‘The Accidental Economist’ with Jack Kern: Market Selection and Brainy Pursuits

In an age of increasing sophistication and complexity in placing capital in multifamily apartments it seems we have a pretty paranoid view of markets. The only difference these days between a real estate research forecaster and a weatherman is that people will talk to a weatherman at a party. In real estate research, hardly a day goes by without the release of yet another Oracle from Everywhere offering a view towards what’s happening in a market. It seems not only “Dallas Does Well” sells but also “Cincinnati is Sinking” and “Lucky in Louisville.” To be honest, it is shocking to think that the sophisticated money managers placing capital in sponsors take any of this seriously. If someone were to suggest that buying this year’s model of last year’s most popular car was a sure winner, they’d be laughed off of the showroom floor. OK, so you probably do know someone like that, but at least they’re not running money for funds. Hopefully anyway, and with the current state of the industry showing slowing in some places, yesterday’s headline is a sure path to tomorrow’s foreclosure. Now I recognize that sending out a view towards recent market performance can have some value, but it is most helpful if you already have an investment in a growing market. Those that are chasing yield usually get to the closing table just as that desired yield disappears and is replaced by undisclosed expenses and a very reticent club fund committee of money managers.

Recently there was a list of America’s 25 brainiest metros, published by Lumos Labs, called the Lumosity Score. It kind of makes you wonder when you look at the list. Is it representative of the brightest minds in America or the more likely dumbest apartment shoppers because being smart and having good judgment are not correlated (look at the Congress this year)?

The top five cities in the index included Charlottesville, Va; Lafayette, Ind.; Achorage Ark.; Madison, Wis.; and San Francisco, Oakland and San Jose, Calif. It is a pretty odd mix of places and there are lots of reasons why these are mostly not investment grade markets. Then there are the ones towards the end of the list, including La Crosse-Eau Clair, Wis.; Harrisburg-Lancaster-Lebanon-York, Pa.; and Springfield-Holyoke, Mass.

If levels of education, financial success and better long term value of rental customers are correlated in any way, then this list ought to reflect something that means high value brain power and concentrated education make the best markets. As a point of fact, it does not. Interestingly, two of the perennial favorite markets, numbers 11 and 12 out of 25 in the list are Boston, followed by Austin. If any of the data has demonstrated anything beneficial to planning and strategic managers, it’s that the real estate economy in multifamily is only a small part of the greater metropolitan area, and following these lists and emailed self proclaimed messages of brilliance have little credibility and value. So the next time an inbox header says, this market is the best in the West, just delete it and don’t encourage them. After a while they’ll take you off the list.

Jack Kern is the research editor for Multi-Housing News and Commercial Property Executive and spends a great deal of time pondering life’s little questions. He feels a lot of things annoy him, which is why he loves working from home. When he isn’t writing for CPE-MHN you’ll find Jack on the golf course, commenting on the conspiracy about where the flags are placed on the greens. He can be reached at [email protected].