Metrics for Supply and Demand and where to find them?

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When I'm evaluating a sub-market, what are some good metrics to evaluate supply and demand for rental units? Where can I find that info?

For example, I know that building permits are a proxy for future supply, but what do I compare it to to see if there will be an "over supply?"

Thanks

James

You want to look at historical and projected:

  • Rent growth
  • Vacancy rate
  • Construction starts and completions
  • Construction/absorption ratio
  • Job growth
  • Income growth
  • Population growth
  • Household formation

I also like to look at affordability by looking at rent as a percent of income. 

Finding the data is tricky. You can bootstrap it by looking at the census bureau website, other sites like City Data and Zillow and getting the market reports from Marcus & Millichap and CBRE. The challenge is that you have to sift through a lot of data to get what you are looking for some of the data is either dated or unreliable. 

The pros use subscription based services like REIS, Axiometrics, MPF and CoStar. And perhaps there are others. But this stuff isn't cheap.  To me it's worth it because it's the best data and all in one place--no hunting around trying to get bits and pieces from a bunch of different sources. 

One way to get this for free is to establish a relationship with brokers and property management companies that subscribe to the service and ask them to provide reports. They might do it if you are looking at a property they are selling or might manage. 

As to your question on over-supply, look at the absorption rate (the number of units occupied in the market this quarter (or month or year) minus the number occupied last quarter (or month or year). If the number is positive units are being absorbed and the market is healthy (at least by this measure). If the number is negative vacancy rates are increasing and additional supply will create a serious problem.  

Then look at the construction/absorption ratio. This shows the number of units added versus the number absorbed. If more are absorbed than built, this is good. But there could come a point where the number of units built is more than absorbed and if this continues vacancy rates will creep up and rent growth will face headwinds.