Assessing New Cities for Rental Properties

6 Replies

Hi all, I'm interested in learning what factors lead to certain metros to become hot rental markets (or what makes them so desirable right now). 

An example: Is there more demand for rental properties in Chicago than in Boston? If they're equal, will there be higher demand in Chicago or Boston in the future?

Some intuitive factors could be the rate of job growth (number of jobs available over time), or rental price change (year over year median rent) in a given city (or pull values from best performing neighborhood). 

I figured there are a lot of seasoned pros on here, are there other factors that you would consider if you had to pick a new market?

- Josh

@Joshua Zastrow , I actually ran a regression model with annual Census Bureau data from 2005-2017 to answer this exact question.

I wanted to see what actually correlated to rising rents. I compared the numbers in every metric available -- population growth, job growth, income, education, family size, industry diversity, etc. -- to see which metrics actually tracked with rising rents.

The metrics that track most with rising rents are:

  1. Tightening Supply (as measured by persons per unit)
  2. Median Household Income Growth
  3. Job Growth
  4. Population Growth

So, while the common knowledge is to chase population growth, the real answer is to chase limited supply and rising incomes. If people are making more money and there aren't new apartments to move into, the existing apartments will become more expensive! A great example of this is Bloomington, IN -- which hasn't seen a lot of population growth in the last decade, but also hasn't seen much new construction, so rents have grown 42% since 2005.

Interesting insights @Jonathan Schwartz! Didn't think to measure supply on a persons per unit basis. I'll have to pull in the Census Bureau data and check that out.

Perhaps ratios and segments of the four metrics you and @Jason Marcordes mentioned might be telling signals-- for example take certain industry segments (tech, finance, medical maybe?) and measuring # open job postings per unit and look for high ratios or growing ratios when sampled over time.

Was thinking of tracking how long rental listings stay on the market? This should be shortening for metros on the rental rise. Though it doesn't seem like an established REI metric.

I did pull crime data on NYC and tried to filter for "neighborhood" crime activity and see if there was any signal there related to the rent indexes but didn't come up with anything telling, maybe that's just NY.

@Joshua Zastrow , I'm working on a new spreadsheet that analyzes more recent data -- specifically, monthly employment numbers from the Bureau of Labor Statistics and the Census Bureau's monthly report on issued building permits. Both of these are on the MSA level. My thinking is, if you can track where jobs are being created and where not too many buildings are being permitted in almost real time, you'll have quite an advantage in finding a great emerging market.

Regarding your interest in industry segments, no dice there. I looked to see if a rise in high-paying jobs -- specifically, information jobs, finance jobs, and professional jobs -- correlated with rising rents, and the answer is no.

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