5 Submarket Factors to Consider When Buying an Apartment
By Andrew Gaines
In a previous post, I discussed some initial characteristics to look for to determine the “investability” of a particular submarket. Once a submarket has passed the initial screening in terms of crime and safety, school quality and area median income one will then look closely at some additional data points. These factors are often specific to the location of a particular apartment complex but can be applied more generally to any building in a given submarket.
1. Proximity to retail
Neighborhood retail proximity, quality, and variety are always on a person’s short list of considerations when choosing a place to live. This impacts the quality of life. An investor will want to see retail of similar or better grade than the asset under consideration present within the submarket. Specifically, companies like Target, Starbucks and Whole Foods are examples of retailers that perform careful demographic analysis when selecting store sites. Looking for those names in nearby neighborhood retail centers is a way to leverage the demographic knowledge of those companies to an investor’s advantage.
The location of entertainment, restaurants, and lifestyle shopping centers is another factor to consider. The specific demographic segment that one is serving will play a role in how important proximity to these amenities will be. The millennial generation, for example, is known to prefer a very walkable neighborhood environment where both necessities such as grocery stores and entertainment, restaurants and bars, are both near at hand. In a suburban setting, the distance between housing and this type of retail may not be walkable but should be readily accessible.
2. Job Centers
An investor will pay close attention to the proximity of job centers to the submarket and asset under consideration. Most people prefer to live within a reasonably short distance from their place of employment, when possible. It is important to consider what job opportunities are available to the demographic one hopes to serve through an apartment investment. Government, healthcare and higher education are examples of employers that are unlikely to relocate under most circumstances and provide job opportunities to the workforce demographic. These employer types have historically been very stable but there are certainly others. The number and diversity of employment opportunities within or proximate to a submarket is also important. Economic diversity is as critical on a submarket level as it is to the larger metropolitan area. Economic performance and the unemployment rate will be less volatile when multiple industries form the basis of the areas productive capacity. Finally, some consideration should be given to the industry and company-specific outlook for the major employers in a given submarket to form a perspective on the medium-term prospects for those companies.
3. Development and Zoning
An investor will also want to evaluate what the potential for an additional supply of new apartments and other forms of multifamily housing within a submarket might be. If development is occurring within a submarket it will have an impact on the demand for existing buildings and the economics of those assets going forward. In general, barriers to new development can be considered favorable in an otherwise strong submarket because the demand for existing units can be expected to grow so long as the area remains attractive for other reasons. Significant new development may siphon away demand and lead to above-average vacancy unless there is significant population growth to absorb new supply.
4. The Competitive Set
Assess what the competitive properties in the submarket are. Are the properties generally of the same age and grade? Or are there more recent developments competing with older, established properties? It is also important to determine, to the extent possible, what business plan is being executed by other properties in the submarket and what results are being achieved in terms of rent growth. These factors will have some impact on what a new entrant into the submarket can expect to achieve within their business plan. This analysis may also reveal opportunities for the astute investor.
5. Environmental Hazards
Environmental risks can be natural or the result of human activity. Natural environmental risks include flood plains, earthquake fault lines, areas susceptible to landslide or that have an elevated fire risk. These issues are readily identifiable with basic knowledge of an area. Risks associated with flood plain information may require closer consideration since even 500-year floodplains can become relevant to real estate investors as was recently experienced in Houston.
Potential hazards related to human activity require more effort to uncover because efforts to mitigate or hide those hazards can occur leaving no visible evidence of their existence. Here we refer mainly to chemical or industry-related waste material that may have been left behind after the activity ceased. This type of risk can be identified during the Phase 1 Environmental Site Assessment performed as part of due diligence before the sale of commercial property.