Developing a Resilient, Balanced Market Strategy
3 min read
How to use an alternative lens to add value to a real estate investment portfolio.
At Grubb Properties, we are often asked how we analyze and select the markets and locations of our real estate investments and fund portfolios. Market analysis and location selection are central to our investment process and are among the fundamental inputs that drive the composition of our portfolios.
At its core, our process involves a deep-valued based analysis and a forward-looking perspective that may have a contrarian feel to it. This edge has enabled us to secure great locations and prices that – in hindsight – are fantastic. We have built an acquisition strategy that is both scalable and repeatable, which is central to the advancement of our essential housing mission.
Underpinning our strategy is a focus on highly resilient markets and high-growth markets. We place a heavy premium on resiliency and have identified five key pillars that help us narrow the field when locating the most resilient markets:
- Climate-related risk;
- Presence of state and/or federal government;
- Presence of public or well-capitalized private universities;
- Presence of a highly developed hospital and medical infrastructure; and
- Presence of a developed public transportation system.
Within the markets that meet the requisite combinations of these five pillars, we take a closer look to identify locations that provide market elements that map to our essential housing strategy. Leveraging the granular quantitative analytical work of RCLCO, we have collaborated to develop a proprietary index. This index drills down to the ZIP Codes within the desired metro markets and produces a score based on 38 weighted variables. This produces a heatmap which, in conjunction with our other research, is used to identify the best neighborhood locations for our Link Apartments℠ product.
Our nearly 60 years of experience have taught us some tough lessons. We have learned the importance of assessing a potential acquisition within the portfolio so that we can ascertain its contribution and the risk that it carries. This informs the prospective purchase decisions as we focus on the desired market exposure in the portfolio. In fact, we may choose not to expand in locations that meet our criteria, because we feel we are already at the correct position size in that location for our portfolio and risk appetite.
Gateway Markets Provide Necessary Balance
In the depths of the COVID-19 pandemic, Grubb Properties moved aggressively into the “gateway” markets that are some of the country’s largest and highest-barrier-to-entry markets. The market weakness in each of these gateway markets created a temporary window of opportunity that allowed us to acquire locations at a much lower cost basis than otherwise would have been possible. Our investment thesis was that the de-rating of these gateway markets would be temporary, and that the risk-reward tradeoff was highly compelling and asymmetric.
Already, data is showing that these markets’ residential real estate fundamentals have roared back, with occupancy and rent rates exceeding pre-pandemic levels. We believe this rebound will be sustainable as the country returns to normalcy and the resiliency pillars hold.
While we still have investments and additional developments planned in the Southeast, our company backyard, adding projects in the gateway markets let us leverage on the unique investment opportunity and will help ensure our portfolios are more well-diversified and less exposed to risk from any one specific market.
To learn more about how the latest performance in gateway markets and other factors shape our market strategy, download our full paper here.