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Dear Consultant: How do you identify the best markets for apartment communities?

Jeff Kottmeier

February 28, 2024

Your questions, our expertise.

How do you identify the best markets for apartment communities?

There is no universal list of the best markets for apartment investment. If you’re a company seeking rapid growth, Phoenix, Orlando, or Austin might seem like your best targets. Other companies looking for steady growth with less competition might believe Indianapolis or Cincinnati are better suited for investment.

To help our clients choose the ideal markets for their apartment communities, we built a market ranking model that considers four categories, weighted to align with a company’s strategic objectives:

  1. Demand drivers, like population, household, and income growth
  2. Supply of housing, including for-rent and for-sale supply
  3. Housing trends, including occupancy rates and forecasted appreciation
  4. Local attributes, which include both quantitative and qualitative insights

Hundreds of historical and forecasted data points feed into our model, along with qualitative insights from our local consultants.

1. Demand

The most important fundamentals that drive demand for rental housing are population growth (including migration), household growth, job growth, and household income growth. These measures must be viewed cohesively and weighted based on your unique investment strategy.

For instance, current demand conditions for apartments in Austin, Houston, and Dallas look strong, with YOY job growth rates that exceed the national pace and relatively low unemployment. But these markets also have some of the country’s highest levels of planned supply. You can’t assess demand without also understanding supply.

2. Supply

We assess supply from multiple angles beyond just the pipeline of new projects. We analyze land availability, entitlement constraints, and for-sale housing metrics. 

Abundant supply can adversely impact occupancies and put a lid on rent growth. Rents are declining in current high supply markets like Salt Lake City, Nashville, and Austin, while they are growing in the lower-supply Midwest markets like Cincinnati, Milwaukee, and St. Louis. In the longer term, though, we project a turnaround in the high-growth markets as demand absorbs the supply, while the Midwest markets will continue to grow modestly.

3. Housing Trends

To assess each housing market, we analyze occupancy rates and forecasts for rental rates, home prices, and the relative cost of renting vs. owning. 

We focus on identifying areas where renting may be more attractive than owning. Rent-to-income ratios are strongest in the Midwest, Southeast, and some Texas markets (e.g., Raleigh, St. Louis, Kansas City, and San Antonio). Affordability is a concern across the large cities but is also starting to hit Tampa, Orlando, and Charleston. These markets still have strong investment potential, but it is important to analyze them at a submarket level. 

4. Local Attributes

The desirability of a community also hinges on its local reputation, which is a mix of quantitative and qualitative factors. When scoring local attributes, we consider the cost of living, ease of the entitlement process, crime, commuting times, school quality, and related categories.

Atlanta is an example of a market where the apartment fundamentals appear strong, but a long eviction process impedes future development. 

There is no one-size-fits-all answer.

Determining the ideal markets for your investment opportunities should be customized to align with your strategic objectives. Reach out to learn more about how our market ranking model can help you make informed investment decisions.

We receive an outstanding number of great Dear Consultant questions. Keep submitting them here, and we’ll continue to provide insight from our nationwide consulting team.

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About The Author

Jeff Kottmeier
Senior Vice President, Consulting
Jeff provides strategic insight and advice for housing throughout the Mid-Atlantic and Northeast with a special emphasis on rental housing.

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