Evaluating Your Target Market
Let’s do this.
We’re talking about ground-up real estate development here, and if you want a “bright build” or to build brightly/smartly— you know where I’m going with this — you need to know a few things.
(Oh. And a note: Today’s post is definitely best read in your browser!)
In an earlier post, I talked about walking your dreamland as a way of familiarizing yourself with the neighborhood(s) where you’re dreaming of building so that when the opportunity presents itself, you can act quickly. There’s a story Adam Piore tells about the famous developer William Zeckendorf walking around New York with, literally, a zoning map under his arm. When Zeckendorf found a viable development site - parking lots, abandoned structures, buildings that were smaller than current zoning laws allowed (he could build bigger!) he’d get out his highlighter and mark it down. This is how he found his sites and built his empire. This is how he found the site of the Mayflower Hotel (and several adjacent lots) and built 15 Central Park West, one of the most exclusive addresses in New York. As a side note, that entire development process is a story of how, sometimes, stubbornness wins over savvy in what resulted in the largest tenant relocation fee ever paid by a developer. Read the story. It’s worth it.
But before we settle on a dreamland, we have to figure out if it’s viable. And by viable, I mean we need to know if it’s growing, if the people there have good jobs with growing incomes, and if housing prices are stable or rising.
For our first Bright Build, we’re going to do it here in Minneapolis. Why? Shoot, because I live here. Further down the line, you all can weigh in on our next development (except for the six Bright Build subscribers who live in Australia and New Zealand. I’m not getting on that plane. Not yet :-)
Okay, so first question.
Is it growing?
We need a dreamland where we’re seeing population growth. Most markets/sub-markets have developers, and at some point, development gets ahead of growth. Developers stop for a while and wait for growth to catch up. It’s a stop-and-start cycle. But we always want to make sure that our population is growing. Why? There are a whole bunch of reasons:
Demand for housing: as the population grows, there’s a direct increase in the demand for housing.
Economic Activity: Population growth nearly always correlates to increased economic activity. Remember our discussion of “third places.” You need a neighborhood that can support the types of businesses that your future tenants want. What does Whole Foods require to build a store? Among other things, they want 200,000 people or more in a 20-minute drive time and a large number of college-educated residents.
Rental Yields: For those of you who want to “build and hold,” a growing population drives up rental demand.
Do people have good jobs with growing incomes?
Apart from the points above, growing incomes lead to two things, one obvious and one not so obvious. First, growing incomes lead to:
Stability, plain and simple: Growing incomes = stability = the ability to make longer-term commitments. Your success as a long-term real estate developer depends on your ability to carefully manage your operating expenses. Hidden within those expenses are vacancies and turnover. Provided you’ve matched your product and amenities with the market, tenants with rising incomes are more likely to stay put longer.
Community Investment: In my opinion, this is overlooked far too often by developers. When you build something from the ground up, you are planting your flag in that neighborhood and declaring your commitment to its well-being. BUT you need partners. You want to know that folks in your dreamland continue to climb the economic ladder so that they can turn around and reinvest some of that money back into their community. That’s how they become your partners, and that is no small thing.
Are housing prices rising?
The last thing you want to know is the direction of home prices. Over time, are they going up? Ideally, you want a high differential between home prices and rents. Regardless of how cheap the land is, you don’t want to own, say, a building where your two-bedroom apartments are $2,500/mo and a mortgage on a similarly sized house two blocks down is $2,600. People will usually choose the house.
Alright, so those are the three questions I ask BEFORE I’ve settled on my dreamland.
This is my research.
How do I answer these questions?
In a very, very non-sexy way. If you scratch the surface of every good development story, you’re going to find that it starts with math. And look, before you get anxious about the words “research” and “math,” let me tell you something. Research is just a fancy way of saying, “I know the right questions to ask.” And the math? It’s not hard. Anyone can do it. People just use the wrong numbers at the wrong time :-)
I can answer my three questions using publicly accessible databases that visualize information related to housing, population density, and income. This is what I use in Minneapolis. These databases are easily found online and leverage data from the US Census Bureau. It’s as simple as that.
Let’s start with three dreamlands/neighborhoods. I’m going to give you some information about each of them, and then, based on that information, we’re going to vote on where we might build.