Street vendors know the best location to sell their merchandise and get there before their competition saturates the market. The same approach can help anyone become successful in real estate. However, the competitive environment of the real estate market means the savvy real estate investor needs to move faster than others. They need to recognize the factors that will drive real estate values, rather than just follow real estate prices. Once a location develops these factors buyers will come, and real estate profits will go to those selling instead of buying.
Availability of Good Jobs Drive Real Estate Values
Unless the target market for the real estate is retired empty-nesters downsizing for retirement, the availability of good jobs is a primary factor driving real estate values. A strong job market will attract residential real estate buyers. An increase in homeownership will drive commercial development for businesses that supply goods and services to this market segment, creating more jobs and attracting more buyers.
The demand for residential real estate will also bring renters into the market. This will drive up occupancy rates for multi-family units, resulting in a more favorable return on investment. If the strong job market persists for an extended period of time, these renters will add to the demand for residential real estate as they become first time buyers.
Low Unemployment Means a Strong Market
Measuring job growth can be done either statistically or fundamentally. The statistical approach is straightforward. A high unemployment rate means that it is more likely that there are jobs that need to be filled. Keep in mind that workers are always changing jobs and companies are always failing and laying off workers. This means a low rate of unemployment is full employment and a strong market.
Large cities with an unemployment rate low enough to be considered full employment are Salt Lake City, Utah (2.8%), Denver, Colorado (2.9%), and Austin, Texas (3.5%). Other large cities with low unemployment rates are Phoenix, Arizona (4.8%) and Dallas, Texas (4.1%).
Smaller cities that meet the statistical definition of full employment are more numerous and form geographic clusters around the country. Examples include Fort Collins (2.5%) and Boulder (2.4%) Colorado, Logan (2.5%) and Provo (2.5%) Utah. Another cluster exists in the Northeast. Examples in this area include Lewiston (3.2%) and Portland (2.8%) Maine, and Portsmouth (2.4%), Dover (2.4%), and Manchester (2.6%) New Hampshire.
The cluster in the Midwest includes several small cities in North and South Dakota, including Sioux Falls (2%), Rapid City (2.9%), Bismarck (2.2%), Grand Forks (2.5%), and Fargo (2.2%). It is not much of a stretch to include Rochester (2.8%) and Mankato (2.8%) Minnesota in this cluster. This serves to make the point about taking a fundamental approach, rather than a statistical approach, to unemployment.
Consider the Sustainability of the Real Estate Investment
The development of the Bakken Shale formation in western North Dakota could be playing a significant role in the very low unemployment rate in the Midwest cluster. The “shale gale” created a boom economy and tens of thousands of jobs. The same dynamic is true for the high-tech communities in Texas and Utah. Any booming industry creates jobs.
However, simply identifying a booming region might not be enough due diligence. The sustainability of the industry over the investment horizon of the real estate investment must be considered. The demise of the Bakken Shale jobs has been repeatedly and persistently forecasted, and the growth of high tech jobs is linked in some ways to the availability of high tech workers.
The health of these industries is dependent on larger political and economic forces such as the debate over fossil fuels and immigration policies. Restrictive measures will cut oil production and move high technology jobs overseas. This could reverse the employment trend in those regions and cause real estate investments to either lose money or take longer to pay off.
Understanding the interplay of all these factors can be difficult, leading many real estate investors to stay close to home and on familiar ground. Partnering with a larger organization or finding a local investment partner is one way a small real estate investor can find new investing grounds.