial real estate investment institutions in the country.

These institutions invest a lot of time and money into creating monthly, quarterly, biannual, and annual real estate historical and forecast reports. Some of my favorites are:

• Marcus and Millichap’s quarterly market-specific reports
• Marcus and Millichap’s annual multifamily investment forecast
• CBRE’s quarterly cap rate survey
• Deloitte’s commercial real estate outlook
• IRR’s commercial real estate trends report
• PwC’s emerging trends in real estate report
• IPA’s annual multifamily forecast
• IRR’s annual multifamily report

Review these reports to see which real estate markets the big players are focusing on to select the final two target real estate markets.

The next step is to narrow your list down to one or two markets. The best practice is to perform a detailed online real estate market analysis, finding relevant data on the demand of multifamily in those submarkets. I’ve found that the metrics that best indicate demand are:

• Population demographics
• New and existing businesses
• Top industries
• Absorption rates
• Unemployment
• Occupancy and rent trends

Population demographics

Population age: Different demographics demand different types of apartment communities. For example, Generation Z (born 1996 and later) desires smart amenities, affordability, and communal spaces. The Millennial generation (born 1977 to 1995) prefers resort-style living experiences and high-tech amenities and services. Generation X (born 1965 to 1976) prefers urban areas, high-tech home furnishings, concierge services, and family-friendly features. Baby Boomers (born 1946 to 1964) prefer larger living spaces, state-of-the-art fitness centers, and common areas. Understanding the dominant generation in the target market will let you know what the most in-demand properties are.

For demographic trends, and all other market data, I recommend analyzing at least the last five years. That way you can determine how the metrics are trending. Most of this data is located on the Census.gov website unless otherwise indicated.

Population growth: The more people moving to an area, the greater the demand for housing. A good resource to use is U-Haul’s annual migration study. They rank each state in the US based on the number of one-way U-Haul trips. Census.gov also has detailed data on annual population trends.

New and Existing Businesses

Fortune 500 companies: If a multibillion-dollar company is moving their headquarters to a market, they are doing so because they’ve determined through research that it is the ideal location. The market is pre-qualified in a sense. Looking forward, this will also result in an influx of new jobs and new potential renters as well as other businesses moving into the area.

Go to Google News and search “[target market name] + Fortune 500” to see if any large corporations are moving or have recently moved to the area.

Other businesses: Smaller businesses moving into the market is also a positive sign. While not as positive as a Fortune 500 company moving into the area, this will still result in new jobs and new potential renters.

Go to Google News and search “[target market name] + new businesses” and “[target market name] + new jobs” to see if any smaller corporations or business are moving or have recently moved to the area. New business news is also usually included on local Chamber of Commerce and Economic Development websites.

Top Industries

If a large portion of the population works for one company, or even just a few companies, the market is riskier. If the company or companies decide to leave, this will have a major negative impact on the market. Similarly, the market is also riskier if many people work in one industry. If that job industry were to decline or disappear, it would have a major negative effect on the market.

Ideally, the real estate market does not have one or only a few dominant companies and no more than 25% of the population is employed in a single industry.

Google “[target market name] + top employers” for a list of the major corporations in the area. The industry breakdown can be found on the Census.gov website.

Absorption Rate

The population is the demand. The apartment communities are the supply. Both are important in determining the strength of the market. The ideal situation is if construction cannot keep up with the growing population. The worst-case scenario is a lot of new apartment construction and a declining population.

The metric that best measures the supply situation in a market is the absorption rate. The absorption rate is a ratio of the number of units rented to the number of available units over a given period of time. The higher the absorption, the less supply can keep up with demand.

Integra Realty Resources (IRR) publishes yearly multifamily reports that label US markets being in an expansion, hyper supply, recession, or recovery phase. The markets in the hyper supply and recession phase have poor supply and demand metrics. One of the metrics included in their analysis is the absorption rate.

Fannie Mae also publishes absorption rates in their biannual multifamily market outlook reports.

Unemployment

The more people who are working, the greater the supply of high-quality renters who are capable of paying their rent on time. Markets with higher unemployment rates are fine as long as it is decreasing. The worst-case scenario is a target market with a high, increasing unemployment rate over the previous five years. Ideally, the target market has low, decreasing unemployment rate over at least the previous five-years.

You can find unemployment data on your target markets on Census.gov.

Occupancy and Rent Trends

Occupancy rates and rental rates are also a measurement of supply and demand. The greater the demand, the greater the occupancy rate and rental rates. The best real estate markets have increasing apartment occupancy rates and increasing apartment rental rates over at least the previous five years.

Occupancy and rental rate data can also be found on Census.gov.

Narrowing down your real estate market analysis

Once you’ve gathered your data, rank your seven real estate markets based on the metrics outlined above. The most important metrics are related to supply and demand (absorption rates, occupancy, and rent trends) and job diversity (top industry). Therefore, I recommend ranking each market based on those metrics and then, assuming the other metrics aren’t disqualifying (i.e., a massive unemployment rate, a plummeting population, etc.), using the other metrics as tiebreakers.

Performing an In-Person Analysis

Once you’ve narrowed down the list to the one or two markets with the best supply/demand and job diversity, move forward with the in-person, boots-on-the-ground real estate market analysis to find the best streets within the best submarkets/neighborhoods.

To accomplish this, start by meeting with local professionals to find the best submarkets/neighborhoods. Then, visit properties to find the best streets.

