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Market is Key to a Great Investment

Posted: 29 Jun 2012

Whether you're looking to buy a condo or a major investment property, the characteristics of the market will be critical to making a great real estate investment. So, what type of characteristics should you look for? Smart real estate investor look for markets where there is a steady, increasing demand for real estate. Typically, increasing demand leads to increasing values as demand outstrips available supply.

Aspen real estate

But that's only half the equation. As demand picks up, developers start the process of building new real estate projects to satisfy the demand. In a great many cases new development eventually exceeds demand leading to an oversupply and inevitable correction or crash. In the past few years we've seen this scenario unfold in several major markets like Las Vegas, Miami, Phoenix and Riverside, California to name a few. Prior to the Great Recession, these markets all had the same thing in common; they were all hot real estate markets with explosive demand and plenty of land to build more supply to satisfy the demand. If you were an investor in these markets during the past decade, you probably say your fortunes rise quickly and later fall precipitously. So besides increasing demand, savvy investors also seek out another market characteristic to insure their investment becomes a great investment and is not the victim of a market bust.

This second market characteristic is a constraint on supply from new development. When you look across the country at real estate markets that weathered the great recession well, yet still benefited from the prior boom years, you find markets that could not be easily overbuilt such as New York City, Washington, DC and Aspen. The constraints on supply can either be physical from lack of land, or self-imposed through government regulation. Markets such as the Aspen-Snowmass area have benefited from a steady demand for real estate along with a constant restraint on supply from new development as a result of both government regulations and natural physical constraints from the surrounding mountains and federal land.

Over the past decade, the population of Pitkin County has grown roughly 15% while the national population has grown by 9.7%. On the surface, it may seem like Pitkin County is not growing very rapidly. However, Pitkin County is an extreme example of strong demand and extremely tight constraints on supply creating a situation where only modest population growth is possible. This is evident from the spill over impact on surrounding counties such as Garfield and Eagle where the growth rates over the past decade were 29% and 25% respectively. Despite modest population growth, an Aspen home has appreciated an average of roughly 14% annually since the mid-1970's while the national average was roughly 4.0%. Aspen's commercial rents have mirrored the residential market with average increases in rents of roughly 7% per year over the past 30 years. During this same period of time, other healthy commercial real estate markets have only seen 3-4% average annual commercial rent increases.

In the next thirty years, it's estimated that roughly 20% of the population (roughly 70 million people) of North America will migrate to key core cities, desirable small towns, resort areas and new growth cities, with resorts being the number one destination. As a real estate investor looking to buy either residential or commercial properties, you will find that the Aspen-Snowmass area and the Roaring Fork Valley likely have ideal market characteristics for a great long-term real estate investment.