Submarkets are boundaries that define where a property competes. Having specialized knowledge at the sub-market level is a significant strategic advantage over your competitors. What defines a sub-market is:
An area with similar properties in terms of physical stock and rents
An area that reflects patterns of locational preference
Transportation patterns, natural barriers
The location of competitive properties
Profiles of residents and workforce
Some things we know to our core, right? The effect of vacancy on revenue; that crime in a neighborhood will eventually impact the reputation of our assets; that a bad loan will be front and center at the absolute worst time in the business cycle.
Many of these things we can stay ahead of through proactive management. How far "ahead" of the curve are you with respect to the changing demographics surrounding your assets? It's easy to be complacent.
We think "we know what we know". We live, work, eat and sleep, usually, within close proximity to the assets we own or management. Surely, we will be the first to know about plant closings, an influx of immigrants, a "brain drain" from local institutions.
How? How will you know these things? And how will you react to such knowledge? More importantly, how will this knowledge impact your decision-making at the property level? Will you take advantage of these "signals"? They can tell us when to sell, when to double down our investment; when to change marketing strategies to scoop up new tenants everyone else is ignoring.
Sub-markets are the boundaries that define where a property must compete and where property comparisons begin. In a study using 50 metropolitan-area markets:
…between 40% and 50% of a property’s overall performance is explained by sub-market factors while only 10% is explained by metropolitan factors (Submarkets Matter! Applying Market Information to Asset-Specific Decisions- Real Estate Finance Fall 2000).
A sub-market will seldom be a perfect radius or a very square box. Depending on geography, the market area could be represented by a serpentine impression or L-shaped figure. First- define the geographic area of your sub-markets using the bullet points above.
This is not a grow or die strategy. More like know or die from lack of paying attention. The assets in your care are very important. If you don't care about the demographic changes surrounding them.... who will?
How do you define and research your submarkets? What is your best source of information about local changes in populations?
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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com
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