Many landlords are attracted to markets with a large institutional presence because they offer stability. Hospitals, universities and government agencies rarely make major cuts in employment, and they very rarely close. That means your prospective tenants are not likely to leave.
This also used to be the case for military bases. Years ago, career soldiers could build very comfortable nest eggs by buying a home in every base where they were stationed, and keeping it when they were transferred. They would always be able to find other soldiers to rent their homes. That’s changed to some extent because of the number of base closings over the last couple of decades. However, the largest bases will remain active for many years.
Are these markets really stable?
Big institutions almost never make up more than half of the employment in any market, meaning those markets are still subject to other private industry employment losses and gains. Often, institutions such as universities and medical centers spin off technologies and companies that spur private-sector job growth. Later, those companies may fail, cut their workforces or do their expansion out of state – causing downward pressure on the state economy,
Institutional markets are also subject to bubbles and busts, because bubbles and busts are rarely driven by changes in employment.
However, market volatility is dampened by the presence of the big institutions. A recession or housing bust panics fewer people because most of those working for the institutions know their jobs aren’t going anywhere.
The result is a market with some volatility, but much less than in areas that are heavily dependent on private industry and entrepreneurship.
The Boston Example
Consider the Boston Metropolitan Statistical Area (MSA), which has some of the finest hospitals and universities in the world. These institutions helped create the state’s high-tech economy, as students and researchers created companies based on their ideas.
That’s the good news. The bad news for Boston’s economy is that many of those companies have failed, been sold (with subsequent loss of local employment), or had massive layoffs. Others kept their technical core in the Boston metro area, but expanded out of state or out of the country. This upheaval has been moderated by institutional employment, which has remained steady or grown at a moderate pace.
The Boston real estate market is down right now, but not by as much as others. It boomed during the good years, but not by as much as some other markets.
The Boston-Quincy-Cambridge MSA’s average home price peaked in mid-2005 at about $410,000 and is now at just over $300,000. That is about a 6% annual drop. Scary, to be sure, but not nearly as scary as the Miami-Fort Lauderdale MSA’s plunge. Home values in the Miami MSA have gone from an average of $307,000 in mid-2006 to a current average of $169,300 – nearly a 13% annual drop.
Targeting is important
Even the biggest institutions can only have so much impact. The biggest institution in the United States is, of course, the federal government, which employs nearly two million people. The government dominates employment in the Washington MSA. However, that area includes three million workers in Maryland, the District of Columbia and northern Virginia. Only 285,000 of those people work for the federal government. I will be writing about the Washington Metro Area in my next blog post.
In other areas, an institution’s impact is going to be limited to two or three towns surrounding it, simply because people generally like to live close to where they work. For example, Fort Bragg is located next to Fayetteville, NC. Chances are not many people drive to it every day from Clinton, NC, which is 34 miles. That means there may be great reasons to invest in Clinton, but Fort Bragg’s proximity isn’t one of them.
Doing further research
If a relatively stable economic environment appeals to you, start by mapping out the biggest institutions in the area you are considering. Look at the towns right around those institutions as the most likely candidates for long-term stability. But bear in mind that a strong institution does not by itself make for a promising town. Areas that are suffering long-term private industry collapse, e.g. Buffalo, New York or Detroit, are not going to be saved by their institutions, no matter how strong those institutions are.
Image by Kansas Sebastian via Flickr