Supply/Demand Analysis
How do you guys go about analyzing the supply and demand dynamics in new markets that you are not yet familiar with?
I know the basic metrics (i.e. absorption, construction, pop., jobs, etc.) can help but are there other—more precise—ways to analyze it? Is there some sort of quantitative model you can run?
I’m pretty new in RE and the company I work for only invests locally so I feel like it’s easier for me to get an understanding of the local market dynamics because I live here. However, I don’t understand how the big national firms can invest in so many different/new markets where they’re not based out of.
Do these national companies hire people on the ground to work out of satellite offices or does it just require extra research?
It’s probably a rookie questions but I’m having a hard time understanding how to analyze supply/demand well enough to feel confident with any assumptions.
Thanks for your help!
Most big shops will just commission a market study in my experience, or will leverage internal subscriptions to demographic datasets.
The dynamics and stats you look at are going to vary depending on asset class you are investing in so would really need to know more about what is applicable for your shop.
This will be heavily dependent on the asset class that you're looking at. Hotels will vary massively from industrial. The hard part is understanding the demand drivers of the asset class, but once you do, you can quickly analyze new markets to see if those drivers are present.
In affordable I see metrics like capture rate (dividing the total number of units at the property by the total number of income eligible renter households in the primary market area) and penetration rate (the percentage of income eligible renter households in the primary market area that all existing and proposed properties, to be completed within six months of the Subject, and which are competitively priced to the subject that must be captured to achieve the stabilized level of occupancy). You can always account for leakage into the area by multiplying the number of households by a leakage factor.
May need to reach out to a few different sources:
1) Supply: Reach out to a large brokerage shop's research department and request a supply pipeline to forecast what's coming onto the market over the near term (anything beyond 2-3 years is largely useless as it becomes too speculative). Using this data, you can look at how much is being delivered to the the market as a % of the existing inventory.
2) Demand: Reach out to local leasing brokers to get a sense of market demand and more importantly a TIMS list to extrapolate demand. Some may be unwilling to share, but if your firm has good relationships with some of them (with offices in wherever you're trying to research), should be able to get it fairly easily. If you're covering multifamily, a demographics data provider may be more useful since TIMS won't exist.
3) Knowing this, and supplementing it with current/historical absorption stats, this is one way you could piece together a defensible local supply/demand analysis for the near term
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