Nuance in Investment Real Estate (2023)
A common mistake among investors is their inability to adopt a nuanced approach to the market. They tend to look at data and accept it at face value without critically examining the information. This results in chasing short-term trends or failing to notice an emerging market. As a consequence, they end up missing out on valuable opportunities in the long run.
That is why it helps that an investor is aware of how to take a nuanced approach when making an important decision.
A Nuanced Approach
To understand how a nuanced approach could be rewarding, it helps to examine a few metrics.
Population Growth: When making a decision based on population growth, one could be fixated on those with potentially high growth. Most likely, an investor would want to go for a metro that is expected to see over 7% growth in the next five years. However, every other investor is going to think the same way. Thus, the competition is going to be intense.
Metros that will see between 2% to 5% are also promising while at the same time, competition will not be so intense. That is because these metros are more established and so investors feel there might be more competition. While the competition does exist, it won't be as strong in metros that are expected to have major population growth.
Macro Level: Investors will often look at data regarding a region or state and not dig too deep into the results. National / Local averages don't present an accurate picture and oftentimes are skewed by outliers.
Look at the difference between the Office market in San Francisco vs. San Mateo County. In San Francisco, the vacancy rate was at 8.9% in 2019 but has surged to 23.6% as of 2023. In San Mateo County, the vacancy rate was at 6.4% in 2019 but has surged to 7.7% as of 2023. At the same time, the average office rent in SF has declined by -20% while it has risen by +39% in San Mateo.
Sub-Markets: Even in fast-growing metros, there are going to be submarkets that will be underperforming. One example to look at is Austin, TX. It is one of the fastest-growing metros with the average retail vacancy rate at 3%. When you break it down by sub-markets; the average retail vacancy rate is 6% in Central Austin, 4% in Northwest Austin, and 6.3% in West Central Austin.
What it Means for Investors
When it comes to examining market data, "use a shovel, not a rake". By not taking a nuanced approach to researching a market, an investor is missing out on an opportunity. A smart will also realize they will not know everything and instead seek advice from a market expert to guide them.
The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.