In real estate, headlines often focus on broad market trends, such as demand for a sector, national vacancy rates, or rent growth for an entire metro area. In practice, however, asset performance can diverge widely neighborhood-by-neighborhood, or even block-to-block. Proximity does not equal parity, and two areas just a mile apart can experience vastly different economic outcomes. This presents a key advantage for small and mid-sized real estate investment managers.
Large institutional investors focus their capital on big cities and major metropolitan areas, often limited by their mandates and the scale at which they need to efficiently deploy capital. For this reason, they may exclude entire metro areas or even states from consideration.
In contrast, local high-net worth individuals, family offices, and experienced operators can recognize small-scale patterns in overlooked markets and benefit from an extended window of growth.
As an example, suburban markets are highly dynamic environments and offer local experts unique opportunities commonly missed by broad-brush market generalizations. Over the last decade, and especially since 2020, the flexibility of remote or hybrid work and evolving lifestyle priorities have decreased the allure of ‘downtown’ or central business district (CBD) investments. Perceived safety concerns have contributed to reduced desirability of urban residential neighborhoods. While moving to the suburbs was once synonymous with homeownership, the lack of affordable for-sale housing and rising prices have made renters a major part of the suburban migration pattern.
This is not to suggest a total exodus from urban centers. Gen Z young adults, including single individuals or couples without children, typically show a preference for city living, desiring access to vibrant social scenes, cultural amenities, and a walkable lifestyle. Mixed-use urban neighborhoods enjoy lively activity at all times of the day. Still, today’s suburbs are not the ‘bedroom communities’ of the past. The most sought-after suburban districts now offer self-contained hubs that include office spaces, shops, healthcare, and entertainment all in one place.
Regardless of suburban or urban location, a flourishing neighborhood usually revolves around a few key traits. Chief among them is strong economic activity supported by a diverse employment base.
To this end, it is critical for investment managers to ensure that a targeted asset is designed – and priced – appropriately to the demographic and economic profiles of the local workforce. School districts are also a powerful predictor of property performance and stability. Families will pay a premium to ensure that their children have access to the best education. Collectively, demand drivers such as employment, retail, recreation, and schools always need to be viewed against the backdrop of available supply. Income growth is only possible when demand exceeds supply.
For markets with less widely available data, experienced owner-operators who possess their own data from property operations benefit from a competitive advantage when evaluating new investments. By studying current data from existing portfolio assets, they can more accurately estimate operating expenses and forecast vacancy and concession losses. They can project payroll expenses, informed by the specific wage pressure of the local market. For value-add strategies, they know exactly which upgrades the local market will support.
In major gateways such as New York or Chicago, market participants know the market rent to the dollar. However, in secondary and tertiary markets, public data is often outdated. While large institutional investors rely on lagging indicators to confirm a trend, local operators can use their information advantage to move early with conviction and generate outsized investment returns.
More than ever, local expertise is paramount to identifying and capitalizing on hyperlocal supply and demand fundamentals. Small and mid-size operators with proprietary data can spot trends in suburbs or MSAs overlooked or written-off by larger, institutional investors. Gross generalizations about markets large or small, urban or suburban is a recipe for failure. As opposed to deals banking on financial engineering and capital markets tailwinds, success today will be determined by those investors accurately recognizing hyperlocal market dynamics.