As the presence of social media, instant messaging and “smart” devices continue to encroach on our physical, non-digital lives, I have observed that real estate markets are becoming hyper-localized, even more so than they were in the past. Any real estate investor who has done so much as a single deal using any strategy will tell you from firsthand experience, “Real estate is local.” Now, however, the old adage, “Real estate markets vary from street to street” has never been truer.
Perhaps because we are so accustomed to the presence of devices and software that cater to our preferences, we have become more demanding of perfection in our physical property. Perhaps it is due to the fact we can poll our 500 closest friends about the relative merits of a street with mature elm trees versus the one with sapling maples one block over. Whatever the source of this hyper-localization, it is a cause for concern for high-volume investors active in multiple markets.
A New Need For Different Information
Like most investors, I do preliminary market studies for any potential investment. I look at local population trends (typically growth is what you want), track employment (low unemployment but a variety of well-paying, stable job opportunities is best) and trace home value history (steady, predictable markets are ideal, although there are arguments to be made for buying at the bottom of a really staggering downward trend). I evaluate this information in light of what I know about the specific investment vehicle I’m considering. If things look good, then I proceed.
In the past, if I reached the point I just described, there would be a pretty good chance that I would be seriously considering making the investment in question. Today, those specifics leave investors with far too general a view and far too little information to make an educated decision about whether or not to move forward.
To address this lack of specificity, I’ve developed a secondary set of evaluative tools. The key to using these tools relies on your ability to obtain and interpret data from entities with a great deal of support for their data collection process and a high motivation for collecting that data accurately.
What are these entities? Retailers.
There are several ways you can leverage the commercial retail space to your advantage when evaluating a potential real estate investment in either the commercial or the residential space:
Leverage local occupancy information for a fast red or green flag.
The first thing I do once I have identified a specific investment I believe holds promise is find out what the commercial real estate situation is in the area. For example, I recently considered purchasing a multi-unit property near a major metro area. It looked like a good deal: The price was right, the market seemed sound and it was within commuting distance of several major employers in the area. However, when I looked closer, I discovered an almost entirely vacant mall directly adjacent to the neighborhood. That certainly changed things. I did not immediately rule out the deal, but I let the seller know that I would not be paying their asking price given the security and logistical issues associated with living that close to an abandoned building.
Of course, you will not always have something as stark in front of you as a dead mall. Sometimes, you will need to track how many restaurants are open in an area or trends in occupancy levels in local retail centers. In general, this first option tends to convey a bright red flag if things are potentially negative, as it did in my example, but it does not necessarily provide an equivalent, definitive answer on the more positive side.
Use retail demographics as bellwethers for residential investing trends.
Once you have evaluated the presence (or absence) of local retailers, restaurants and other commercial tenants and business interests, take a look at where those businesses moved from. Have they been in place for years? Did they recently arrive? Are they moving out and, if so, where? If the businesses are solid, that indicates a relatively solid buying population as well. If they have recently arrived, then it’s time to take advantage of all the money that goes toward consumer sentiment studies.
Take a closer look at what types of businesses are moving into the area and in what volumes. Do their clients match your target residents or buyers? If so, then these businesses clearly expect to find those individuals in that area, and you can feel good about taking a cue from their moves and keep considering making a move of your own as well.
Identify local market strengths using commercial presence as a comparison.
Big retail developers do intense, expensive studies before they start to build. While it is always nice to see the physical manifestation of this type of development in the same area as a complementary investment opportunity for yourself, sometimes you may have to look at building permits instead of actual buildings. As you continue to leverage this secondary set of indicators in your own investing, you will begin to get “a feel” for what types of commercial real estate tend to be a good sign for your own strategies. Once that happens, you will find that you can learn a great deal about the future of a market in which you are considering investing simply from information about local building permits identifying what might be built, who might be doing the building, and the identity of the tenants in those properties once they are complete.
Of course, always remember that a building permit does not guarantee a building. As with any indicator, you must use this as one facet of your decision making process rather than relying on it as a sole decision maker.
CEO of Affinity Worldwide.