How to Calculate Supply and Demand Economics for a Local Market?
Hi All,  

I was hoping you could walk through this thought exercise with me. 

As an example, I am small-time investor Joe Smalls.  I want to acquire a multi-family investment in a large market (~1.2MM people) that's displaying very strong growth trends (~11% projected millennial growth over the next 5 years).  Investor sentiment is very strong in this market, and developers and investors of all size seem to be rushing in at bubble-like rates.  

The property Joe is looking to acquire is a small 12-unit multi-family building comprised of 1 and 2 bedroom units, each with 1 bath. The property is 83% occupied by young professionals (10/12 occ.) The property was recently renovated, and sits adjacent to an up and coming trendy area.  It is currently on sale for a 6.84% cap. Apartments rent from $900 to $1,100 per month.

In reading the local news, Joe discovers that the amount of new apartments being built is the highest in the US.  He's concerned about over-building and understands that a new apartment with amenities will always be more attractive than renovated housing stock with the "garden apartment" design.

Given the growth in the market, Joe wonders if there's room in the market for a small first-time acquisition.  From a general investment standpoint, he believes he can lease up the remaining units, slowly raise rents over the next 3 years, and possibly benefit from the appreciation caused by the investment-market appetite.

**How would Joe accurately predict the amount of supply and the amount of demand in the market?**

Joe figures he would calculate supply by researching all the existing multi family bedrooms available on the market, and after researching local plans at the local Planning Office, he adds the to-be-built units and considers all the one bedrooms.  He does the same for the number of residential homes in the area. He assumes that each room in whichever dwelling will be occupied by 1 person. 

To calculate demand - he starts with the local population adds a year of growth rates, and considers how many of those would rent or purchase residential homes and how many would rent apartments.  Joe heard somewhere that of the existing population, 75% will live in homes and the remaining 25% will rent apartments. 

If Joe's research and numbers are correct, he concludes that if the number of apartment renters is greater than the number of apartment bedrooms available, then there is enough room in the market for his potential acquisition to maintain high occupancy, despite all the new apartments coming online in the next 2-3 years.

**Is Joe correct in his analysis? And if not, why? How could he refine the supply/demand economics to make sure that all his tenants don't flee to the new supply leaving him with a vacant building? How can Joe incorporate monthly rental prices into his analysis?  How sensitive are his tenants to $100-$300 price increases?**
[{"id": "d82xuen", "text": "I believe Joe's demand/supply analysis is the best he can do without subscribing to a demographics provider for the demand side and a vendor like Axiometrics for the apartment supply side.  Digging deeper into monthly rental prices and household income figures without professional data would likely end with Joe spinning his wheels.  For his purposes, I think his approach will be fine for his small project, but not sufficient if he was, say, adding 400 units of inventory to this particular submarket.", "replies": [{"id": "d82y4dc", "text": "Thanks for this answer, Mike.  Is your response typical of what the bigger investment shops use, with respect to analytical tools?  To rephrase the question - how would the guy adding 400 units to inventory go about this S/D analysis? ", "replies": [{"id": "d82yg4y", "text": "Yes, but only really scratching the surface of what a bigger shop would be doing.  Here we dig into local economics (especially employer information), job growth, household dynamics and demographics on the demand side.  On the supply side we look at how things have leased-up in the area recently, what the age of the product in the area is and what is in the planning/construction pipeline.  ", "replies": [{"id": "d82yhsk", "text": "Damn. That's in-depth. Do you mind if I ask where you work and what your role there is? Thanks.", "replies": [{"id": "d82ymjf", "text": "I work in RE Private Equity in Boston as an analyst", "replies": [], "depth": 5}], "depth": 4}, {"id": "d82yknb", "text": "To add to this, Joe should be more concerned with his micro-market (are you the right product in the right location for who you hope to attract as tenants) and making a product that is desirable to folks in that area (granite countertops, NEST thermostat, high ceilings? -- what is in-demand)", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d83gjw3", "text": "Supply and demand are a factor but I always follow job growth more than anything else.  I used to work AM and Acq for a big mf developer.  Housing absorbtion levels and permits filed are important for large complexes but less so for 10-12 units.  You'll make the most bang for your buck on a smart stylized rehab.  Also, Witten for market info.  BLS and local news for jobs.", "replies": [{"id": "d83ku5e", "text": "I agree with you. In my apartment demand models I use forecasted job growth in order to derive an estimate of net in migration, which is then adjusted by a market observed housing tenure factor to arrive at an estimate of apartment demand.", "replies": [{"id": "d83w0sc", "text": "That kind of data can be great in market comparisons when you have a lot of acq options.  For a 12 unit, I would get better info drinking at the local bar and talking a walk through the nearest grocery store.  Cant sell it to the banker, but it would make my own personal go/no go decision.", "replies": [], "depth": 3}], "depth": 2}, {"id": "d83pv2o", "text": "Thanks for your response, Remlu. You have quite the resume.  Do you mind if I ask what you're doing these days in real estate (if only to get some ideas of my own)? ", "replies": [{"id": "d83vyqq", "text": "I have a small PE firm.  Currently moving away from it.  If a really bad time to purchase MF with my rehab oriented business model.  I'm currently in the middle of starting a plumbing company.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]