Competitor analysis and quick curiosity

Development 101

I am constantly researching my competition. If I’m standing outside a restaurant, waiting for a table, and there’s an apartment building across the street with a “for rent” sign, I will call that number.

I want to know.

How much for a 1-bedroom? How much for two? How many square feet? Are they offering move-in specials, and if so, what are the specifics?

“Quick curiosity,” a buddy of mine calls it, and the information you gain in the steady accumulation of those moments is invaluable.

You can drive through a neighborhood and admire the shiny new buildings, but behind that glass and brick may be below-market rent rolls and a high vacancy rate. Some of this may have to do with poor management and marketing, but you also want to know how these new builds (and old) are fairing in the current market. Did development get ahead of demand? If you build in that dreamland, will the rents be competitive? And then, of course, the more data you have, the more opportunities you have to spot gaps in the market. Sometimes, people spend so much time playing follow-the-leader that they buzz by opportunities that could be revealed by practicing quick curiosity and, of course, doing due diligence.

In last week’s Development 101 post on evaluating your target market, I revealed the three questions I ask when doing preliminary research on a neighborhood.

• Is it growing?

• Do people have good jobs with growing incomes?

• Are housing prices rising?

If the answer is yes to all three of these questions, I start looking at competitors.

Last week, I offered up three potential neighborhoods as possible places to develop, and you voted on your preference:

• The North Loop (young, hip, the old warehouse district in Minneapolis)

• The Northeast Arts District (old-school bars, lots of artist studios, and older single-family housing)

• Southwest Minneapolis (near the chain of lakes, primarily residential, mostly tranquil with vibrant pockets of commercial activity mixed in)

At the time I sat down to write this post, here were your votes:

Very, very interesting! There’s a clear preference for the North Loop and Southwest Minneapolis. From the emails and comments posted, I'm going to guess that you’re attracted to the above-average incomes in both neighborhoods and the consistently rising home prices (North Loop!)

But what about the competition? How do we assess it?

The first thing we need is to have some idea of the size of our build. Is this our final number? No. But we need to figure out whether we’re building five units or fifty. In this economy, given the high-interest rates and the cost of construction, let’s aim for something modest YET contains, within it, economies of scale. So, for now, let’s run our competitor analysis for each dreamland using buildings at least 50 units or greater. And we want to look at newer construction, preferably projects built within the past three years.

Why?

Because that is your new project’s competition, not an older apartment building built in 1973 with no amenities or in-unit washers and dryers!

As a side note: Did I spend my afternoon identifying competitors in each of the various zip codes and then dialing for data? No, no, I did not. I’m a big fan of working smart, not hard. I had someone hop on apartments.com and pull together a data set, and then I asked a bunch of questions (You, too, can do this. It is not as complicated as it sounds!).

So here’s what our competitor analysis reveals after removing “outliers” (meaning amongst similar buildings, we removed that one crazy penthouse that rents out for $10k a month and is currently sitting vacant :-)

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Northeast Arts District:

• Average Rent: $1,903

• Median Rent: $1,730

• Minimum Rent: $1,344

• Maximum Rent: $2,996

• Average Unit Size: 675 sq ft

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North Loop:

• Average Rent: $2,199

• Median Rent: $2,059

• Minimum Rent: $1,486

• Maximum Rent: $3,810

• Average Unit Size: 860 sq ft

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Southwest Minneapolis:

• Average Rent: $1,725

• Median Rent: $1,452

• Minimum Rent: $1,095

• Maximum Rent: $3,555

• Average Unit Size: 750 sq ft

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Okay. So…

From this data, the North Loop has both the highest average rent and the largest average unit size. On the other hand, Northeast has the smallest average unit size, though its average rent is the second highest among the neighborhoods.

In terms of rent per sq ft:

• Northeast achieves the most with an average of $2.82 per sq ft.

• North Loop is next, averaging $2.56 per sq ft.

• South Minneapolis achieves the least per square foot, averaging $2.30 per sq ft.

In terms of what each unit type achieves by average rent per square foot:

1. Studio: $2.81 per sq ft

2. 3 bedroom: $2.65 per sq ft

3. 1 bedroom: $2.55 per sq ft

4. 2 bedroom: $2.34 per sq ft

Studios have the highest average rent per square foot, while 2-bedroom units have the lowest among the listed unit types. Interestingly enough, while studios achieve the highest average rent, they are only found in 53% of the buildings in the data. (opportunity, perhaps?)

Whew!

Now…

Given what you know about growth, income, housing prices, and average rents, where would you look to build?

Since we last voted, did you change your mind? See anything intriguing in the data we should pursue? Curious about anything?

Take another vote, and then we’ll roll up all this information into a decision!

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