Detroit to Dallas...Where to Invest?
Real estate investments, in general, are impacted by national trends; responding to recessions, interest rate changes, and overall optimism/pessimism. However, performance is also highly local, dependent on the employment and supply picture of the immediate area and region. This can lead to very different outcomes simultaneously for similar assets in different locations. Further, an investment’s outcome is obviously tied to the specific property and the terms on which it was acquired.
We assess a metro at a high level to determine if we are interested in pursuing investments there. Then, when we begin reviewing opportunities, we give attention to sub-markets to identify micro dynamics such as area incomes and rent growth potential. When we drill down into a specific project of interest we begin examining proximity to amenities and employment and site layout, which includes things like visibility. These multiple levels (the overall metro supply and demand measures, a sub-market’s health, and a specific property’s exact location dynamic) inform our underwriting assumptions and projections for an individual project. A goal of our analysis is to identify the chances of a market tailwind, and, more importantly, of a nasty “gotcha” jumping out that could hurt our holding cash flows and/or ability to sell when we want.
Despite our emphasis on market analysis and the fact that we only proactively seek investments in those markets that successfully come through our multi-level filtering processes, Ripe Assets won’t usually categorically redline a market and instead position ourselves as opportunistic buyers. While we seek to invest in locations that will provide the investment with the greatest market tailwind over time, we realize that our true investment is not a metro or neighborhood, but a specific property with very specific property level economics. We believe it’s possible to have a homely investment outcome in the most beautiful location, and a beautiful investment outcome in a homely location. We understand the following:
A homely location requires a different set of underwriting assumptions. A homely location is one that may have one or more of the following characteristics: a concentrated local economy, negative population growth, slow rent growth, etc.
A beautiful location requires an extra dose of reality. A beautiful location is one in which there are strong fundamentals: household growth, employment growth, rent growth, etc. These are what we want, however, we can’t afford to become credulous and buy indiscriminately. Every virtue carries with it its own vice. In this case the virtues cited above can be accompanied by over-supply and overly excited pricing.
If an opportunity is presented to us within a metro that we don’t qualify as otherwise attractive; one in which we would not initiate seeking an investment, or, similarly, if an investment presents itself within a market we have identified but in a submarket that we would not normally find attractive, we will review it with the approach that we could be looking at an unobvious winner, provided our underwriting makes the necessary adjustments and we could acquire the asset with a price that reflects a suitable margin of safety.
Partnering with you in Excellence.
