Following up to the previous blog Evaluating the Sponsor where we discussed the critical importance of choosing the right operator to work with, the next most important consideration when deciding on a syndication deal is to evaluate a market where the asset is located.
The market should be of sufficient size to ensure that it has the proper infrastructure to attract additional businesses and population in-migration. The Metropolitan Statistical Area (MSA) should be of adequate size and the smallest that we prefer is at least 1 million in population. Ideally, the asset is located in an emerging market or in the path of progress with above average job / population / and wage growth which should ultimately lead to rent growth and potential to force appreciation. It is more common for growth markets to be located in business and landlord friendly states.
Having a diverse employer base across several industries is also critical in that it minimizes the negative impact to the overall job market from adverse changes in any one or two industries, and even better if the various businesses are non-correlated. Ideally, the submarket should not be dominated by any one industry or make up more than 15-20% of the total employer base. The presence of large hospitals, blue chip S&P 1000 companies, and the likes of Costco or Trader Joe’s would be a great sign as these types of companies often conduct a substantial amount of research at great cost before deciding on where to set up shop.
The ideal median income range should be at least 2.5 times the pro-forma rent levels, not too high where people can afford to buy homes or too low where they cannot support the higher projected rents for upgraded units as is often part of the value add business plan. In addition, higher median home prices would make homeownership a lot less available and more attractive for renting. A low cost of living, favorable crime statistics and school ratings are other key attributes that support an attractive submarket. Lastly, you will need to pay attention to the absorption rate to avoid a sudden increase in the supply of units that could impact occupancy. To sum up, it is critical to be in growth markets with strong fundamentals to enhance the success of executing Value Add strategy.
Break of Day Capital created a free evaluation tool with a comprehensive list of questions that you can use when evaluating the sponsor team. https://breakofdaycapital.com/investor-tools/
As always, please feel free to reach out to Joe if you have any questions. firstname.lastname@example.org