Christopher Rudolf, Analyst – Multifamily Acquisitions, shares a few insider tips used to assess the value within multifamily investments in pursuit of providing maximized returns.
Location, location, location! Harold Samuel coined the phrase in 1944, but we all know there’s more to the theory of defining and determining property value. So how exactly do multifamily investors evaluate locations for potential investment opportunities? Why are some markets considered to be “hotter” than others? Which submarket metrics are most important to analyze?
This article provides a brief overview of 5 essential criteria that provide answers to some of the most important questions while ascertaining value from the perspective of a real estate investment firm. There are numerous market metrics to consider when evaluating a potential deal, however, these five are often scrubbed the most:
1. Population/Employment Growth:
One of the first things we analyze is a submarket’s population and employment growth. These are driven by various economic factors including education accessibility, taxes, legal environment pertaining to business, and government policy. People will move to locations with opportunity to increase their standard of living. For instance, a market like Orlando has added 87,900 jobs in the last year, which has contributed to the city witnessing some of the highest apartment demand in the country. It is also important to consider industry/employer diversification in the event there is a pullback within a given sector. For instance, a city like Houston relies heavily on the cyclical energy sector to fuel economic growth. Investing in a property primarily comprised of energy employees could raise concerns during a pullback. In markets like Houston, Westmount targets investment opportunities with a diversified rent roll, ideally working in defenseless industries (medical, education, government etc.). While jobs typically serve as the predominant driver of population growth, there are other factors fueling overall apartment demand such as livability.
2. Livability:
Multifamily investors should have a keen understanding of the livability within the submarket they are considering. Livability, which is defined as the “sum of the factors that add up to a community’s quality of life”, is subjective in nature. Measuring livability is entirely dependent on the demographics within a community. For instance, the Uptown Dallas submarket is full of 1 and 2 bed apartment communities housing young professionals working in Downtown Dallas. This demographic of professionals typically seeks proximity to walkable retail, entertainment, and office. Additionally, young professionals in today’s world are willing to pay a premium for a community containing upgraded amenities. Compare this demographic to that of a family of four who’s priorities lie elsewhere, one example being public schools. Public school ratings are often overlooked by real estate investors fixated on other fundamental economics, but in a building consisting mostly of 2 and 3 bed apartments, school ratings play a large role in a family’s eagerness to rent in a given submarket. Furthermore, crime is closely correlated with the strength of a given school district. Certain demographics weigh crime statistics differently than others. Population growth, job drivers and public schools drive the demand function of a submarket, but where does supply get factored into the equation?
3. Absorption:
Supply and Demand, both equally as important when underwriting the viability of a deal, must be considered with the same level of importance. Demand could be through the roof, but if a particular submarket has an abundant supply of units, underlying rent growth assumptions are exposed to risk. One of the key metrics real estate investors look for in target submarkets is absorption. This statistic represents the expected amount of supply and new supply to be occupied in the coming year. In essence, absorption represents demand contrasted by supply. For instance, you may know that every day over 200 new residents move to Phoenix. Therefore, rents have grown an average of 11% in the last three years. Hypothetically, if developers were planning on constructing 10,000 new units over the course of the year the absorption statistic becomes unattractive as supply would outpace demand. Because of this, the anticipated construction pipeline plays a critical role in identifying opportunistic markets.
4. Follow Institutional Capital:
As an investor, targeting markets with stable and improving flows of institutional capital will position the property for an accretive exit down the road. Liquidity risk is a critical component on the sale side of an investment. Keeping this in mind when targeting submarkets can help source better debt, syndicate equity and ultimately find well capitalized buyers when the time is right to sell.
5. Rent Growth:
All the aforementioned criteria lead to the most crucial component when assessing viable submarkets for investors, rent growth. Any real estate investor will tell you, the overall success of their investment lies in market driven cap rates and forecasted rent growth. As an investor, we do our best to analyze markets, determine rent premiums given specified upgrades and renovations, but at the end of the day your top line growth is dependent on resident’s ability and willingness to pay forecasted rents. Population growth, livability, supply constraints and various other criteria play a key role in what you predict someone’s willingness to pay will be. Unexpected expenses in underwriting are inevitable in multifamily, but similar to cap rate compression, having strong rent growth can mitigate the asset’s overall financial performance. For example, in the current economic climate depending on the submarket, landlords are burdened with expense inflation stemming from global supply chain and labor constraints. In response, Westmount has strategically focused on primary and secondary high-growth markets in the Carolinas, Texas, Arizona, and Florida. These markets are witnessing rent growth increases that mitigate many of these industry wide constraints.
These five items do not encompass the entirety of an investment team’s acquisition due diligence process, but we find these core criteria to be fundamental in our pursuit of identifying emerging markets.
Author: Christopher Rudolf
Christopher is an Analyst – Multifamily Acquisitions at Westmount Capital Realty, LLC. He has experience in real estate development, brokerage, and is now part of Westmount’s multifamily acquisition efforts in markets throughout Arizona, Texas, and the southeastern region. At his current role at Westmount, Christopher has been a part of over $200 million worth of real estate transactions through both acquisitions and dispositions. Christopher began his career in real estate with a development firm in Pittsburgh and graduated from SMU with a degree in Finance.
To learn more about Westmount Realty Capital or for additional information, contact us at info@westmountrc.com or find us at https://westmountrc.com/.
This article, and Westmount Realty Capital blogs in general, is intended for informational and educational purposes only, and does not constitute a solicitation or offer by Westmount Realty Capital, LLC to buy or sell any securities, futures, options, foreign exchange or other financial instrument or to provide any investment advice or service. Westmount is not your advisor or agent. Please consult your own experts for advice in these areas. Although Westmount provides information it believes to be accurate, Westmount makes no representations or warranties about the accuracy or completeness of the information contained on this article.
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