Apartment Market Analysis is very important if you are evaluating a particular apartment unit for investment purposes. The apartment investor has two major challenges.
In order to make this assessment correctly you will need to have an independent valuation from a competent valuer. This is a necessary step before acquiring a property but it is by no and any means an indication that the apartment you are considering is a good investment.
A good apartment investment is the purchase of a unit that has significant appreciation potential or, in other words, it is expected with high degree of confidence that will increase significantly in value.
In order to assess the prospects of a particular apartment unit for value increases a thorough apartment market analysis is needed, which will provide answers to the following key questions:
1) What are the prospects for increases in apartment demand in the market within which the unit under consideration is competing?
In order to answer this question we need forecasts of population, employment, income but most importantly households and their age composition within the project’s market area. Such forecasts are usually available from competent econometric forecasting firms that use fairly sophisticated models to generate them. New households are the key to increases in demand for housing. Increases in the number of households of young age is the key to increases in demand for apartments.
2) What is going to be happening on the supply side of the apartment market? With how many units will your apartment be competing for tenants when the one-year or shorter lease of the existing tenant (if you have one) expires and what level of rents will you be able to achieve over the holding period of the unit?
Understanding and quantifying how many vacant apartment units will be competing with your unit for tenants over the investment horizon and how this number compares with the expected number of households that will be looking for apartments in the unit’s market area is of utmost importance. Why? Because the balance between demand and supply, that is, whether demand for apartments will exceed or fall short from the supply of vacant apartments, will determine whether apartment market rents will be increasing or decreasing respectively.
Investing for significant profits in apartments means acquiring apartments that will be producing an increasing rental income over the investment horizon. Holding constant, capitalization rates increasing rental income translates to increasing apartment values and a high appreciation return, which is the key to achieving double-digit returns in property investing. If capitalization rates decrease while market rents and your apartments income earning capacity increases, which historically has been the case in the office market, then the increase in your apartment’s value will be even greater. That is why a thorough apartment market analysis is one of the most component of the apartment investment evaluation process