Market analysis for dummies …

Buying an income producing property is an investment in the underlying economy.

That’s REALLY where the income originates. That’s why we put so much emphasis on market analysis.

Investors who focus exclusively on deal analysis (crunching the numbers on the property) but fail to underwrite the market sometimes end up in a mess.

The context of a deal is the macro-environment … things like interest rates, taxes, energy costs … that affect everyone everywhere.

But there’s also regional factors … local taxes, landlord law, supply and demand, and jobs.

Once all those things check out, you (probably through your boots-on-the ground team) go to the street level and start looking for a deal that makes sense by the numbers.

That’s because a strong market will lift a marginal deal, while a weak market can suck the life out of even a “good” deal.

Market selection matters.

Of course, that’s easy to say. But figuring markets out can be a bit of a challenge.

So we cheat.

While in school it’s frowned upon to sneak a peak at the smart kid’s homework … in the real world of real estate investing it’s actually a preferred practice.

In this case, the very smart folks at Cushman Wakefield recently released a report they call Spotlight on U.S. Employment – A Tale of 35 MSAs.

As you’ll see, it’s about office space. But even if you’re not an office investor, the report is helpful for understanding where jobs are being created … and why.

Remember, market analysis is about economic activity. And even if you’re exclusively an affordable housing investor and your target tenant doesn’t work in an office … remember, high-paying jobs create a ripple effect.

That’s because a six-figure office worker spends a chunk of their income at local businesses … restaurants, healthcare, auto needs, entertainment, etc.

In fact, as Amazon claimed during the highly publicized hunt for their HQ2, each high-paying job creates an additional 4-5 jobs in the local market.

Our point is that tracking the office market can be a good gauge of local economic vibrancy, no matter what type of real estate you’re investing in.

So let’s dig into the report and see which markets look promising …

“While the U.S. economy has added jobs at a steady pace … the growth in employment has not been evenly distributed.”

“ … hotspots … have outperformed the national average … based on local market factors.”

Isn’t that that way it always goes? The world’s not fair … and that’s GREAT …

… because it means well-informed strategic real estate investors can dramatically improve their odds of success simply by being attentive to market selection.

The CW report looks at 35 markets over 9 years and divides them into categories … All-Stars,Over-AchieversMiddle-of-the-Road, and Late-Bloomers (like us!).

The first three are probably self-explanatory. Late-Bloomers are markets whose growth the last four years is substantially higher than the first five years.

We think there might be some real opportunity in Late-Bloomer markets because they’re less likely to attract attention (and competition) from less studious investors.

It’s kind of like a team with a few early season losses that gets hot at the end of the season, sneaks into the playoffs ranked low, and then shocks everyone.

We’re not saying momentum is all that matters, but it happens for a reason … so it’s probably worth a deeper dive.

But let’s start with the five All-Stars …

  1. Dallas
  2. New York City
  3. San Francisco
  4. Riverside / San Bernadino
  5. Austin
  6. Orlando

Dallas is no surprise to us. We’ve been attracted to Dallas since the Great Recession.

At least in the beginning, and even to this day, DFW has it all … business friendly, low-tax, great infrastructure, geographically linked economic drivers (energy and distribution). It’s awesome.

But NYC and SF? High-tax, uber-regulated, very unaffordable. What gives?

We’re guessing it probably has to do with lots of the Fed’s easy money flooding into the financial and tech sectors.

Of course, from an income property investing perspective, neither NYC or SF makes much sense by the numbers or the business climate.

And if someone trips over the cord at the Fed and the printing press stops, it might suck the equity out of those markets. We saw a little of that happen as rates rose and the Fed tightened.

And add to that the recent tax code pouring some SALT on the wound, wealthy folks are leaving … and in many cases, taking their businesses and spending with them.

The point is that just because a market is on the All-Star list for job creation and office space absorption doesn’t make it a n0-brainer market for residential income property investing.

You still need to use your brain.

Meanwhile, we’re guessing the San Bernardino / Riverside market growth is probably distribution related. There’s a zillion people in Southern California … and if you want to ship stuff to them fast, you need nearby distribution.

The Inland Empire is among the most affordable and open areas in California to build these big centers. It’s also not too far from the ports bringing containers of merchandise for domestic distribution.

So ff we HAD to invest in California again, the Inland Empire would probably be on the short list.

But the bigger lesson here is to pay attention to the role of distribution in driving a market’s job growth. It’s one of the shining stars of commercial property investing.

And when you dig deeper, you’ll see distribution is something several top markets have in common … and those jobs aren’t getting offshored … though they could be robotized.

Of course, technology doesn’t necessarily kill jobs … but it can move them. After all, robots need to be built, installed, programmed, updated, repaired.

So that’s just one more trend for a savvy investor to watch carefully.

