Multifamily Demographics: Anatomy of a Submarket

The number of existing and proposed housing units in an area and their impact on rent growth is directly correlated to population and income.  But population and income growth where?  The “where” is in the submarket that an apartment property competes- the area defined partly by competing properties with similar attributes.  

A submarket is a geographic area defined by streets, natural barriers and the specific properties in which a property is in competition for  customers  

Once the submarket is defined, a multifamily property owner or management company has a very solid view of the population, income and competitive properties affecting a give apartment asset.   Seldom is this area square or round.  Nor does the shape or size follow census tracts or block groups.  The shapes, sizes and area covered varies immensely.   

 Making a determination about population growth and income, and aligning this information with the number of housing and multifamily housing units will provide guidance of future vacancy and rent growth.   These factors have significant impact on value.   

 The funnel approach to identifying multifamily acquisition candidates is to first narrow from region to Metropolitan Statistical Area (MSA).   From here, many people begin to segregate cities by quadrant (north, south, east and west).  Wrong!  Submarkets baby!  Its all in the submarkets.  From an article entitled “Submarkets Matter”, to wit: 

  …between 40% and 50% of a property’s overall performance is explained by sub-market factors while only 10% is explained by metropolitan factors (Submarkets Matter! Applying Market Information to Asset-Specific Decisions- Real Estate Finance).  

 First identify submarkets (sections of a community) with positive attributes and then locate specific properties to acquire.   From “Mortgage Banking”: 

 Comparing expected revenue growth over the next seven quarters with historical revenue growth over the past two years, one can identify those markets with either accelerating or decelerating rental growth rates.  This is an important measure of market performance to the extent that the market “prices” apartment assets according to past, not expected performance. (“Scouting Top Apartment Markets”, Mortgage Banking, – Geoff Rubin). 

 The above denotes “markets”.  I say applying the same map overlay to submarkets is where the rubber meets the road.  From Co-star,

Co-star Finds maps outlining specific, contiguous, non-overlapping geographic boundaries for similar commercial property types (eg, office, industrial, retail).  

And once these contiguous, non-overlapping geographic boundaries  of  commercial properties are identified….. then what?  From my perspective, this  is the starting line for acquiring quality multifamily assets.  

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