Choosing an Apartment Market for a Syndication: A Checklist

Choosing the market is the first real decision in an apartment syndication, and it sets the ceiling for everything after it. A well-run building in a shrinking local economy can still struggle to fill units, and a mediocre building in a growing submarket can still do well. For sponsors, the market is where the raise starts. For investors, it is the part of the deal you can check most easily, because most of the evidence is public.

This guide explains how to size up an apartment market, which free government data to use, and what to ask a sponsor when a market story sounds too good. If you are a sponsor, we built DoorRaise to keep the raise organized while you do this work. The market analysis itself is yours to do, and your advisers should review it.

What is the difference between a metro, a submarket and a property?

A metro area is the broad labor market, such as a city and the suburbs that commute to it. A submarket is a smaller area inside it, often defined by neighborhood, school zone, highway access or a single large employer's campus. The property is the building itself, with its age, condition and exact location.

Each layer answers a different question. The metro tells you whether people will want to live in the area for years. The submarket tells you whether renters from that metro will choose this part of it over the others. The property tells you whether the building can compete for those renters at the rent you plan to charge. A deal can fail at any layer, so a good answer at one level does not settle the others.

What makes an apartment market strong?

Apartment demand comes mostly from people who need a place to live, and those people usually come for work. Four things matter most.

1. A broad job base. Look at how many people work in the metro and how many different industries employ them. A metro that depends on one employer, one industry or one government contract has more ways to lose tenants at once. Diversified employment is not a guarantee, but it spreads the risk.

2. Population and household growth. Population counts are useful, but households drive apartment demand. The Census Bureau publishes population estimates by county and metro area, and its American Community Survey reports household counts and renter shares over time. Ask whether growth is coming from people moving in, from births, or from a single event that may not repeat.

3. Affordability. If rents already take a large share of local incomes, renters have less room to absorb increases. Compare the typical rent in the submarket with the typical renter household income in the same area. You will not get a precise threshold from this check, but you will see whether the rent story depends on a population that can keep paying it.

4. A regulatory and tax climate you can read. Some states limit local rent control and some allow it. Property taxes can reset sharply after a sale or reassessment in some places, and insurance costs vary by region and risk. These do not decide a market by themselves, but they change the expenses in your underwriting, so they belong in the market review.

Which public data sources should you check?

You do not need paid software to check the basics. These sources are free, updated regularly and used by lenders and researchers.

Bureau of Labor Statistics, Local Area Unemployment Statistics. Monthly employment and unemployment by metro and county. Use it to see whether the job base is growing, flat or shrinking. See bls.gov/lau.
BLS Quarterly Census of Employment and Wages. Jobs and pay by industry and county. Use it to see which sectors employ people in the area and whether one sector dominates. See bls.gov/cew.
Census Bureau population estimates and the American Community Survey. Population, household and renter data for the metro and smaller areas. See census.gov population estimates and the American Community Survey.
Census Bureau Building Permits Survey. Permits for new housing by county and metro area. Permits are an early signal of supply, because units take time to finish. See census.gov/construction/bps.
Local sources. The city or county planning department lists approved and pending projects. Read the zoning map for the submarket. A project that is approved but not started is a risk you should price in.

Commercial data services publish rent, occupancy and construction pipeline figures by submarket. Sponsors often use them, and they can be useful, but they are estimates built on methods you should ask about. Whatever source a sponsor uses, ask for the name, the date and the geographic area.

How do you check new supply?

New supply is where many market stories fall apart. Strong job growth can attract builders, and a few years later the same submarket has hundreds of new units competing for the same tenants. Your deal then leases up slower, or it has to offer concessions to fill units.

Start with the permits and the local pipeline. Count the units that are permitted, under construction and planned in the submarket, not just in the metro. Then ask two questions. Will the new units be the same class and price as your property? And will they finish before, or at the same time as, your lease-up period? A project across the highway at a lower price affects you differently from a luxury tower two miles away.