Among the Late-Bloomers are markets we know and like are Jacksonville and Memphis. Landlord friendly, good numbers, and apparently some good local economics.

What’s educational and fun (at least for real estate junkies) is to look at these “hot lists” and then analyze the markets for similarities and themes.

You’ll often find clues about what makes a market attractive to employers and resilient for investors. Then you’ll recognize these factors sooner in lesser known markets and able to make your move ahead of the crowd.

Just remember … while sneaking a peak at the smart kid’s homework can shorten your learning curve, it’s not a substitute for doing your own homework.

Until next time … good investing!

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Oh no! Vacancies are up!

If you’re a regular follower of The Real Estate Guys, you know we like to see the opportunity in every problem.  This is the time of year when all the reports on the previous year – as well as the the predictions for the New Year – are all over the airwaves and internet.

One that caught our eye is from the Wall Street Journal on January 7th:  U.S. Now a Renters’ Market – With Apartment Vacancy Rates at 30 Year High, Landlords Cut Prices 3% in 2009.

Oh no!

If you’re a landlord competing for tenants and trying to eke out positive cash flow, this is bad news.  The problem, as the article (and common sense) details, is a lousy US job market.  People are “clustering” (moving in with friends and family), so even though the people are still out there, the demand for rental units is down.

Stop right there.  Have you ever clustered?  There’s nothing more fun (not!) than moving back home with mom and dad – or sharing a bathroom with a roommate.  As soon as things get better, what is the FIRST thing you want to do?  Get a place of your own!  Hold that thought.

Now, let’s go down memory lane.  Do you remember when every 3rd person you met was a real estate investor?  Folks with no experience and very little real estate education rushed in to buy real estate to make a quick buck – or in some cases, a quick tens of thousands of bucks – as the flood of money pouring into real estate created hyper-appreciation.  Ahhh….those were the days!

But now those days are over.  Lots of those rookie owners are now facing not only their first, but undoubtedly the worst, real estate correction in their lifetimes.  While some have already been wiped out, many others are still struggling to hold on.  But they don’t want to be real estate investors any more.  In fact, they never really were real estate investors.  They were mutual fund investors (i.e., hands-off-just-send-me-the-statements-showing-my-net-worth-growing investors) who ended up in real estate because it was the hot commodity at the time.

In other words, they are what true real estate investors affectionately call “Don’t Wanters”.  Maybe you have some properties you don’t want,  so you’re a Don’t Wanter.  But, we’re not talking about having a problem property (that’s just part of the game), as much as we’re talking about people who are leaving real estate investment never to return.  They don’t have the heart to stick it out during the tough times.  Maybe we should call them Quitters (not in a bad way – real estate investing isn’t for everyone).

This is where the true blue investors have opportunity.

How much effort is going into job creation in the US right now?  We know that’s a loaded question.  But we didn’t say how much effective effort is being put out.  Just how much effort?  There’s no question that it’s a top political priority.  If this current group doesn’t fix it soon, a new team will get a chance.  But sooner or later someone is going to fix the problem.  If you don’t believe that, then it’s time to move somewhere else (how’s your Chinese?).

Meanwhile, people struggle. They cluster. They hunker down and watch expenses.  They save when they can. And they dream longingly about the day they can get out on their own.

What about builders?  Are they cranking out new rental units?  Heck no!  The credit crunch and economic uncertainly have put the kibosh on that.  And in certain markets, there simply isn’t any room to build anything new even if someone wanted to.  Markets like San Jose and San Francisco California.

Hmmmm.  Arent’ those two of the three markets the Wall Street Journal article said led the decline in rental rates?  (Yes, they are – as you’ll see when you read the article).

Do you see the picture yet?

Amateur investors with rental properties in markets “that had brisk growth until the recession” (again, quoting the Wall Street Journal) – whose properties are now experiencing declines in income.  Those declines might be temporary, but when you want out, you don’t think long term. You just want out.

Might the Quitters be interested in selling?  Since income properties are valued by the income they produce (more income equals more value and vice versa), those properties are worth less (not to be confused with “worthless”) now.  That is, they’re on sale.

Meanwhile, potential tenants are clustered on the sidelines waiting for economic recovery to give them the jobs they need to move out.  And with few new units coming on line, they will be competing for the available units – which seem to be abundant now (hence the price declines).  But again, the population didn’t substantially decrease – so at its core, the demand is still there.  But without jobs, people are…well, let’s say “enjoying each others company” more often.

Conclusion?  Now might be a great time to strategically acquire rental properties from don’t wanters in markets with good prospects for recovery, but poor prospects for an increase in supply. Because when you combine growing demand with capacity to pay (jobs) with limited capacity to increase the supply, you have a formula for increasing cash flow and value.  But if you wait until all that happens, you’ve missed it.

As Wayne Gretsky once said, you have to “skate to where the puck is going, not to where it is.”

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