The 5 factors to use when selecting a Market
This is a question we get asked often: How do we select markets? There are 5 factors we use when identifying potential markets. The first 4 metrics are population growth, income growth, crime, and job growth. The last factor is a gut feeling/smell test of the market. I will go through these 5 factors in detail in this blog post.
Population Growth
I will first talk about population growth. Without population growth, we won’t have higher demand and makes it hard to push rents in the future. We like to see at least 1.25% growth a year in the MSA (metropolitan statistical area) or the city itself. We pull this data from city-data.com, which shows data from 2000-2017. For example, in Oklahoma City, they had seen an increase of 1.6% a year during that time frame. Meaning OKC has quite a healthy amount of population growth. For example, Los Angeles had a much lower, .48 % increase per year. Ultimately you can’t look at the population alone to decide.
Income Growth
On the same website city-data.com you can find income growth as well. We like to see about a 2% increase in income growth a year. To keep up with inflation at a minimum. Again, OKC does well, climbing almost 4% a year in that 2000-2017 timeframe. In comparison, LA did pretty well there as well at 3.6% a year, just shy of OKC.
Crime
Regarding crime, the FBI has an index per 100,000 people in an MSA for violent crimes per year. The definition of violent crime covers murder and nonnegligent manslaughter, rape, robbery, and aggravated assault. We want to be under 500 violent crimes a year per 100,000 people. For example, in 2019, the violent crime index for OKC was 461. For reference, in LA, it was 560. Though we tend to pick particular neighborhoods within those MSAs with a more favorable crime rating.
*https://ucr.fbi.gov/crime-in-the-u.s/2019/crime-in-the-u.s.-2019/topic-pages/tables/table-6
Job Growth
Our last data metric is job growth during the last 12 months. We want to see at least 2% job growth per year. We get this data from the website deptofnumbers.com/employment/metros. In OKC at this time, job growth from last year to today is 3.96%. Comparing that to LA’s 5.37% job growth, they are similar. On top of job growth, we want to see a good mix of industries. We don’t want to city to be dominated by one industry. If that one industry goes bust, there goes our demand. Across the country, job growth won’t be good at this time, but it’s something for us to monitor and therefore increase our conservative approach to underwriting closely.
Gut Check
Lastly, our last metric per se is our gut check. How does the city feel, especially the neighborhoods we are targeting? Does the city have a good entertainment scene, such as cool bars, restaurants, parks, coffee shops, sports, and outdoor activities? What kind of tax incentives is the city giving for further development? Do the pockets we are focusing on feel safe? In OKC, we were impressed with what was going on in the Downtown area in this regard. In Norman, OK, where we made our last purchase, you had Target, Starbucks, Walmart, Panera Bread, Sprouts, et…around the corner. So, it passed our gut check. On top of the gut check, you need to be able to connect with the right brokers, vendors, and property managers that will help you be successful there. There have been other markets of interest, and for one reason or another, we never felt we could get traction there with the appropriate team players. These factors did not allow these cities to pass our gut check.
Those are the 5 main metrics we use before feeling comfortable with a city. Though we have selected 2-3 markets that we are focusing on now. We try to focus on a few markets to get to know the pockets, brokers, property managers, and other vendors we may need access to. This way, we can really foster those relationships, become more knowledgeable about local intricacies and create better economies of scale by growing a larger portfolio in a couple of markets.