Supply-and-Demand is a key factor in real estate investing.
When we look at Supply, we ask ourselves: How much developed land is there, how is it zoned, and how is this projected to change over time?
When we look at Demand: we ask ourselves: How many people are in the area, what are the demographics, and how is this projected to change over time?
More people means more demand for homes, more spending at local businesses, and more demand for commercial real estate to serve those people. These conditions lead to higher rental prices, lower vacancy rates, and greater interest from investors.
That’s a big part of why some of America’s most expensive real estate is found in the wealthy states of California, New York, and Illinois. Does that mean these are particularly good places to invest? Not necessarily. These three states are also losing more people than any others, with net out-migration of about half a million people a year, and that can depress real estate prices.
It’s also a mistake to think that shrinking state population means an overpriced market. The population changes we care about are local. It doesn’t matter how many people are moving out of Buffalo when you’re looking at commercial real estate in Brooklyn. In fact, commercial real estate is intensely local. Neighborhood trends matter most of all because local residents only want to travel so far for shopping.
Population growth is a clear and powerful leading indicator for rising demand. More people in a given area almost guarantees more future demand. But specific demographics and other details matter too. Is the population aging or getting younger? What sort of infrastructure is in place and how will that affect consumers’ behavior? These questions, and many others, help us forecast demand.
None of this is easy, and I’m thankful for that, because it has helped Alliance carve out a great niche. It’s critical to get the micro-level details of each property and deal structure right. There’s also one big data point that helps us get there — markets often don’t fully price in the value that will accrue in growing markets. Finding and investing in high-growth cities and neighborhoods tends to be a winning strategy.