As a property owner (or manager), how can you say you know your assets without the knowledge of the human demographic surrounding the assets in your care? Demography is the study of statistics about human populations. Many people turn the page when they see the word demographics. It seems like the study of “something” that could be useful.
A review of demographic patterns is all about trends. These trends make and break fortunes. Here are a few examples:
- When an area is gaining in population with people earning high incomes, property values rise.
- When young people move away from an area in droves, as occurs in small communities with limited job prospects, the in-place population ages rapidly, and eventually income falls since there are fewer wage earners.
Demographics – a statistic characterizing human populations (or segments of human populations) broken down into defined categories of useful information
Let’s not confuse demography with “data mining.” Data mining is all about generating usable information from a mass of facts and figures. Demography is a platform to study people and populations, to gain knowledge on communities. The strength of an asset lies within the “four walls” and also within the community. Demographic analysis assists in defining the community surrounding a specific address by delving into the particulars of the people residing within the localized community.
Demography is a platform to study people and populations, to gain knowledge on communities
In our business, the business of commercial real estate, we need to know the direction of events on the ground surrounding our asset(s). Demographics greatly assist us in this endeavor. When reviewing potential acquisition candidates, I focus as much on the demographics of the people living in the area as I do the building(s) or development.
Answer the following twenty-one questions about an address, and you will likely know more than most locals’s including the people that live at that address! While many of these items may seem mundane or, at best, remotely interesting note the reason behind acquiring the knowledge.
1. What is the street address? An address is necessary to begin the process. No address, no place to begin the analysis. Everything we learn folds out from a certain place, a street address. Begin with street address, add the city, state, and zip code. Knowing the zip code is important because so much “free” information can be garnered on a zip code basis.
2. Concentric Zone. Has to do with urban social structure. How is the area characterized? In the patchwork of American culture is the area known as “blue-collar” or a cultural Mecca? This is one of the first broad brush strokes in defining a place. (See Burgess Model for an in-depth view of this perspective).
3. Radius in question (Market). Market studies often have a nice and neat one, three, and five mile rings around a star that depicts the subject property. For housing, the “real” market area, the area from which you are drawing customers is seldom a 360-degree sphere. There are always barriers that define the shape as something other than round. These barriers are defined by various aspects; there can be physical barriers (a freeway), cultural constructs (local art scene), financial (price).
4. Polygon (Trade area). A polygon is nothing more than a boundary. What makes polygon’s interesting is building them accurately to “fit” the market area for a property. When accessing an asset, it is imperative that you know the shape and size of the marketplace for said asset- and who the competitors that fall within the market area. Build the polygon- even on a paper map with varied colored dots representing properties.
5. Average Age of Population. Renters are usually younger. “Younger” is often defined by generational names like Gen X, Echo Boomers, etc. It’s imp0rtant to know the present-day percentage of people within the market for an asset that can be described as “younger”…. twenty versus thirty versus forty years of age, etc.
6. Median Age. This category tells us where people are on income pendulum. People in their 20’s and 30’s (the primary rental group) have less income than older people with little time to build passive income to supplement earned income. The over 50 demographic (more like over 60 based on the recent recession) will begin to see their earned income dip with, hopefully, other income sources in place to supplement this change (social security, retirement payments, retirement savings).
7. Household Size. A household is a dwelling where there is at least one resident. A household is comprised of all the people living in a dwelling regardless of relation.
8. Family Size. A family is a “household” where the people in the dwelling are related. Family size is getting smaller in the U.S. It’s important to make the distinction between household and family size for several reasons. Reason #1: Families move less. Therefore, an area with more families will have less turnover than an area with fewer families. Second, household and family size for a particular area leads directly into a discussion of the demand for bedrooms; the larger the household and family size, the greater demand for more bedrooms per unit.
9. Household formation. The pace of household formation is tied to job growth. The greater the job growth in an area, the sooner little Bobby and Betty move out from Mom and Dad and start their own life in their place. Positive growth in GDP (Gross Domestic Product) positively affects household formation. Although the birthrate is down in the U.S., we continue to grow our population from in-migration.
10. Marital Status. It’s important to know what percentage of people in your market are married because married people stay put longer be they renters or home owners.