How much should the submarket matter?

Most of the market analysis should happen at the submarket level. Renters choose a neighborhood, a commute and a school zone before they choose a building. A metro-wide statistic that looks strong can hide a submarket where rents have been flat for years.

Ask the sponsor to show the submarket and the comparable properties on a map. A comparable property, or comp, is a similar building nearby with a known rent, occupancy and age. Good comps are close in location, similar in age and amenities, and recent. If the sponsor's comps are far away, old or much better, the rent assumption needs more support.

What should a sponsor's market thesis include?

A useful market thesis is short and testable. It should say why people will rent in this submarket, where the rent growth assumption comes from, what supply is coming, and what would make the sponsor change the plan. It should also name the sources and dates for each figure.

Be wary of a thesis that relies on phrases such as "best market in the country," "migration boom" or "undersupplied" with no numbers behind them. These may be true, but they are not a reason to invest. Ask what the market looked like three to five years ago, and what the sponsor expects to happen if the local economy slows.

What are the red flags in a market story?

The plan assumes rent growth well above the submarket's recent history, with no explanation of why this building will beat its neighbors.
The main employer is one company, one hospital system or one government agency, and the thesis does not discuss that risk.
The submarket has a large pipeline of new units, but the model shows no effect on lease-up or concessions.
The comps are old, far away or in a different class than the property.
The sources are a single broker's report with no date, or no source at all.
The thesis cannot say what would make it wrong.

Our take

We think a market review should be written down before the deal is marketed, and that a sponsor who has done it will be glad to show the work. Investors should expect the sponsor to name the sources, explain the supply and test the rent assumption against the submarket history. If the answer is a slide with no sources, treat that as information about the deal.

We also think a sponsor should be willing to say when a market is not a fit. Not every good building is in a good market for this strategy, and walking away from a weak submarket is part of the job.

Trade-offs and who this is not for

Public data is slow. Monthly job figures and annual population estimates can lag the market by months or more, and they describe the metro far better than a single block. Commercial data is faster and more detailed but costs money and uses its own methods. No single source settles the question, so compare several.

This guide is for people who want to understand the market review, not for those who want a precise forecast. No checklist can predict rents. It can show whether a claim has support, and that is what matters when you are deciding how much to rely on a sponsor's plan.

How DoorRaise fits in

If you are raising money for an apartment deal, DoorRaise helps you organize the investor side of the raise: the offering, the escrow and the investor updates. The market analysis is part of your deal, and it is your job and your advisers' job to do it well. For the investor checks that follow from a market review, see our due diligence checklist and how to vet a real estate syndication.

FAQ

What is the most important factor in an apartment market?

There is no single answer, but the job base usually matters most. Without employment, household growth follows slowly, and rent growth depends on people who can afford the rent. Check jobs first, then supply, then the submarket.

Where can I find free apartment market data?

The Bureau of Labor Statistics publishes local employment data, the Census Bureau publishes population, household and building permit data, and local planning departments list approved projects. These sources are free and can be checked directly.

Why does new supply matter if the job market is strong?

Strong jobs bring builders, and new units compete for the same renters. If the pipeline is large in the same submarket, a property can lease up more slowly or need concessions, even when the metro looks healthy.

What is a comparable property?

A comparable property, or comp, is a nearby building with similar age, class and amenities and a recent known rent and occupancy. Comps are the best check on a sponsor's rent assumption, and they should be close and recent.

Local knowledge is useful, but it is not evidence by itself. Ask for the data, the sources and the comps. A sponsor who knows the market should be able to show the numbers behind the view.

Does a good market make a deal safe?

No. A strong market lowers some risks, but a deal can still fail because of debt, expenses, management or an unexpected drop in rents. Read the market review together with the loan terms and the operating plan. The risks of apartment syndication cover the other side.

Sources

This article is general information, not legal, tax or investment advice. The market factors described are examples of what to check, not a forecast of any market. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.