Tomorrow’s Growing Neighborhoods
Evra’s data defines neighborhoods with growth in their future
We’ve recently been thinking about quantifying the prospect of future rent growth. Evra by GeoPhy has plenty of metrics that might be used to predict rising rents. In our analysis, our goal was to answer the golden question that interests all investors: “Where to deploy my capital in ‘less obvious’ locations with high potential that the rest of the industry has yet to notice?”
A good starting point in thinking about this problem is the related work in the study of gentrification. The typical academic measures of gentrification include home price growth, rent growth, household income growth, and growth in the share of residents with a bachelors’ degree.
These metrics, however, all tend to be backward looking. We wanted forward-looking measures. And the results shouldn’t target neighborhoods that might gentrify so much as any neighborhood that would see price appreciation – including already good neighborhoods. Our research excluded only the highest quality neighborhoods.
How We Define Neighborhoods Poised to Grow
Our thesis: places that will experience higher-than-average rent growth in the next five years are those that are currently experiencing low supply growth, and price growth that exceeds rent growth. From Evra’s vast assortment of granular Neighborhood data, we selected the following to define and test this idea:
- The difference between recent home price and rent growths: If prices and rents move together in the long run, Neighborhoods’ future rents should experience faster increases when recent home price increases have outpaced recent rent growth.
- Changes in per capita housing units: Change in units per person is key to measuring changes in supply. Low or negative values indicate a flat or declining availability of housing per person, a key supporter of rising rents.
Building a Neighborhood Outlook Score
With these two metrics, we produced a composite Outlook Score for all 94,103 GeoPhy-defined neighborhoods across the U.S. High outlook Neighborhoods have relatively fixed supply and “owned units” whose values have recently risen faster than rents.
(By the way, each of these metrics are available in Evra’s downloadable Neighborhood offering.)
We applied those criteria to our dataset of more than 425,000 multifamily properties. We excluded properties in rural locations and any neighborhood with fewer than 500 residents. To further ensure we have appealing Neighborhoods, we also filtered out Neighborhoods with declining population, household income, or shares of renters.
We discovered 2,585 properties nationwide that had transacted in these neighborhoods from 2004-2021. Of those, only 79 had ≤0% growth in the last 12 months. In other words, 97% of the properties with high outlook scores increased in value – a pretty good indication that our thesis is on target.
Where These Deals Are Located
So, where are these great locations? And how can you find actual properties within them?
Step 1: Filter locations to match thesis
Western markets dominate the top 10 in terms of high outlook Neighborhoods. Los Angeles takes the top spot with over 380 high outlook Neighborhoods. Oakland, Phoenix, Riverside, and Fort Lauderdale round out the top five. All told, the list suggests there is serious potential upside in some well-known, non-gateway multifamily markets.
Step 2: Find suitable properties
To understand the firepower GeoPhy can arm you with, let’s take Los Angeles as an example. Neighborhoods are great but where are the deals in those Neighborhoods?
We’ve got you covered. We can take our list of high outlook Los Angeles Neighborhoods and find the actual properties worth checking out. Unit count, year of construction – you name it, we’ve got it.
Unlike anyone else in the market, we can tell you the credit characteristics of the tenants in those buildings. Sky high credit scores? We’ve got ‘em. No deferrals in 2020? Let us show you. Low revolving debt? Right this way.
Most importantly, come talk to us if you’re looking for growth opportunities. Our Outlook Score will let you stay ahead of the industry by sourcing deals in less obvious investment areas that show huge potential in upside growth.
Sign up for a demo of Evra to see the data we have available and how it can keep you a step ahead.