This episode is entitled Sources and Uses of Market Information in Real Estate. We’re talking about decision analysis for making real estate acquisitions. As much as that’s a mouthful, the easier title is finding and using market information for making real estate decision. We have two different areas; one is sources of market information and the other is uses of market information. I’m going to suggest you to please download the spotlight page and have that in front of you when you’re listening or download it for future reference because it makes the things I’m about to share with you a lot simpler to follow.
[00:00:44] What we're presenting to you today is honest sources for obtaining market information. There's always another source and there's always ways to spend more money, versus less money, to obtain information. I'm sharing with you today free methods for getting this information that at least allows you to set the baseline. With this you can always go further into sources and you spend more dollars to further clarify to get better or more succinct information or more updated information. Just to get to the baseline, just to get some basic market information, I'm going to provide for you today a handful of sources where you can obtain this information for free.
American Community Survey is an ongoing survey that provides vital information on a yearly basis about our nation and its people. Information from the survey generates data that help determine how more than $675 billion dollars in federal and state funds are distributed each year.
[00:02:08] That's the reason that our government spends so much money on census data. They want to know who we are, and where we are, and they also want to know how to allocate government resources. The only way to do that is to know your populations, to know your audience.
[00:02:23] This is a really good place to start. In essence, the American Community Survey provides you with a snapshot information, demographic information, on communities and city. I suggest you start with that.
[00:02:38] The Next website I have for you is called Neighborhood Scout. That is a paid for services website but the information they can provide use is invaluable. Please take a look.
[00:02:52] Another place to find market data is Bureau of Labor Statistics which is another government website bls.gov. That there's just a plethora of data there that you can narrow down to the city get a better picture of what's going on in a particular place.
[00:03:09] One place are a lot of people overlook the local Chamber of Commerce. Sometimes there's no better place to obtain information about a market that you're looking to potentially invest in.
[00:03:23] Another source is the Regional Economic Development Agency. These are quasi-government agencies that provide services to local developers and builders along with the community at large. They're also collecting, or have collected, demographic information that is often free to the public.
[00:03:44] Another sources is your local planning and zoning offices (P&Z) they know where things are about to be built in addition to where everything is already built. P&Z is a good place to stop in particularly they're looking for a specific piece of information. That's the folks to call (P&Z) to see if they already have that available.
[00:04:05] Another source of local police, sheriff and fire departments. Not that you are going to go to these places or call them incessantly, but if you really looking to know what's going on the street nobody knows it better than the local police, sheriff Fire Department. Don't discount them as a source for real time information.
[00:04:25] Another sources is USGS.gov, the U.S. Geological Survey. They've got some great maps and that's worth a visit.
[00:04:34] For demographics, consider going to RefDesk.com. The website is a little bit clunky but if you have the time to ferret through there you can dig out of quality information that will be of use.
[00:05:10] Apartment owner’s associations. Whether you are in Houston, Chicago or Memphis, every mid-sized city or larger will have an apartment owner’s association. If you are an apartment owner you could be a member.
[00:05:26] Lastly property management companies. They do know their markets (those that are good at what they do). If you're looking to build long-term relationships in local markets, property management companies and apartment owner associations are a good spot to the engage with the people that are in our business full time.
[00:05:47] Now that you have all these sources of market information what are you going to do with them? Now we turn to the uses side of marketing information.
[00:05:56] What I provided you with above is a handful of sources to obtain; demographic information and market information so that you have an opportunity to collect market information without spending much money. Now that you have some market sources let's look at the uses side of what you can do with this information.
[00:06:19] Part of what you're looking to accomplish with market information is the collection of rents, market rents and things like rent per square foot or the age of assets. That's why you may end up at planning and zoning so that you can find out the age of certain asset or the assessor's office that will have age of assets by address.
[00:06:45] Next is absorption. What exactly is absorption? Absorption is the rate at which available homes are sold in real estate market during a given period. We are usually looking at monthly a quarterly figure. Absorption is calculated by dividing the average number of sales per month by the total number of available home. We have absorption rates for new home construction, we have absorption rate for new multifamily construction. We also have absorption rates for existing housing. You can break down absorption into various categories or you can look for an aggregate number for a metro.
[00:07:27] Let's presume that absorption is slow. What does that mean? That means that more product is coming online than it's being purchased, or absorbed, by the market. When there's too much product what happens- prices begin to get soft.
[00:07:43] The opposite is true when absorption rates are high. When new product is coming onto the market and it's being snapped up rapidly then there is a firming of prices and if anything then prices go higher once that price firming starts to take hold. Absorption is a very important factor within the pricing of real estate assets.
