Minute Mastery Series: Evaluating Local Markets

Video Transcription

Welcome back to another segment of Minute Mastery Series, I'm Adam Hodge from Holland & Hodge Capital Partners and today we are going to review key metrics we use when underwriting and assessing if we want to lend in a particular market. This series is meant to offer insights and discuss various trends and topics in a few minutes or less to satisfy the short attention spans we all have today. So, let's see if we can cover this pretty quickly. These are some key metrics we look at any time we try to assess a local market. We typically lend to tier one or tier two markets. We will look at some tertiary markets. It really kind of depends on what's happening there.

1. So, one of the first things we look at is growth. We're going to break that down into subcategories:

    • What's happening from a population perspective?
    • What's happening from a job perspective?
    • What's happening from a rent perspective?

Right. So is the city contracting? Is it expanding? Are people moving there? Are people leaving? What's happening with jobs? Are jobs being created? Are we seeing more businesses starting in that city, from a year over year perspective? Or are jobs leaving? Is it a business friendly environment or are companies making an exodus and leaving? Now what's happening from a rent perspective, price per square foot? Is rent going up, or is it going down? And do we understand why? So, these are some key growth metrics we look at. This is all public information you can pull from various sources. You have the Census Bureau to pull information on population. You have the Bureau of Labor Statistics if you want to pull statistics on jobs and what's happening in various local markets.

2. We also look at Cap Rates and Return on Cost when we're looking at the valuation of a performing asset. So, what is the current net operating income that's being thrown off of the property today? This does not take into account net service or capital expenditures. This is just simply understanding the performance of that asset. So, that's taking the Net Operating Income and dividing it by the value of the property. Return on cost is taking into account the capital expenditure improvements and understanding what the future, not just the stabilizing NOI but what the future net operating income is on that property.

3. What's happening from a let's say civic or municipal standpoint? What is the general local sentiment? What is the business climate there? So, are the government and the local community in support of development and if so what type of development? One of the easiest ways to pull in information about what is being developed is by looking at the permits that are being issued.

4.Understanding the key metrics for supply and demand in that particular local market is critical. A big part of this is looking at a particular asset class and saying "Is there a lot of inventory? Is there a surplus or saturation, or is there a shortage? Is the demand strong enough to fill new inventory coming online?

5. Demand Generators are something we look at when we're looking at a city or market that we're looking at investing in. What's happening in that area particularly. Where's the real estate located? What's the location and what's going on around it? What type of real estate is around there? What type of reason, is there retail nearby? Is there office space nearby? What are the various demand generators? What's happening in that local market?

So this is quick back of the napkin approach to what we look at in every deal when assessing if that's a market we want to be serving. This is a little more granular answer to the question, "What's happening in that market and would you invest in it?".

Stay tuned for our next segment on Minute Mastery Series where we are going to review the financials that we look at for a borrower of an asset when underwriting any given deal. 


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