What is the Econometric Model?
The econometric model is basically a fancy way of saying we collect a bunch of data and use this to measure if a project is worth pursuing. It is selfish in its very nature in that we do not want to spend time, money, or resources on a site or project that does not meet our basic requirements. For this reason, our due diligence process includes running an econometric model for a site with several go- and no-go variations built in.
How does the Econometric Model work?
Econometric models factor in a series of parameters to evaluate whether a particular multi-family property is feasible. The model serves as a filtration tool that enables MarketSpace Capital (MSC) to identify potential investments with the highest likelihood of success. It also incorporates macroeconomic data within the nearby region (both overall market and the submarket) as well as property-specific data. Most of the model’s data is sourced from CoStar, the leader in commercial real estate information, analytics, technology, and news.
While subjective evaluations of sites are a key aspect of making investments, having an intensive, data-driven approach based upon objectivity allows for a consistent and efficient process to make calculated investments. As MSC expands to cover more property investments within its portfolio, the model will allow for a quick, efficient evaluation of prospective investments.
The model serves as a filtration tool that enables MarketSpace Capital (MSC) to identify potential investments with the highest likelihood of success.
What are the main considerations within the model?
Through CoStar reporting, we can derive many of the different parameters related to the property. The model is mainly broken down into three sections: demographic considerations and a basic property summary, market and submarket data, and local crime and education statistics. The division of the model into such sections enables simpler use with the CoStar platform as the reports align with these sections. However, the third section, which includes education and crime data, is not found within CoStar and as a result, is derived from additional external resources.
When considering a site, it is vital to understand the property’s surrounding region as well as certain underlying features of the site. While an asset could be perfect in terms of internal characteristics and potential, having a poor neighboring area could limit its profitability. Similarly, deciding to invest in a booming market but failing to construct and maintain the property correctly can make it difficult to achieve maximum potential. The econometric model allows for the perfect tool to incorporate both criterias when deciding which assets to invest in. Diving deeper into the three sections can help highlight some of the specific parameters used to rate a property.
Demographic Data and Property Summary
Demographics are a major consideration for the potential of a multi-family residence. It is important to identify important statistics such as the population of the surrounding area as well as its accompanying population growth. Investing in a declining region in terms of population is a very risky venture as the number of potential tenants will continuously decrease, reducing demand in relation to supply. With interest (demand) decreasing, rents will inevitably decrease, lowering the future cash flows and thus later valuation of a property. Additionally, if the population of the region is not large enough, there simply might not be a purpose for the property. With lower population levels, the level of saturation within an area is much lower meaning that another property would serve no value to the community. These characteristics, along with other demographic statistics, determine the attractiveness of the area. Gauging these attributes is critical to understand the viability of the region in bolstering a profitable investment.
Market and Submarket Data
Looking at the surrounding market and submarket of a particular property provides valuable insights on potential value. The submarket refers to a smaller subset of the region while the market refers to the entire region. For example, Houston would represent a market and the Medical Center would be the submarket. Parameters such as submarket vacancy, submarket rent growths, and market job growth are utilized in the model to quantify an asset’s potential. Vacancy rates are key to projecting potential rents from a stabilized property. If there are high levels of vacancy within a submarket, it highlights the potential that rents will be capped due to defaults or unoccupied units.
Similarly, recent rent growths within a submarket highlight the increasing demand and underlying cash flows of a multifamily residence. Investing in a submarket with major rent growth could result in substantial boosts to annual cash flows, thus increasing the value of a property. Finally, job growth can be key to understanding the potential and demand within a market. Throughout history, it has been clear that jobs drive settlement and migration. Additional jobs will always be accompanied by additional settlement and most likely accompanying increases in prices which would include rents. As a result, it is wise to invest in a market where job growth is on an upward trend as this usually points to increasing cash flows as well as value within a property.
Crime and Education Data
Finally, the levels of crime and education are pivotal to understanding the viability of the neighboring region of the property. While these characteristics are seen as deal breakers, they are important to understand the type of project that needs to be implemented. For example, investing in a crime-infested neighborhood is not a guaranteed detriment but rather will require intensive property management practices. As a result, understanding the crime patterns around the property can make it simpler to assess the type of investment and potential profitability. Furthermore, education trends are a key indicator of tenant demand for a particular property. If the site is surrounded by prestigious school districts, parents are more likely to settle in the region to have their children receive a higher level of education. Even if the community is defined by below-average educational scores, consistent improvements over the years can highlight the potential for a strong education system and thus in the future high levels of demand within surrounding multifamily residences.
Potential of the Model
The econometric model employs a detailed, analytical approach in evaluating properties. The use of three different sections (demographics and basic property summary, market and submarkets, crime, and education) allows for both the underlying characteristics of the site and attributes of the surrounding region to be evaluated when appraising an asset. As MSC expands its portfolio, this model will allow for an efficient manner to evaluate assets without investing high levels of time and subjective analysis.
Potential of the Model
Economists use past relationships between variables such as consumer spending, household incomes, tax rates and interest rates, and then attempt to predict how changes in one variable will affect the future course.
Econometric models provide estimates of the actual values of forecasted variables. These models can indicate both direction and magnitude change. The most important benefit of econometric modeling is their ability to explain economic phenomena.
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MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
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Disclaimer: *For sold properties, actual sales price is reported. For active investments, the Estimated Current Value is based on the Managing Member’s estimate of current value. Recent acquisitions are generally valued at the acquisition price. Values may be internally prepared. This web-page/website is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of any offering of MarketSpace Capital.