[00:08:05] Household formation is another data point that we can obtain from using our sources of market information and helpful information. Household formation is the rate at which new households are formed. When Don and Mary leaves the nest and make their own home a new household is created. Household formation slowed during the Great Recession. It has started to recover, yes, but it's still not back to pre-recession levels.
[00:08:37] Look at FTE's (full time employees) in your market area. Full time employee counts provides a barometer of where we are on the employment front. More than looking at unemployment rate, or the employment rate, the number of FTEs does change over time and you can trend that number for a metropolitan.
[00:09:04] Retail sales is another marker that we can review with market information. Retail sales tells us the trends about a particular Metro, whether things are going up, down the sideways and at what rate of change.
[00:09:17] The same is true for per capita income. Per capita income is amount the income earned per household, per person. A four-person household that earns $50,000 dollars per year is earning the per capita income of twelve thousand five hundred dollars. Even if there's only in fact one person employed in the household the per capita income rate is divided by the number of people in the household.
[00:09:48] This is different than household income. Household income is an aggregate of the income for an address that is a residential address. Household income will be different than the per capita income it is just one number (earned income) for the household.
[00:10:04] Average family size. We had much larger family sizes in the last generation than we do now. That's in part due to our aging population and in part because people are living longer and they're living by themselves. Average family size has decreased but we also can see, within that number, that there are more households with just a single person.
[00:10:31] Population, age and the direction of each can tell you a lot about what services are being rendered and what services are necessary in the metropolitan. We already know that there's a lot of school age children we need schools. Those children do grow up and they did go to the next school, and the next school. Who is coming behind them? Is of the same large population or is there change?
The same can be said for seniors or an aging population. In locations where there's an aging population, not only will you see more seniors housing, you'll see other related services for seniors. Not just medical services but also those that relate to the age of the population such as in-home care, Meals-on-wheels and other services that relate to an aging population.
[00:11:21] Here's one hard to get from just market data to market information that is important if you're buying that real estate assets; you want to know before you make an acquisition about the reputation of the property. Just like people, every property has a reputation. In many instances, it's not known. However, for multi-family the reputation is known. Information about a property's reputation is a little easier to obtain present-day with the Internet and property ratings but that's not the whole story. Take the ratings you see with a grain of salt because, frankly, the property that has a 60 percent rating in aggregate that's very good. And the reason it's very good is because people that are performing reviews are disgruntled, not all of them of course. If an asset is in the 50-60 or 70 percent range, in terms of positive reviews, that's very good.
[00:12:18] We can't take that rating number as static. Compare that number and that rating percent positive in a bell curve. You'll see that those 50-60 and 70 percent ratings are near the top of the curve.
[00:12:34] Reputation as schools and graduation rates. Reputation again is back to that qualitative data-point, sometimes hard to come, but can be ascertained. Graduation rates on the other hand are very firm and easy to obtain and they tell us a lot about an area. We not only want to know the graduation rates of schools, we want to know what percent of high school graduates go on college.
[00:13:02] Neighborhood that have higher graduation rates and high percent of graduates that attend college are very likely more stable neighborhoods than those that have lower graduation rates or a lower percentage of graduates going to college.
[00:13:21] To recap, finding and using market data is looking for information that allows us to come to conclusions and make decisions about property that we own and about property that we are looking to buy.
[00:13:37] Why is it important to use this same information and apply it to property that you already know? That's because if you own more than one asset there's going to be a differentiation between how those two assets run, what their yield and what their return on investment is.
[00:13:53] If you have five assets are more you're likely going to have one that stellar and one that's dragging and then three that are somewhere in between. It's no different if you're looking at multi-family, warehouse, light industrial, retail. If you have a portfolio of assets very often the one that's stellar than this one that's dragging.
[00:14:13] Instead of trying to make guesstimate of which one is the one that's dragging down the portfolio use market data as a good methodology for coming up with data-points with quality information so that you can decide whether or not hold an asset.
[00:14:35] For example, if everything trend is negative, absorption is down, household formation is down, retail sales are down, per capita income is down...Then guess what-- the neighborhood is going down, right? If you can capture those data-points and you see the trend, then as much as you may like that asset, it's probably one that needs to be moved out of your portfolio so that you can invest those dollars in a neighborhood that has a higher quality demographic profile.
[00:15:07] That's the reason we want you to have these sources of market information and apply them to the uses so that you are in a better position to make better decisions, not only about assets that you may purchase, but also with assets that you already own.
Here is a related article: Rent Roll Analytics: Baseline Data
[00:15:25] Thanks for listening today. This has been John Wilhoit on Real Estate.