Let the Market Be Your Guide: Investing in MDU Development
Real estate investors can find guidance and inspiration in odd places. Take old, and now obscure, works of history as an example. The Urban Frontier: The Rise of Western Cities 1790-1830, by Richard Wade, is a classic work on how cities developed in the early American west. This was when the “West” was defined as the other side of the Appalachians, when Lexington, Pittsburgh, and Cincinnati were all considered wild frontier towns, and St. Louis was at the far end of imagination. In the book, Wade briefly touched on a key piece of information: you could always tell that a city was about to experience real growth when the addresses of businesses started diverging from home addresses.
This is actually an intuitive assessment. In early settlements, you had the trading post, the blacksmith, the town doctor, the portmaster, and others. Just about all of these important professionals lived where they worked. Eventually, new addresses came in the form of forgeries, glass factories, and rope lines, and the number of jobs that couldn’t be done in the confines of a home began to increase. This was a sure sign that a city had reached a key point at which people were coming not only to build, but to find work at the businesses that were already there. It was hidden factors like this one that showed a city’s development progress. It wasn’t just the job market, but the kind of job market, that impacted growth.
The near north side of Chicago is a great example of an MDU hub. Image from Wikimedia commons user HowCheng
The same is true now, even if the theory has been put through the looking glass. If you are a real estate investor who is wondering how a city is going to develop and what you should do with your investment capital, there are a few factors that are important for you to consider. We all know the job market is crucial, but it is also vital to look at what kind of jobs a city is attracting if you’re going to decide where to put your money. 1,000 manufacturing jobs and 1,000 tech jobs do not mean the same thing in terms of urban development. When you are looking to invest in multifamily dwelling units (MDUs), you should look at the kind of job market a city is growing.This is essentially the most important factor to let you know if MDU development is a worthy investment.
The Reason MDUs Are Important
MDUs occupy an important place in today’s urban environment. It is inarguable that apartments, condos, and townhouses have always had a central role, but with concerns about urban sprawl on the rise and the resulting desire for more ecologically responsible buildings, they are no longer considered mere starter homes for young people or families on a budget.
MDUs are also a vital part of a newly popular theory of city planning, which focuses on hub-oriented development featuring mixed-used MDUs where people can live, shop, work, and play, with offices, residential units, retail components, and entertainment. After all, so many people move into cities so that they don’t have to stray too far from home to find what they need for their daily lives. Having everything within walking distance serves as a great incentive to put down roots and stay. This makes MDUs a key component of urban development.
How Jobs and Transportation Impact MDU Development
This is, in some ways, an inversion of Wade’s theories, talked about above. In his theory, a city was considered to be “developing” when people were forced to leave their homes and head to the factories, stores, and other outposts around town to do their jobs. Today, cities are attempting to bring the jobs closer to home again, in the hopes that more people can work in mixed-use buildings or in the same downtown area near a development burst. Many of these jobs tend to be high-tech, located in corporate headquarters or bustling new startups. 200 of the Fortune 500 companies have headquarters in large cities as opposed to suburban office complexes, and 250 more have major satellites in downtown areas. Startups are disproportionately urban, with the top 20 US cities for startups all having populations of over 250,000. The workers who are attracted to these fields tend, by and large, to be concerned with living responsibly, which is why many of them forgo living in the suburbs. These workers also demand buildings that are both smart and ecologically friendly, and they often have the income to afford those demands.
In the Chicagoland area, salaries for coders and other software developers average around $100,000, even when including entry-level positions. With signing bonuses and stock options, this can easily get to $150,000. Denver, which had no tech scene to talk about as recently as a few years ago, now has one of the fastest growing tech scenes in the country and salaries are pushing into the six-digit range. This is the case all over the country, in cities as diverse as Atlanta, Austin, and Charlotte.
The theory behind this is that these kinds of workers want to come to an area where they can work, live, and play in relative proximity, while still living comfortably in MDUs designed or retrofitted to fit their needs and desires. A hub is formed for them and, simply by proximity, they also form a hub of their own, thus attracting others like them and bringing in even more businesses to take advantage of this amazing, well-trained, and highly-motivated labor pool. They mass around an area and give it a center of gravity.
Lessons for the Real Estate Investor
What can the real estate investor take from this? When working with an investment partner or group, you’ll want to make sure that your investments are targeting the right areas. Any kind of job market is great for a city, whether it is tech, manufacturing, or anything else. It’s good for a city and good for the people. But a high-tech culture, with all its auxiliary industries, brings in an educated class that is looking to buy or rent in multi-use MDUs.
When looking at property, you’ll want to see if it is:
- In proximity to public transportation.
- Potentially able to be converted, with proper capitalization, into mixed-use.
- Part of a hub, or near other hubs, so that it can be part of a growing super-hub.
- Ready to be upgraded and retrofitted to meet the technological and environmental demands of potential residents.
At Origin Capital Partners, we’re students of history and urban development. We know that as much as things change, some things never do. The types of jobs in an area impact the development of housing and dictate what is a smart investment. We do the research to make sure that your investments – which are the same as our investments – are going to the right places. Though no one thinks of Chicago as a far-flung settlement anymore, that same pioneer spirit exists in all the cities in which we invest. Let’s help them grow together.
If you are a real estate investor looking to broaden your portfolio and join other investors in major developments, Origin Capital Partners would be excited to work with you. At Origin Capital Partners, we have a powerful connection with the cities we invest in, and we understand what makes them tick. We know which areas are booming and which commercial and residential investments will make the most sense moving forward. Our Funds deliver consistent returns, because we know how to make sense of the real estate market. Contact us today to talk about how your investments can grow with the city.
