The Ultimate Guide to Researching Real Estate Markets & Submarkets

Market & submarket research is the crucial first step in multifamily investing. It is essential to believe in the area a property resides in just as much as the property itself, as external factors will always influence the performance of an investment. How do we research the markets and submarkets we are thinking about investing in?

Types of Forecasts  

To understand our research approach, it is best to understand our forecasting first, which can be "simple" or "multivariate." Our simple forecasts give us an approximate idea of how specific metrics, like rent growth, will grow on an individual basis—not tied to any other variables. These are not as predictive as our multivariate models, but they can be run more quickly and consume less time in the data cleaning process. They give us a general idea of how the market is expected to perform but are not definitive enough to be used for major decisions. Our multivariate models take in much more data and are used for our direct target markets and submarkets, generating the most accurate results with the best data available.

It may seem that the simple model isn't necessary for our process, but it saves plenty of time since we can weed out the subpar areas of town quickly. If we are pitched a deal where they predict massive growth and our simple model disagrees, we know to be skeptical immediately and be cautious with every assumption that a broker or seller is making. At Rise Invest, we develop all our models and forecasts in-house. We felt nothing provided us with the types of projections we wanted at the quality we strive for. If you are interested in more information on how we use machine learning to generate market insights, read our article How Artificial Intelligence Can Boost Your Real Estate Investments.

Market Research

Property research begins with market research. Rise Invest has developed predictive models for the performance of key multifamily real estate metrics, such as cap rates and rent growth, on both a market and submarket level. Our market-level research starts with our quality data, sourced from various sources, ranging from purchasing data from industry providers, looking through federal sources, accessing data from APIs, and more. We firmly believe that to generate quality insight, you need quality data and have invested heavily in industry-standard providers so that our models always use the best data available. Our simple and multivariate analysis utilizes data points from these diverse sources, leveraging millions of data points relevant to our market-level analysis, such as average market cap rates or population changes—though we use them for different purposes. 

The market stage of research is focused on the complete market outlook for a metropolitan area that a property resides in. Rise Invest has forecasted metrics ten years into the future for dozens of markets across the country ranging from Seattle to Miami and continuously updates and improves our forecasts when new data becomes available, thanks to our model's dynamic capabilities allowing it to be run at-will and produce new forecasts rapidly. These machine learning models are at the heart of our market research. They inform us of the areas of the country we want to be looking for deals and paint a picture of the overall trends in the entire country.

Aside from our machine learning forecasts, we also have access to industry reports and paid sources research platforms such as YardiMatrix, Moody's, CoStar, and others for every major metropolitan area in the country. We refer to them as additional opinions on any particular region to avoid instances of tunnel vision.

Submarket Research

Once we have determined the markets that we want to be in, we move into the vital stage of submarket analysis. Our submarket analysis begins with a simple forecast of the neighborhood and zip codes used as a quick glance that can be relayed to the rest of the team so they have an idea of what to expect as they analyze the deal.  We then dive into the multivariate analysis, where we determine our positions and define an upside and downside scenario for our underwriting. Our submarket multivariate analysis is a crucial tool we use at Rise Invest since it is the predictive algorithm that is the most reflective of an individual property we are underwriting. This model informs us on projected rents and population/job growth values that guide not just our decision to invest or not but the entire investment strategy itself for the property going forward. 

While we typically underwrite more conservative growth rates than our AI forecasted growth rates to remain conservative, our forecasts are instrumental in our decision-making process. We do not pursue deals in markets that we do not believe in.

Backtesting To Ensure Accuracy

We aim to construct the best models possible with millions of data points that we have acquired. For all of our models, we go through a rigorous backtesting process to maximize accuracy and predictive capabilities. Backtesting is the process of testing the models you create on real, historical data and evaluating their performance. Doing it allows you to adjust your model so that it is tailored to predict your desired values in a dataset. This is being conducted during the creation and optimization of our models and continuously informs our data science team about the key characteristics of our data, such as seasonality of rents in different regions, and how correlated metrics such as job growth historically have been with rents. Every single iteration of our models is backtested with actual data from our target markets to ensure that we have the most accurate representation of how markets have performed historically.

How this Applies to Property Acquisitions

Our data science team's submarket research informs us where we should focus our acquisition efforts geographically. Our acquisition team then identifies properties in those submarkets that meet our general investment criteria. We then reach out directly to the owners of those properties or work with a trusted broker in the market to reach out to them on our behalf. We push very hard to go deep in those markets, meeting other owners and brokers. Most of the properties we acquire are not on the market, and we are usually the only group looking at obtaining the property. A less competitive acquisition process in a top-performing market leads to the best investment results. 

Once An Acquisition Opportunity Comes In

Suppose a promising off-market deal is sourced from our acquisitions team in Phoenix, Arizona. While our underwriting team begins to screen the agreement, our data science team will provide additional insight into the region the property is located in—starting with the overall market research. The team will begin by looking at previous forecasts that we have generated for Phoenix, it being one of our target markets that we continuously keep tabs on. We believe it is essential that we use the most recent data to have the most accurate outlook on the market, and should our data be more than a month old. We will acquire the latest data points and rerun our forecasts to see if anything has changed. From here, if we still like the outlook the model is providing us, we move onto the submarket research. 

We would then do a variety of submarket analyses in the Phoenix Metro, going by neighborhood, by zip code, or personalized borders to then forecast the same metrics so that we can compare how the individual area of the metro market that the city is in will correspond to the city average. This gives us a better understanding of the upside and downside of the property in terms of external influences on rent and population changes that we can expect going forward and helps us develop individual strategies for properties. 

Property Level Strategies 

In certain markets, our models are predicting rapid growth for the next 3-4 years and leveling out in the 5th year. A discounted property in a market with that growth trajectory would make a great candidate to own for a 3 to 5 year hold, with us selling the property at the end of the hold period. We continuously run our models and confirm this is still the outlook before selling, and they constantly guide our investment strategies on a property-by-property basis. Our models help us do more than predict the neighborhoods that will do the best. They allow us to customize our investment strategy around facts and data to get the best time-weighted financial result for our investment in a specific property.

Rise Invest for You 

Rise Invest is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.

We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago. To begin receiving high-quality investment opportunities from us, sign up here today.