Learn how to conduct a regional analysis and which factors to consider.
- In this lecture, we're going to dive into regional analysis. What are the things that you need to think about for your investment, at the broader regional market level? Let's see. Okay, now, first we're going to talk about the metropolitan statistical area. Now, generally, this is one or more counties, with a population of 50,000 or more. For MSAs that are bigger than a million in population, so you think of LA, or any other big metros where the statistical area would cover more than a million people, oftentimes, that area would get subdivided into multiple primary MSAs, or called PMSAs, that can be broken down, alright.
Now, the goal is, in looking at the MSAs, is to investigate the economic factors of that larger area, right, that might impact the apartment community, because if it does, obviously, it's going to have an impact in the way you're looking at the investment opportunity. Now, some of the things that we're going to be looking at, we're going to be looking at job sources. Okay, where are the jobs currently coming from? Is it concentrated in just, you know, a handful of industries, or is it pretty spread evenly among lots of different industries, very eclectic mix, and also, you know the key industries, industries that are responsible for most of the jobs, if it is concentrated, you know, are those industries going to be around? Are those industries going to be healthy in the coming years, right? You want to look at where the jobs are coming from because the jobs determine the wages.
The wages are going to be how people are going to be paying rent, so if the jobs aren't there, then that's, there's going to be an impact on the rental market for sure, so looking at job sources is really important, and the thing is, for a particular area, there's not going to be a single easy way to find where the job sources are, because it really depends on what market you're in, right? Some cities are going to have really good data, some cities are not going to have a bunch of data, and you're going to have to look at the chambers of commerce, you're going to have to, you know, talk to your city halls and get information on maybe, you know, what companies are around, and sometimes, you don't want to just look at a city that your target property is located in, we want to look at the surrounding cities, anything that's within, you know, a reasonable commute for people, right? So, they could be living in the city you're looking at, but they could be working in a nearby or neighboring cities, so you want to look at the job sources within a reasonable commute, and obviously, related, you want to look at growth prospects of job growth.
You know, are industries coming in, are they moving out of the area, are the number of jobs and the type and quality of the jobs going to be growing, or is it going to be in decline? Now, educational facilities, if an area has a good university or schools, that's typically a very good source of recurring renters. Students are one of the biggest renters. They're not likely to be buying permanent homes where they're going to school, they're going to be renting, especially, you know, grad students or students that are living off campus, there are many opportunities there, and sometimes, that is a good play, being in kind of a college town, you've got lots of demand for rental units.
Shopping centers is a good indicator. So, you know, we want to look for an area that has good retail and shopping centers because shopping centers are an indicator of people wanting to live in the area. Shopping centers don't build a new location, they don't open a new Walmart or a Kmart where people aren't living, and where people don't have a need to buy things, right, so they do their research, and looking at where the shopping centers are located, and especially where they're building their next shopping centers, you know, if you have an area where it's kind of growing, but you're not really quite sure that there's a lot of people there, but you notice in the city permits that hey, they've, Walmart or somebody else is permitted to open a new store there in the next two years, well, they're betting on the population there, right, so, and they have a lot of financial analysts to do the research to say that hey, it's going to be worth it for our company to open a new location there.
What it means is, that's kind of a good cosign. They're not always right, but, you know, it's always good to have some other big companies with a lot of resources, a lot of manpower, who also believe in the area that you're looking at. So, looking at where shopping centers are opening, not just where they're currently located, is a good way to look at some up and coming neighborhoods that might be a good place to invest. And obviously, another indicator of where people are choosing to stay is places that have good entertainment venues or outlets.
People want to live near areas where they can actually have leisure activities and outlets, so look at those as signs of where people may want to locate. The areas that have more options, more entertainment, more leisure options, tend to be places that have more demand for people to want to live there, which tend to have higher demand, higher upward pressures on the rents.
Unemployment rates related to jobs, definitely got to look at that, and, you know, a lot of times, that's a very easy metric. It's easier to find than job sources and easier to find than try and guess at and get data on trying to see where the growth is going to be coming from, unemployment rates, it's often tracked, and you can see if it's changing higher or lower, and if unemployment rates have been edging higher and higher over recent years, especially over a long term period and a trend, that's when you got to be very careful, and that's usually an indication of some sort of a missing component for that area.
There's some underlying major factor that's leading to higher unemployment, leading to people not being able to find jobs, maybe the industries are weak, right, so unemployment is an important and easy metric to find early on. Now, another thing we want to look at is household income. Household income, you want to be in markets where, on average, the folks in terms of their income level are able to afford the rents that you're trying to get, right.
Now, obviously, there's going to be some correlation between household income and the rental rates in the area, which also will correlate with the property values, right, super high income area, well, the properties are going to be super expensive as well, but maybe immediately near it, where people want to live near the area, can't quite afford to buy in the area, may want to rent close by, right, so looking at household incomes give you an opportunity to potentially find these pockets.
Density is important to look at. In terms of density, population density, you want to see where people are kind coalescing, in a particular market, right. There's, even within a certain city, not everyone is evenly spread out across that part of the city. There's going to be certain pockets where more people are going to be crowding around, and the other things that we talked about, in terms of shopping centers and entertainment, leisure, those are going to be indicators of where the density is going to be going, so you can think about looking at those things in terms of looking at density.
The age of the population and how it's aging, how it's changing over time, is, could be something that's important to look at, right. If, generally what you have is a much older, aging population, and you have young people moving out, moving away to look for jobs elsewhere, and the folks that stayed tend to be, you know, folks that already have houses and they're retiring, you may have a harder time finding the wage earning young professionals who can pay rent and are looking for a place to rent, in that case.