11. Household Income (average versus median). There is a multitude of income statistics to choose from; per capita income, Household, average hours worked, etc. Whichever one you choose, stick to it for all of your analysis- no jumping around. The objective is to compare apples to apples. So if average household income is the choice, use this same data point in comparable markets.
12. Educational Attainment. There is a direct correlation between personal income and educational attainment. Over-stating the obvious, people with a college degree make more money than those dropping out of high school.
Can we select multifamily assets to acquire based on the local school achievement test? How about buying multifamily based on the educational attainment of the individuals residing in submarkets? The latter offers a better correlation of future value.
13. Employment. The national unemployment rate of “X” percent is not indicative of every place. Some “places” have near full employment (with an unemployment rate under 5%) while other “places” are suffering at three times the national average. High levels of employment create a vibrant community and a stable tax base. A stable tax base generates consistency in public services (not always, of course- just ask Jersey City).
14. Employment Type/FTE. Type refers to regular, short-term temporary, long-term temporary, or seasonal. Regular employment is a forty-hour a week job. Short-term temporary jobs are expected to last six months or less. Long-term temporary refers to jobs expected to last six months to two years. Seasonal work varies but usually ends abruptly as the peak work culminates. Naturally, the more regular jobs we can project future income with a greater level of comfort.
FTE refers to Full-Time Employee. We count FTE’s as working forty hours a week for the entire year. Multiply the FTE count (within your polygon, for example) by the average hourly wage provides one metric for determining average income per FTE.
15. Home Ownership Rate. Home ownership rates are decreasing, creating an expanding renter pool. More people looking for rental housing concurrent with a limited new product is a crystal clear point towards higher rents.
16. Ethnicity and Race. Is this important? Should it be? I’ve mentioned in other posts about hearing from commercial buyers that have a stated preference for a particular race. In terms of making a buy decision, I would prefer to throw race out and focus on income and educational attainment. This cuts across all racial lines and tells me about the people that reside in a place more than does race. After all, the color is green ($). So the higher the income, the greater the average education, the higher the probability of a stable asset- regardless of skin color (a baseline that is so last century).
17. Primary Language(s). Not to be skipped! Do not presume! No guessing! What is the primary and secondary language spoken in your market area? What percentage of the populous speaks these languages? We may joke that people from Atlanta and Seattle do not speak the same language, but people from Hong Kong and Shanghai do not speak the same language. So saying they speak Chinese is only a half-truth- which Chinese language?
The same scenario holds for population centers that have migrated from South America or the far East. Part of knowing the people in a market is knowing their primary and secondary language.
18. Crime and Violent Crime. There is a crime, and there is violent crime. No asset is immune to crime. The question is to determine the type of crime. It may seem obvious, but areas that experience higher crime rates generally must offer lower rental rates to entice people to live there.
19. Housing Affordability. Affordability bounces around – I mean, really bounces around – from place to place. The rent versus own narrative is alive and well but, more importantly, if it affects the value of income property. This information is imperative to assess the strength of property within “your” polygon (#4 above).
20. Voter registration. Do affiliates of one party pay their rent better than the other? Probably not, but it’s important to know how your tenant base thinks and knowing political leanings assist in building your knowledge on this subject. We are a collection of red and blue states… and red and blue neighborhoods. While recent elections show the U.S. to be a 50/50 country, there are great swaths of the country that lean heavily in one direction or the other. I know people who go out of their way to assure their friends think exactly as they do. While this may seem smallish (and ultimately boring), there is a myriad of people that take this same tact.
21. Insurance rating. There are a handful of cities in the U.S. with fire ratings so poor that the costs of insurance are prohibitive. And you can’t tell the difference by driving down a few streets—capacity to address fire hazards impacts rating. Contact a local commercial insurance agent to gain intelligence on the local property insurance marketplace. Take two cities of similar size, and the likelihood of fire insurance being the same is small. Are rates in line with market averages? If not, why not? If rates are higher, why? Find the nearest fire hydrant and closest Fire Station. But more importantly, identify the why behind the rates you are or will be paying. Knowing about ratings is the first step.
Informed decisions are made with superior knowledge. Demographic “knowledge” is a cornerstone to knowing your assets, the people that reside there, and the surrounding community.