Why do submarket analysis? The typical answer is to obtain market information on competitive assets, right? Let’s go a little deeper. How about trending Gross Potential Rents, occupancy rates, unit mix? Here are some serious submarket market analysis points to ponder.
To get rolling on becoming a submarket expert, you will love the link here from Vogt Santer that breaks down demand and capture rate methodologies. It’s the kind of article I get excited about reading. For housing geeks only.
As the cornerstone to baseline data for performing submarket analysis it is imperative to know Gross Potential Rent. From the book How To Read A Rent Roll:
Gross Potential Rent (GPR). GPR represents a perfect world whereas for the term of a lease every rentable square foot is 100% occupied at market rents with never a single day of vacancy for any reason. GPR also presumes 100% collections for the entire term year.
It’s important to have a handle on market rents. Submarket analysis presents opportunity to drill into multiple layers and data sets about your submarkets. The end result of knowing submarkets to this level of detail places you in a position of strength based on having superior knowledge.
With this knowledge you will be at the forefront of making quality decisions on behalf of your assets under management- often six months ahead of competitors.
Following are five submarket data points that will make you a burgeoning submarket expert.
Own vs. Rent percentages. What is the total housing unit count in the submarket? Once known, segregate housing by owned versus rental. Trending this information over time will present information about available rental housing in a submarket.
Here is an excellent academic article on the rent versus buy argument by Eli Beracha and Kevin H. Johnson.
Is the absolute number of rental units increasing or decreasing in the submarket? Is this percentage changing with no new construction? Is gentrification removing rental units as people convert rental housing to home ownership thus reducing total rental units?
Too many people believe a submarket that is majority rental is a bad thing. It’s a relative number. The more important metric is the amount and direction of rents. For example, there is a Beverly Hills submarket with rents from $12,000-$40,000 per month and land sales near ten million dollars an acre.
Unit counts- yours. Knowing absolute rental unit counts provides a baseline for much of the analysis performed. Then determine the percentage management by your company as a percentage of the rental units within the submarket. In a submarket of 2,000 rental units where your company manages 350 units- you are managing 18% of the units in that submarket.
Vacancy. There is several types of vacancy; actual units vacant and economic vacancy. Actual vacancy is a simple calculation. Economic vacancy requires knowing market rents by unit type. Most people use a dollar amount (rent per square foot). This should still be segregated by unit type as larger units often rent for less per square foot.
Housing Absorption levels. New product is pretty easy to track. The pipeline can be determined initially by permits pulled, then by inspections and utilities moving towards an occupancy permit. Inventory that goes out of service and returns in service is a bit more difficult. This is only important if the total units can be reflected in whole percentages.
For example, in a submarket with 3,000 units if 100 units are off-line that represents a three percent drop in inventory. That is a significant number if occupancy is already in the high 90’s. From Realtor.com here is how to calculate housing absorption.
Unit distribution. Unit distribution has to do with matching in-place unit type and cost with in-place population demographics. For example, what is the distribution (or number) of two-bedrooms units in a submarket as compared to the number of families that require two-bedrooms? Recognizing the over/under supply points by unit type is a significant tool in pricing product.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets. Multifamily Insight Vol 2 is set for release in 2015.
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About This Blog: 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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