Meet local professionals: There may be tens or hundreds of submarkets/neighborhoods in any one market. The most effective way to narrow them down is to ask local real estate professionals for their opinions. The best professionals to speak with are property management companies and commercial real estate brokers. They are actively managing and selling apartments every day, which means they are experts on the market.

Contact at least three local property management companies and three commercial real estate brokers. A simple phone call will suffice to start. Explain your investment criteria (i.e., what types of apartments you invest in) and ask them for the top submarkets/neighborhoods in the market to focus on.

Once you have a list of a handful of submarkets/neighborhoods from the local experts, focus on becoming an expert on each submarket/neighborhood.

Visit properties: I have my apartment consulting clients begin the process of becoming an expert in a submarket/neighborhood by finding and logging information on actual (yes, real) properties in the market. I recommend a total of 200 properties for each market. Thus, the exercise is called the 200-Property Analysis. The purpose of this exercise is to have street-by-street-level expertise on your target submarket/neighborhood. Plus, you may target these properties with off-market lead generation strategies in the future, so it is not only an academic exercise.

To being the 200-Property Analysis, create a spreadsheet to track the following 17 data points:

1. Market Name
2. Property Name
3. Property Address
4. Submarket/Neighborhood
5. Total Units
6. Rentable Square Footage
7. One-Bedroom Rent
8. Two-Bedroom Rent
9. Three-Bedroom Rent
10. Year Built
11. Who Pays Utilities?
12. Value-add?
13. Source
14. Owner Name
15. Owner Address
16. Appraised Value
17. Year Purchased

Using Apartments.com, you can generate a list of well over 200 properties in a market, as well as find data to complete most of the spreadsheet. I recommend finding properties that are scattered across the submarket/neighborhood rather than a concentration of properties in one area. Remember, the goal is to learn about the market and find the best neighborhoods.

I am a value-add apartment syndicator and teach others how to be the same, so we want to know if the property is a potential value-add opportunity. One strategy I like to use is to look at pictures to see if the interiors look outdated or if there is only one photo listed. If the interiors have been recently upgraded, the owners of the apartment will likely list a bunch of pictures to highlight the renovations.

Another strategy is to determine whether the owner pays the utilities. This indicates an opportunity to bill back utilities to residents via a ratio utility billing system (RUBS) program to increase revenue.

In addition to Apartments.com, you will need to locate the apartment on the local county auditor/appraiser site to find the owner contact information, appraised value, and year purchased.

This may seem like an arduous process, but no two streets are the same in a real estate market, and this can save you and your investors from years of headaches because of acquiring an asset on the wrong street or in the wrong neighborhood.

Once your spreadsheet is completed, print it out and set aside at least one weekend to visit as many properties on your list as possible.  At the property, you will want to perform the following tasks:

• Take a general picture of the property: You will be viewing many properties, so this main image will be your visual reminder.
• Take another picture of something noteworthy: Examples would be large green spaces, fresh landscaping, newly paved parking lot, and/or an interesting monument or signage. Be creative here. When you eventually begin reaching out to owners to see whether they’ve interested in selling, you can bring up this noteworthy item during the conversation.
• Look for any signs of distress and take pictures of anything noteworthy: Examples would be an uncovered pool in the winter, a pool closed for the summer, poor landscaping, peeling paint, old roofs, and old HVAC systems. Signs of distress relative to other assets in the same area signal a potential value-add opportunity and/or a motivated seller.
• Number of cars in the parking lot: This is important, especially during the day, since it will indicate the employment situation at the property.

This will give you an understanding of the types and quality of apartments in each neighborhood.

Drive around the real estate market: While you drive between property visits, pay attention to your surroundings to get a “feel” for the overall neighborhood and each street.

A great strategy is to print out a map of each neighborhood. Bring a green, yellow, and red highlighter. Highlight the map green to denote a “great” street, yellow for “okay,” and red for “avoid.”

Other things to look for when driving between properties are:

• Starbucks/McDonald’s: these businesses are nearby for a reason
• Parks and trails
• Schools: especially in “family friendly” markets
• Entertainment hubs
• Restaurants
• Major highways and roadways: this means the location has ease of access to jobs
• Traffic: could be a good thing because of walk-ins
• Road quality: a lot of potholes and trash or newly paved
• Quality of cars: indicates the resident type in the area

Another best practice is to drive the neighborhood at night to see how “safe” the area feels.

Based on the in-person analysis, you should have a better understanding of which neighborhoods are the best.

Bonus tip

Another recommendation is to set up Google Alerts for target markets you are interested in. Just because a market is qualified today, that doesn’t mean it will remain qualified this time next year. Therefore, use Google alerts to receive automated email updates on any changes, good or bad, in specific markets.

Good keywords to set up for each prospective target market are:

• Apartment
• Multifamily
• Real estate
• Jobs
• Unemployment
• Absorption
• Vacancy
• New business
• Fortune 500

Real estate market analysis summarized

In summary, the real estate market itself is not as important as your ability to implement your business plan. However, selecting the right real estate market does increase the likelihood of preserving and growing your passive investors’ capital.

Therefore, to select the best real estate market, follow my tried-and-true real estate market analysis:

1. Select seven real estate submarkets
2. Perform online analysis to rank these real estate submarkets
3. Narrow your list down to one or two real estate submarkets
4. Perform in-person, boots-on-ground research to locate the best neighborhoods

And now that you have your analysis in place, start building a successful Real Estate Capital Markets group.