Most people have heard the often repeated phrase “location, location, location” and have a decent understanding of why it’s important. But what is it that makes some locations more desirable than others? Even people with little interest in real estate investment will know the areas in their area that are more desirable, but most might not understand the forces at work beneath the surface that cause some areas to have more viable real estate markets than others. What we need to understand in order to shed further light on this topic are “demand generators.” As the name implies, these are those forces at work within an area that are causing demand to be generated, in this instance for real estate. This demand comes in the form of demand for housing and commercial real estate.
Most people have heard the often repeated phrase “location, location, location” and have a decent understanding of why it’s important. But what is it that makes some locations more desirable than others? Even people with little interest in real estate investment will know the areas in their area that are more desirable, but most might not understand the forces at work beneath the surface that cause some areas to have more viable real estate markets than others. What we need to understand in order to shed further light on this topic are “demand generators.” As the name implies, these are those forces at work within an area that are causing demand to be generated, in this instance for real estate. This demand comes in the form of demand for housing and commercial real estate.
This relationship between demand generators and real estate has actually been at play since the beginning of human history. Take, for example, the earliest civilizations that were often based along rivers with fertile soil. These conditions allowed for more fertile harvests, a necessity at a time when agricultural techniques were not nearly as effective as today. These natural conditions then led to settlement along the banks of these rivers and civilization built up around it. Items were brought in from far flung places and trade networks were created that had people congregating into denser population centers than ever before.
This relationship between demand generators and real estate has actually been at play since the beginning of human history. Take, for example, the earliest civilizations that were often based along rivers with fertile soil. These conditions allowed for more fertile harvests, a necessity at a time when agricultural techniques were not nearly as effective as today. These natural conditions then led to settlement along the banks of these rivers and civilization built up around it. Items were brought in from far flung places and trade networks were created that had people congregating into denser population centers than ever before.
This trend is still at work today, with the demand generators in our modern economy much the same, though seemingly more complex. Modern cities are often still based on areas that are advantageous for trade, often by water but also by road, with many of the world’s largest cities centered on coastlines. To take the city of Boston, Massachusetts, for example, the original geographic conditions present allowed for easy trade across the Atlantic Ocean. Over the centuries many universities and colleges were opened in the Boston area, the most famous among them perhaps being Harvard University and the Massachusetts Institute of Technology in nearby Cambridge. Today, the inertia from these historical advantages has allowed the area to leverage its scholarly talents into an economy housing world-renowned life sciences and technology companies, as well as one of the highest percentages of start-up companies in the country.
This trend is still at work today, with the demand generators in our modern economy much the same, though seemingly more complex. Modern cities are often still based on areas that are advantageous for trade, often by water but also by road, with many of the world’s largest cities centered on coastlines. To take the city of Boston, Massachusetts, for example, the original geographic conditions present allowed for easy trade across the Atlantic Ocean. Over the centuries many universities and colleges were opened in the Boston area, the most famous among them perhaps being Harvard University and the Massachusetts Institute of Technology in nearby Cambridge. Today, the inertia from these historical advantages has allowed the area to leverage its scholarly talents into an economy housing world-renowned life sciences and technology companies, as well as one of the highest percentages of start-up companies in the country.
This strong backbone constitutes the demand generators for the area. You could also say that the old adage of “the rich get richer” is often true in the case of demand generators and the ascension of different markets as they become more desirable. Having a strong university system made it easier to layer the life sciences sector of the economy on top of it. As renowned home-grown employers build a reputation nationally and internationally, major employers begin to move into or open up branches in the area as well. The larger employer base leads to a population increase, allowing developers to construct newer and hopefully (local regulations permitting) denser housing to meet the demand, as well as new office and retail space. Long time investors will renovate their assets and either sell to newer investors looking to get in or benefit from rising rents.
This strong backbone constitutes the demand generators for the area. You could also say that the old adage of “the rich get richer” is often true in the case of demand generators and the ascension of different markets as they become more desirable. Having a strong university system made it easier to layer the life sciences sector of the economy on top of it. As renowned home-grown employers build a reputation nationally and internationally, major employers begin to move into or open up branches in the area as well. The larger employer base leads to a population increase, allowing developers to construct newer and hopefully (local regulations permitting) denser housing to meet the demand, as well as new office and retail space. Long time investors will renovate their assets and either sell to newer investors looking to get in or benefit from rising rents.