So, sometimes, for some markets, it could be relevant, not always, but something to pay attention to. So, that relates to population movements, right, how it's changing, and you want to look at the movements or changes in terms of the different demographic factors, age being one of them, income being another, and education. Education is related to jobs, as the, you know, if there's a very low level of education in the area, compared to, you know, the rest of the nation, or compared to the surrounding areas, then that group, or the people that live there, may have a harder time finding some of the harder wage earning jobs.
Now, it's not always a requirement, obviously, that you need a place that has high college education because there's some towns that have very good high paying hourly wage earners or blue collar workers, the idea is, this is just one piece of the puzzle that you have to look at. Family composition, that's something that can impact your decision about the specific mix of the units, right, so, you know, if you got families that tend to be larger in the area, a lot of families that are maybe, you know, six or seven, it's just disproportionately higher amount of bigger families in that area, then you don't want to only have studio and one bedroom apartments as part of your mix.
You might want to add in a few two and three bedrooms in order to accommodate for what the demand is going to be, so looking at the family composition can tell you that. Ultimately, you know, when we do regional analysis and we get that data, we want to look at anything that could affect the competitive environment for multifamily properties, right, things that can affect the basic demand for and the supply of multifamily, that would impact the rental market, there.
So, anything that impacts demand in terms of impacting the population or jobs, but things that would affect supply would be more on what would draw people to want to, other investors and developers, to build more multifamily in that area. Now, another thing to look at when you're looking at the analysis of kind of a city, a larger city area, is to look at the zoning maps.
So, this is just an example of what a zoning map might look like for a city, and each code will give you how certain areas are being zoned, right, so we might say, for example, if you look at R4, right now, R4 is zoned for multifamilies, so all the kind of yellow-ish brown, kind of a golden brown color, there, on the screen, you're able to have multifamilies, so these R4s, right and we see that a lot of these are zoned for R1 or R2, which is, you know, single or two family homes, and when you're looking at these areas, you want to start looking at new developments, where are they being developed, are the zoning restrictions, have they changed from the years prior, has it grown more? 'Cause it might be the case where, you know, some of these R4s were previously R1 and R2, and now it's R4, but it still hasn't been developed yet, right, so, you know, an area that's growing quite a bit, you may be able to find these pockets where the city's already planning for that growth, and they've approved it, but, you know, it hasn't been completed, it hasn't been enough developers to actually act on that yet.
Now, another thing to look at in terms of your regional analysis, look at whether there's rent control. Now, we're going to look at what rent control, how it impacts the rental market. So, if we were looking at a graph of the number of available rental units against the rental price, or the price of the rents, we'll see something like this, right? Here's a supply line. So, this is a little bit of an Economics 101, but in terms of looking at rent control, alright, so, you know, from supplier's standpoint in terms of investors or developers building multifamily units, the number of units that they want to put on the market will go up if the rental rates are high and increasing, right, the more the prices are, the more supply they're going to try to provide for the market, because they can make profits.
Now, for demand, the higher the price, the fewer units they're going to be demanding, right? People are not going to pay as much, not as many people are going to be able to pay for it, right? But the lower the price, the more units that people are going to demand, right. So, at some point, in the market, where it is currently in terms of what rents are being charged and how many units are available, versus the demand to fill it, you can see a market equilibrium.
Okay, now what happens when there is rent control price? A rent control price basically keeps the actual price below what the market would end up pricing it at, okay, so it would be something like this. So, the rent controlled price would be below what a normal supply and demand price would be. So, in that case, what ends up happening is the prices will be lower, so then there's going to be less supply from the investors and developers to provide units for the market, because it's not worth, quite as worth as much, but then what ends up happening is there's going to be a lot more demand for them, so the occupancies are going to be higher in these markets, but, you know, when there's rent control, then you can't charge more than that, as well.
So, what ends up happening, then, is there's usually a market shortage when there is rent control. Next thing, we want to look at the city's building codes and restrictions in an area. Alright, now building codes and restrictions, these guidelines for growth and development, you want to ask how the city handles violations, and if it's applicable for an older property, and, you know, if the city expects a property to be upgraded to new code standards, you know, or whether some sort of a safe harbor exists for old properties, right, because that matters if you're buying something that's older, it might be in good condition, but if the codes have changed and you don't know about it and any new change of ownership might trigger bringing a building up to code, and that can be really costly depending on what that is, so you want to do that kind of research, and because, some things, like common upgrades that might be required, are like changing older properties to include parking ratios that make sense for how many units there are, because people tend to have more cars now than before, that certain fire or other safety requirements, or potentially some new environmental concerns that weren't, you know, around 20 or 30 years ago when that property was build, but now is relevant.
So, getting into that, you know, you don't want to get in trouble. Alright, another thing we want to look at is infrastructure, right, we want to look at roads, you know, bypasses, public transportation, public spaces, and any approved or major infrastructure developments that is going to be happening in that area. Why does that matter? Well, because these things can alter the traffic patterns, and ultimately the desirability of living in that specific location or not, right? If there's a certain change to the roads, something, some major closure to a certain pathway or highway that leads from, you know, this particular area towards some other area for work, then you might have some people that might not want to live there anymore because of the hassle there, right.
So, changes to the infrastructure can seriously change the desirability of living in a particular area.
Note: This course uses data and example properties from the United States, but the concepts taught and tools provided are just as useful for any market.
- Determining if real estate investment is right for you
- Choosing a market and a property
- Using financing
- Strategies for first-time investors
- Real estate market cycles
- Valuing a property
- Analyzing your market
- How leverage impacts investments
- Real estate investment case studies