Most investors evaluate the building. The building is not the bet.
A great building in a weak market will underperform. An average building in a strong market will outperform. Most first-time investors spend most of their time evaluating the property. Experienced operators spend as much time on the market itself.
Here is the framework I use:
1. Vacancy rate. How much space is sitting empty? Sub-3% in a market means tenants have almost no options. Landlords have pricing power. Rents
grow. Above 10% and the dynamic flips entirely. This is the first number I look at. We love Sacramento precisely because the market-wide IOS vacancy is sub-2%.
2. Absorption. Is the market filling up or emptying out? A market with 5% vacancy that is trending toward 3% is very different from one trending toward 8%. Vacancy is a snapshot. Absorption is the direction.
3. Supply pipeline. How much new inventory is under construction or permitted? A tight market with a lot of new supply coming is not as tight as it looks. In IOS, new supply is structurally constrained by zoning and entitlements, which is a big part of why we love it.
4. Demand drivers. What is pulling tenants to this market? Ports, freight corridors, population growth, infrastructure investment. The more durable the demand driver, the more durable the rent.
5. Barriers to entry. Can a developer replicate this asset nearby? Zoning restrictions, land scarcity, permitting timelines. These are what protect the value of what you own.
We are not looking for the most exciting market. We are looking for the most durable one. Sacramento. Gilroy. Clovis. None of them make headlines. All of them underwrite well.
What is the first thing you look at when evaluating a new market?
Wednesday Real Estate 101: How to evaluate a real estate market