With a larger population and an increased tax base, competently-run municipalities will be able to improve their cities through infrastructure projects and the promotion of important cultural landmarks for tourism purposes. The need for lodging for travelling businesspeople or tourists then leads to the construction of new hotels. As you can see, demand generators are basically all those things that make markets desirable, and they interconnect with one another in such a way that you have the snowball rolling down the hill effect and certain areas can really take off. The reverse of this is also true: when a place doesn’t have those first-level demand generators in place, it’s impossible to stack any additional layers on top. It’s a very hard hole to climb out from, which can lead to neglect in areas that lost their demand generators as the nature of the economy shifted over the decades.
With a larger population and an increased tax base, competently-run municipalities will be able to improve their cities through infrastructure projects and the promotion of important cultural landmarks for tourism purposes. The need for lodging for travelling businesspeople or tourists then leads to the construction of new hotels. As you can see, demand generators are basically all those things that make markets desirable, and they interconnect with one another in such a way that you have the snowball rolling down the hill effect and certain areas can really take off. The reverse of this is also true: when a place doesn’t have those first-level demand generators in place, it’s impossible to stack any additional layers on top. It’s a very hard hole to climb out from, which can lead to neglect in areas that lost their demand generators as the nature of the economy shifted over the decades.
As an investor you should keep a close eye on demand generators when evaluating a potential market. One of the most obvious symptoms would be population growth, which is an easy metric that can be researched via a search engine. Another easy one to look at is year-over-year rental rate per square foot and cost per square foot of different asset classes in the market. Get familiar with the local employers in the area and research news about potential employers that may look to invest in the area as well. Stay in tune with new development, of all forms; commercial, residential, or mixed-use. You can even get very in-depth with population growth projections, resiliency of the area’s economy, and other such necessary information from public policy organizations like the Brookings Institution. Also remember to keep an eye on the politics in your area. Political decisions can either stimulate demand generation, or halt them in their tracks.
As an investor you should keep a close eye on demand generators when evaluating a potential market. One of the most obvious symptoms would be population growth, which is an easy metric that can be researched via a search engine. Another easy one to look at is year-over-year rental rate per square foot and cost per square foot of different asset classes in the market. Get familiar with the local employers in the area and research news about potential employers that may look to invest in the area as well. Stay in tune with new development, of all forms; commercial, residential, or mixed-use. You can even get very in-depth with population growth projections, resiliency of the area’s economy, and other such necessary information from public policy organizations like the Brookings Institution. Also remember to keep an eye on the politics in your area. Political decisions can either stimulate demand generation, or halt them in their tracks.
Keep in mind that areas with strong demand generators will always have thriving satellite communities and it is inadvisable to just look at a single city without considering the overall local economy that will include many surrounding towns and cities. The United States Office of Management and Budget breaks the country down into 392 metropolitan statistical areas (MSAs), which include major cities, as well as those “satellite” communities orbiting the demand generation in the more dense areas. Many real estate investors prefer to use MSAs as they give you a more comprehensive understanding of a local market than normal municipality borders would.
Keep in mind that areas with strong demand generators will always have thriving satellite communities and it is inadvisable to just look at a single city without considering the overall local economy that will include many surrounding towns and cities. The United States Office of Management and Budget breaks the country down into 392 metropolitan statistical areas (MSAs), which include major cities, as well as those “satellite” communities orbiting the demand generation in the more dense areas. Many real estate investors prefer to use MSAs as they give you a more comprehensive understanding of a local market than normal municipality borders would.
If you keep a close watch on the sort of information we’ve outlined above, as well as speculate on your own the dynamics of the economic drivers in the markets you are choosing to invest in, knowing what’s good and bad for your market becomes much more intuitive. You’ll know that it’s good when an amendment to the zoning code passes that allows for denser commercial buildings in a sector of the town many employers were clamoring to set shop up in, for example. You can also see the interconnectivity of industry, people, and history and use this knowledge to predict future trends. This kind of top-down understanding can pay great dividends given time.
If you keep a close watch on the sort of information we’ve outlined above, as well as speculate on your own the dynamics of the economic drivers in the markets you are choosing to invest in, knowing what’s good and bad for your market becomes much more intuitive. You’ll know that it’s good when an amendment to the zoning code passes that allows for denser commercial buildings in a sector of the town many employers were clamoring to set shop up in, for example. You can also see the interconnectivity of industry, people, and history and use this knowledge to predict future trends. This kind of top-down understanding can pay great dividends given time.
