Real Estate Investing in Growth Markets

How can I capitalize on growth markets? That’s a question I’ve heard repeatedly during the past few months, and it’s easy to understand why. The recent buzz around growth markets in real estate has attracted many potential investors who want to learn more. Have these investment opportunities caught your attention, as well? If so, I’d like to help by sharing some additional perspective on growth markets. 

You might wonder what makes me qualified to comment on this topic — and that healthy skepticism is a good sign, because it’s a critical skill for investor success. Here’s why I have an informed perspective: With two decades of real estate experience and a background in investing in multifamily and mixed-use assets along the East Coast, I strategically target growth markets when sourcing the properties owned and managed by my firm, Lucern Capital Partners.

Before we explore an overview of basic concepts that apply to growth markets, I’ll share this piece of advice that has served me well throughout my career and helped other investors avoid costly mistakes: Don’t get swept up in the allure of trendy markets without applying a thorough due diligence process. Savvy investors know it takes effort to distinguish between an opportunity that’s merely trendy — or one with long-term investment potential that aligns with their strategy.

Now let’s take a look at some of the fundamental considerations behind investing in growth markets, as well as a few recent demographic and geographic trends.

Identify Geographical Areas of Opportunity

When we talk about growth markets, we mean regions with favorable trends, both demographic and geographic, where properties have the potential to increase in value and provide stable returns long-term. Hallmarks of these high-growth markets are steady population growth rates and strong in-bound migration. When demand outstrips supply, that’s a market worth investigating. As you assess markets, here are some questions to consider:

• How does the unemployment rate compare to the national average?
• Are rental property rates increasing?
• Is there notable population growth coming from people who are moving to the area?

Capitalize on Migration Trends

As you know by now, growth markets are shaped by the number of new residents attracted to the area. Let’s consider some of the dynamics fueling current migration trends, which already existed a few years ago and were accelerated by the pandemic:

Sunbelt Migration

Due to a combination of demographics and environmental factors, Southeastern Metropolitan Statistical Areas (MSAs) are experiencing significant population growth. Corporations are relocating to lower-tax areas and finding cheaper labor in Sunbelt states, driving individuals to these regions for improved quality of life. This population shift is not a new trend. Sunbelt cities have accounted for the greatest share of the nation's fastest-growing metro areas for more than 10 years. Investors should expect to see more people relocating to southern cities and states, through 2021 and beyond.

Relocating to Less-Crowded MSAs

The pandemic forced many employees to work from home and also interrupted their favorite metropolitan experiences, such as dining out and attending live shows. This prompted many people to reevaluate where they want to live. If they’re stuck in a home office for the foreseeable future — or if their particular industry is rife with uncertainty — why not move to an area that’s less expensive and more spacious? During the past year, less-crowded cities experienced an increase in domestic migration, and Charlotte, NC is one example. It saw population levels increase 25% since the last census, with housing prices up 18% compared to the prior year.

Generational Cohorts Migrating

As millennials age and raise families, they often question the high cost of urban living. We expect to see a continued decline in demand for urban multifamily properties as more millennials leave behind their urban spots in favor of suburban housing options. Although urban living has strong appeal for some Gen Zers, that dynamic alone likely won’t have enough strength to offset millennials’ growing departures from cities.

Get Familiar with Local Markets

An analysis of population trends is a good first step — but it’s far from the last one you’ll need to take when assessing growth markets. As you take a closer look at promising regions, consider these factors:

Rental Rates

Are rent increases stable in the region, and do they predict the potential for cash returns? When you make property management improvements, strategic unit renovations, or offer new services, you want to feel confident about your potential return on those upgrades.

Employment Levels and Corporate Presence

Have employment and income increased significantly or steadily over the past year? Have large corporations recently relocated to the area, providing a population boost and more potential tenants?

Local Improvement Initiatives and Legislation

Have you reviewed both state and local laws to see how they might affect your potential plans for a property? For example, some states have adopted rent control laws during the past year. 

How to Manage Properties Remotely

In many cases, your best investment opportunities will be located far from where you’re based. That’s why smart investors plan ahead to make out-of-state investments successful. With that in mind, here are some steps to take:

Assemble a Local Team

You’ll want to identify a trustworthy property inspector, contractor, and property management company in the area. This will be a team that you’ll rely on for attention to detail when you make your investments in multifamily properties. After you’ve finalized your purchase, a professional property management company can help you prepare and maintain the property for the rental market. 

Base Your Value-Add Strategy on Local Trends

How do rent increases in that area correspond with improvements like new kitchens or baths? Also, are the supplies you’ll need for renovation readily available?

Cluster Properties to Efficiently Deploy Management Resources

When you have several properties located in one area, it creates a competitive advantage by allowing you to build deeper relationships with service providers who are locally based in that growth market. At Lucern, we use this technique regularly, and our two most recent Charlotte, NC acquisitions provide a great example. Scarlet Pointe Apartments and East Coast Townhomes are located near each other in East Charlotte. When we cluster the location of acquired assets, our property management efforts can easily be shared among investments.

Let Careful Analysis Guide Your Investment Choices

While the pandemic’s impact on real-estate demand is undeniable, the long-term impact on some geographic trends remains unclear. Keep this in mind as you conduct due diligence for potential investment regions. An opportunity may look appealing on the surface, but you’ll need to dig deeper and ask plenty of questions to help ensure demand for your properties, as well as a healthy return on investments in property upgrades. With those elements in place — and a local team you trust to manage issues remotely — investments in growth markets can generate strong returns for years to come.