How to Analyze a Multifamily Real Estate Market: 3 Key Metrics

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“Location, location, location.” You’ll hear it repeatedly in real estate and with good reason. That’s in part because, while national factors like interest rates or the stock market will influence real estate values, local market conditions may play a bigger role in whether your investment soars or tanks.
While you may have a hunch which markets are set to explode or are undervalued, successful, savvy investors don’t invest their capital on theories or intuition. You’ll need to tap into the data to inform your decision.
But with so much information to sift through, it’s helpful to know what truly moves the needle.
In our experience, population growth, economic factors, and regulations are the three key metrics that will help you analyze a multifamily real estate market.

Population growth

Population statistics are perhaps the most important factor.

In general, a growing population increases demand for housing, and that increased demand for housing raises rental rates. As a multifamily real estate investor, few things are better than rising rental rates as they help your potential for cash-flowing, profitable properties.

But this doesn’t mean you should simply go invest in a national hotspot for population growth over the last year. You’re looking to identify steady increases over the long-term.
How much growth? Above-average down to average growth will do. The keys are that the trend is up and that population growth is expected to stay positive for the foreseeable future.
You should also pay attention to the demographics of that growing population. For example, are prime-working-years professionals generating demand for single-family homes, or are young workers and retirees moving into town, placing an emphasis on apartment rentals?

Economic factors

The next piece of the puzzle is the lure that will drive population growth in your target market.

This is where the local economy comes in.

By and large, the strength of the local economy will play the biggest role in whether your target market keeps hold of established residents and attracts new ones.

To start, markets where employment growth is outpacing the national average should get your attention. And in basic terms, larger markets provide more stable employment gains because there are more companies to provide jobs.

However, it’s not as straightforward as just picking big markets and looking at raw job increase statistics. You need context.

When you’re ready for a deeper look, pay attention to these economic factors.

Volatility

Even with positive job numbers, signals of recent instability in the local economy are a warning sign.
You should consider:

  • How steady the jobs market is and for how long
  • How fluctuation in this market compares to the overall U.S. economy
  • If employment growth is more volatile than the overall U.S. economy, what’s behind it

Type of jobs

Not all job creation is equal. Limited income potential and/or employment instability could affect workers’ ability to pay rent. And you’ll want to make sure new jobs are, in fact, creating more renters.

You should consider:

  • Do the numbers support growth in minimum-wage jobs, blue-collar trades, or white-collar, educated jobs?
  • How old is the new workforce? Is there growth among the 18-34-year-old demographic, which makes up the biggest pool of renters?

Industries

Job stability isn’t the same across industries. You should consider the makeup of businesses that provide employment in the area.
For example, government, higher education, and healthcare jobs usually grow over time yet also rarely relocate.
If military jobs account for most of the employment growth, you’ll need to proceed with caution. While a military presence might boost jobs in the market, deployments or base realignments can bring fluctuation.
Virtual service jobs, call centers, and manufacturing jobs can add volatility. They can be relocated to a cheaper market quickly and without much warning.

Unemployment

Even though your focus is on job growth, which seems like it would account for unemployment, it needs a separate look.

For example, it’s possible a market has rising employment growth yet unemployment remains roughly the same.

One way this can happen is when a new high-tech or nuanced business pops up in a city. Highly skilled or highly specialized jobs are created, but the local talent pool lacks the skills and experience to fill them. Instead, the company recruits qualified workers to move into town and take the jobs.

In an overall sense, you want your target market to have:

  • an unemployment rate that is lower than the overall U.S. level
  • an unemployment rate that has held steady over time

Low corporate tax rate

If your target market has a low corporate tax rate compared to other areas of the country or tax incentives for businesses, consider them a boost. Since higher rates make it more costly to do business elsewhere, low tax rates encourage new businesses to move into the area and established companies to stay put.

Regulations

Landlord/tenant laws

As housing is a basic right, it gets plenty of oversight. Many laws and governing bodies will affect everything from your lease to living standards to your rental rates. Laws will also influence your marketing practices, tax bill, etc. All of this can affect your profits.

In addition to standard Federal equal housing laws and business practices, you’ll want to review and consider the state and local business practices and state and local landlord/tenant laws.

Evictions

While you’ll hope an eviction won’t come your way, you may not be able to dodge them forever.

Though it’s true evictions and bad debt scenarios are more common as you move from Class A down the ladder to Class D properties, even the top level gets them from time to time. No matter your investment, most likely you’ll have to deal with one.

As you evaluate your target market, you’ll want to look for a state that has favorable or at the worst neutral treatment toward landlords in legal actions. These states can help reduce your losses.
For example, in states with tenant-leaning laws, you might wait up to six months for an eviction. And you could lose out on any rental income from that unit during that time, with no option to recover your losses. By comparison, evictions can take 30 to 45 days to carry out in states with neutral stances, and tenants breaking their lease will be responsible for the landlord’s losses.

Evaluate a multifamily real estate market with these three metrics

With many economic and social forces influencing a market, finding the right conditions for a successful multifamily real estate investment can seem far from straightforward.
Yet by drilling down into population growth, economic factors, and regulations, you’ll crunch the most relevant numbers and figure out where to make your move.
And if you’re looking for a head-start, some of the cities and metros where we see opportunity include:

At Birchstone Investments, we help investors create passive income streams and grow long-term wealth through strategic multifamily real estate investments. If you’re interested in learning more about commercial real estate investment, join our investor community today.

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Jerry Hollifield

Jerry Hollifield

Jerry is the Managing Principal & Chief Investment Officer at Birchstone Investments, LLC. With a business career that spans more than 30 years, he has been involved in the acquisition, development, financing and management of over $400 million in real estate. In addition, he has been involved in more than 40 Merger and Acquisition transactions with total value exceeding $600 million.

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