Does size matter?

We all hear about the importance of investing in markets that are growing.  This is because if a market is growing it is healthy and will support your investment for the foreseeable future.  Most investors stick to the large city such as Los Angeles, Las Vegas, San Francisco, NYC, Austin, Phoenix and many others.  However, there are other markets outside of these major cities.  A micropolis is defined as a minor city or urban area, especially one with a population between 10,000 and 50,000; however, I would stay in the markets between 50,000 and 100,000+.

Let's discuss the pros and cons of major and micro markets:

Pros(Major): Large population, increasing demand (pop growth), commercial/industrial growth trends (jobs), and of course most cities these days have a particular industry that they cater to (technology, finance, automotive, etc).

Cons(Major): Investor saturation (too much competition), high cost of business, lack of REO assets, limited room to grow except in outskirt speculation, low cap rates, bureaucratic nightmare with governing bodies, and expensive labor.

Obviously there are many more pros and cons than the ones that I have listed, but let's see the difference when comparing to a smaller city.

Pros (Micro): Less competition, long history with predictable growth, commercial/industrial growth trends, REO assets are still available on the market, higher cap rates, more flexible governing bodies, and cheaper labor.

Cons(Micro): Difficult to find statistics/economic reports (but doable), slower population growth.

There are, of course, more pros and cons to the micopolis as well, but just as in the major city it is very possible to mitigate risk.  We all know how to mitigate the risk of major markets(I hope), so let's focus on the micro-markets.  Here are a few questions to be asked and answered:

What is slower population growth?

Slower population growth is caused because if you have a city with 50,000 people the expansion can only happen so quickly.  As opposed to a larger city that has over 1M people and the population growth would be happening quicker.  All of this is in raw numbers and absolutely not as a percentage (some small cities grow faster as a % than major cities).

What is the risk that is caused by a slower population growth?

The primary risk that comes from a slower growth is that you will not have enough demand for your ever growing business.  The additional concern is that you will not have enough product or room to grow in a minor city.

How do I mitigate the risk caused by a slower population growth?

There are many innovative ways that I have heard to mitigate this problem, but there are two that are worth mentioning.  The first would be to use micro-cities as a diversification and the second would be to invest in many micro-cities.  Both of these options are good and allow for good diversity.  The reason the second option is good is because usually the micro-city will have a micro-economy that will stand by itself allowing for more predictable investing.

How does one keep business going for long periods of time in a smaller market?

Simply put, you need to find your own way. Here are a few: diversification between smaller and larger markets, different asset classes (residential, commercial, industrial), clever types of investing (single family, multifamily, pre-development, value add, etc).

In closing, it is a very well known fact that to be successful one must think outside of the box.  Conventional investments are always the safe bet and should always be considered part of a portfolio, but unconventional methods are the sign of the successful entrepreneur and if you are looking for a way to beat the competition then you should consider micro-markets. Remember, just because you are used to the big city does not mean that you should not educate yourself on smaller market.  There are different problems, but if you are a savvy investor then you will overcome them.

Thank you,

Dmitriy Chebotarev