There is perhaps nothing more important than location when it comes to real estate development. Selecting a location for a future development or investment project requires many considerations in connection with the location and the market factors it represents. The best planned project will more than likely fail if implemented in a region that doesn’t demonstrate the demand and growth needed to support the success of the venture. This discussion will address numerous factors that influence the selection of market including industry growth, population, regulatory environment, tax rates, and demographics.
The first consideration in the evaluation of a market is the growth of local industry. Are new players entering the market? Have other developers already started to invest in the region? Examine the primary economic drivers of the local economy to determine if the dominant industry is in the growth or decline phase. Is the industry likely to thrive over the next 20 years? If the primary industry is focused on producing outdated technologies or employs processes that have negative consequences for the environment, it will not be a good candidate for forward thinking industries and developers.
Labor and Employment Trends
The availability of skilled labor is the crux of successful business and real estate development operations. Without a sufficient and quality labor force, it is impossible to achieve sustainable growth, much less get started. If the industry is new to the region, observe how housing availability will either support or limit the growth of the labor force. A developing industry is best served when the local population has the experience and skill sets to support the business model. Bringing new workers to the area is typically extremely expensive and often not feasible on the scale need for larger operations. Additionally, consider how the community is likely to appeal to ideal industry recruits.
Sustainable Real Estate Development
Sustainability is an additional concern that can dramatically improve the long-term financial outcome of real estate development projects. Choose a location that will have the least impact on the natural environment. Where possible, build within existing developments that already provide the infrastructure and utilities need for operations. This will reduce the expense, time, materials, and energy required to complete the new structures, while also reducing the impact on the ecosystem. Consider the availability of building materials and resources needed by the growing economy. Locally produced goods often come at a lower cost and include reduced transportation expenses, supporting sustained growth and minimizing the carbon footprint.
How well does the planned usage conform to the current and proposed regulatory environment? Will the project be viable in the long-term considering the regulatory direction of local and regional governments? These are factors that should be identified as part of the due diligence process. Participation in the local civic process by project representatives will ensure an awareness of emerging regulatory issues and that strategic planning includes initiatives and contingencies to capitalize on and cope with regulations. Zoning and planned changes are extremely important to verify before acquisition of the property. Also consider tax rates and what impact they’ll have on operations, and well as on the demand from incoming laborers and residents.
Population Growth and Availability of Housing
Industry growth typically means population expansion as well. When new residents are moving into the area to seek gainful employment, it stimulates demand and growth in the local economy, further driving the demand for housing and commercial space. As the population grows, the availability of housing tends to decrease, raising prices and rents. When housing is limited, it can hinder growth in the industrial and commercial markets. As you evaluate potential markets, consider the balance between these economic forces and how they move interdependently.
Prevailing Lease Rates and Real Estate Development
The best opportunities are found where the prevailing lease rate for office or residential space is on the rise. There are exceptions, such as in speculative acquisitions, but in most cases strong lease rate appreciation is an excellent indicator of increasing demand or limited available space. Increasing demand can mean growth in startups, population expansion, and overall economic prosperity. Lease rates also tend to rise when there is insufficient space available to meet stable and increasing levels of demand. This signifies the need, and opportunity, for developers to create new structures to accommodate the demand.
Demographics and Target Market
If the firm plans to invest heavily in the local distribution of products and services, it’s important to determine in advance if demand exists for the product or service that will be produced in the proposed property. You’ll want to determine if the industry is in the growth or decline phase, and how far into the future operations will be viable. As most commercial and multi-family structures are intended to last for at least several decades, and often much longer, ample forethought must be given to determine if sufficient long-term demand will continue to exist for the anticipated life-span of the project.
The Right Market
Selecting the best market for investments is a complicated task that can take months of research and visits to many local markets to get a first-hand perspective on the economy. Working with an online real estate investment platform, one with extensive experience in due-diligence and evaluating proposed projects, will make your investment growth more efficient and less time consuming. Partnering with other investors allows the distribution and mitigation of risk and enhanced access to high-value opportunities.