The 5 factors to use when selecting a market.

This is a question I get asked pretty often, how we select markets. There are 5 factors we use when identifying potential markets. The first 4 metrics are population growth, income growth, crime and job growth. The last factor is a gut feeling/smell test of the market. I will go through these 5 factors in detail in this blog post.

Population Growth

I will first talk about population growth. Without population growth, we won’t have higher demand and makes it hard to push rents in the future. We like to see at least 1.25% growth a year in the MSA (metropolitan statistical area) or city itself. We pull this data from city-data.com which shows data from 2000-2017. For example, in Oklahoma City during that time frame they had seen an increase of 1.6% a year. Meaning OKC has quite a healthy amount of population growth. For example, Los Angeles had a much lower .48 % increase per year. Ultimately you can’t look at population alone to make a determination.

Income Growth

On the same website city-data.com you can find income growth as well. We like to see about 2% increase in income growth a year. To keep up with inflation at a minimum. Again, OKC does well climbing almost 4% a year in that 2000-2017 timeframe. In comparison LA did pretty well there as well at 3.6% a year just shy of OKC.

Crime

When it comes to crime, the FBI has an index per 100,000 people in an MSA for violent crimes per year. Within that definition of violent crime that covers murder and nonnegligent manslaughter, rape, robbery and aggravated assault. We want be under 500 violent crimes a year per 100,000 people. For example, 2019 the violent crime index for OKC was 461. For refence in LA it was 560. Though we tend to pick particular neighborhoods within those MSA’s that have a more favorable crime rating.

*https://ucr.fbi.gov/crime-in-the-u.s/2019/crime-in-the-u.s.-2019/topic-pages/tables/table-6

Job Growth

Last data metric we use is job growth during the last 12 months. This isn’t the best metric over the last year due to COVID there has been significant job loss. In normal times we would want to see at least 2% per year of job growth. We get this data from the website deptofnumbers.com/employment/metros. In OKC at this time, job loss for the last year was 4.52%. When you compare that to LA’s 10.11% its not that bad. On top of job growth, we want to see a good mix of industries. We don’t want to city to be dominated by one industry. If that one industry goes bust there goes our demand. Across the country job growth won’t be good at this time but its something for us to closely monitor and therefore increase our conservative approach to underwriting.

Gut Check

Lastly our last metric per se is our gut check. How does the city feel, especially the neighborhoods we are targeting? Does the city have a good entertainment scene such as cool bars, restaurants, parks, coffee shops, sports and outdoor activities? What kind of tax incentives is the city giving for further development? Do the pockets we are focusing on feel safe? In OKC we were really impressed with what was going on in the Downtown area in this regard. In Norman, OK, where we made our last purchase, you had Target, Starbucks, Walmart, Panera Bread, Sprouts etc…around the corner. So, it passed our gut check. On top of the gut check you need to be able to connect with the right brokers, vendors and property managers that will help you be successful there. There have been other markets of interest and for one reason or the another we just never felt like we could get traction there with the appropriate team players. This among other factors did not allow these cities to pass our gut check.

Those are the 5 main metrics we use before feeling comfortable with a city. Though at this time we have selected 2-3 markets that we are focusing on. We try focus just on a few markets to really get to know the pockets, brokers, property managers and other vendors we may need access too. This way we can really foster those relationships, become more knowledgeable about local intricacies and create better economies of scale by growing a larger portfolio in a couple markets.