Looking for Love (and Returns) in All the Wrong Places: Why Property Investors Should Focus More on Job Growth than Consensus Outlooks

Job growth is moderating, which will slow property leasing and reduce investment returns. For investors still in the hunt for new acquisitions, market selection becomes that much more important.

In my new analysis, I review the consensus market recommendations from several ULI’s annual Emerging Trends reports over the last decade, as well as both recent and historical job growth trends for the nation’s larger metropolitan areas. Among my key findings:

• ULI’s Emerging Trends reports can provide valuable guidance for investors. ULI’s top-ranked markets yield consistently higher than average returns over both the short and longer term.
• However, the herd mentality implicit in these consensus outlooks tends to draw from a relatively short list of leading markets, often relying on outdated market reputations, while neglecting markets with even greater return potential, especially when market conditions are changing.
• Most of the investment outperformance among the top ULI metros is attributable to appreciation returns (based on investor expectations) rather than income returns (based on property performance). This suggests a certain self-fulfilling prophecy generated by the “mob mentality” of investors focusing on the consensus metros, thereby driving up values.
• Investors can realize even greater outperformance by focusing on markets with the strongest economic drivers – especially job growth – that bolster property fundamentals and raise income returns. Relative to the ULI markets, properties in the fastest-growing metros derive a much greater share of their returns from income.
• Accordingly, investors should always consider the economic outlook, particularly projected job growth, in addition to consensus expectations. Turning away from the herd and focusing more on economic fundamentals is especially crucial for investors more concerned with income returns than capital appreciation.

You may read the full report here.