Buying real estate properties in local markets at the right price takes more than knowing its current value — or that of its neighboring markets. While it’s important to analyze recent sales comparables to understand a potential commercial or multifamily real estate investment’s risks and rewards, that’s just a starting point. Buying right also means extrapolating market forces that will impact a property’s price five or more years from now, when investors are now potential sellers.
Finding commercial real estate deals means knowing the fundamentals in a local market that will change supply and demand. In looking at how Origin investigates new markets, and how our acquisitions team develops local relationships to expand their knowledge, three local market fundamentals most consistently impact our searches to find properties that will increase in value and build wealth:
1. Tracking Population and Employment Centers
Looking for the best neighborhoods to invest in real estate starts with identifying where the jobs are and where the bulk of the population lives. Understanding the motivations of major employers and the workforce reveals much about the dynamics of real estate submarkets and infrastructure development. Local brokers are gatekeepers and privy to local knowledge, so having the persistence to develop relationships with them is critical. Ultimately such relationships offer a fast track to learning about the pros and cons of a local market’s fundamentals.
For local businesses, requirements such as space needs, access to suppliers and a skilled labor pool brought them to their current locations, and will factor in any of their relocation decisions as well. In turn, workers look for affordable housing with a reasonable commute and good schools. A perfect example is Amazon’s HQ2 effort. As communities across North America bid for HQ2, they’re boasting of their superior infrastructure, talented workforce and affordable housing. The economic drivers in Amazon’s choice are also key to finding commercial real estate deals.
2. Following the “Food Chain”
Economists may not look at it this way, but the food scene is a leading indicator of changes in a real estate submarket. When chefs open a new restaurant, they’re often willing to take chances on an emerging neighborhood. They need lower rents when they’re just starting out, and will look at neighborhoods in transition. So do artists and creative retailers when opening studios, galleries, and eclectic shops.
When the patrons who frequent these emerging and edgy establishments spend time in these trendy neighborhoods, they start to perceive them as safe. With affordable housing in short supply, they think about rehabbing buildings nearby for homes or apartments. I’ve seen this pattern in east Austin, the Bishop Arts District in Dallas and other emerging real estate submarkets.
Eventually, the up-and-coming neighborhoods become the preferred neighborhoods. Rents rise, fancy retail chains move in and, eventually, office development follows suit. The process may take years, or even decades. But investors who watch where a neighborhood stands in this development lifecycle can stay one step ahead, and plan projects to be ready to meet new market demands.
3. Recognizing Economic Catalysts
Some market-moving events seem to emerge out of thin air. For example, Klyde Warren Park opened in 2012 in downtown Dallas over an eight-lane stretch of highway, bringing Zumba and Pilates classes, lunch-hour food trucks and after-hours socializing. Yet this 5-acre park was an economic stimulus 10 years in the making. By connecting downtown and uptown neighborhoods, the $110 million Dallas park brought new real estate investment and $317 million in economic development, according to a study for the Landscape Architecture Foundation. CBRE saw nearby office rents jump 30% to 60%. And if you thought the park couldn’t get any better, think again. Woodall Rogers Park Foundation and VisitDallas recently partnered to complete the park’s vision, a $76 million expansion that includes additional green spaces and public gathering spots.
Real estate submarkets all have their own stimulants — in west Dallas it’s the Margaret Hunt Hill bridge, which was called a “bridge to nowhere” when it opened five years ago, but has drawn real estate investors to Trinity Groves and other revitalizing neighborhoods. Many of the best real estate investments count urban parks, transit lines and other public works as nearby attractions, and the economic impact of their construction is by no means temporary.
Finding commercial real estate deals means planning for the potential impact of civic catalysts such as Houston’s $1.5 billion Texas Medical Center expansion, the $4.7 billion light rail extension in Denver or Chicago’s $8.5 billion plan for O’Hare Airport expansion. In fact, Chicago has a number of major civic catalysts in the works, from the Obama Presidential Center to the development of a 62-acre South Loop site along the Chicago River.
Underwriting Still Seals the Deal
Despite the promise of these fundamentals, rigorous underwriting is still paramount. Technical fundamentals are still important in commercial real estate investment, and asset managers should be underwriting acquisitions to ensure success. But when our acquisition team talks to owners and sellers, it’s the local economy that speaks most strongly to a property’s potential.