Not every market is investable right now. Some markets are still overpriced. Some have demographic headwinds that have not played out yet. Some have regulatory environments that punish operators.

Here is what we look for before committing capital to a market.

Population Trajectory

Markets need to be growing or stable. Markets with sustained population decline are death by a thousand cuts. Each year, the renter pool shrinks. Each year, your competition gets more aggressive.

We look at five year and ten year population growth from census and state demographer data. Anything below 1 percent annual growth is a yellow flag. Anything negative is a red flag.

Population growth alone is not enough. But its absence is usually disqualifying.

Employment Diversification

Single employer markets are fragile. If 30 percent of your market jobs come from one company and that company has a bad year, your rents follow.

We look for markets with at least four to five major employer categories. Healthcare, education, finance, manufacturing, government, logistics. The more diversified, the more resilient the rental demand.

Energy markets are a particular trap. Boom years feel great. Bust years are brutal.

Income to Rent Ratios

Median household income divided by median rent should be at a healthy ratio. Generally, rent should be 25 to 33 percent of gross household income. Markets where rent is over 35 percent of income are stretched.

This matters for two reasons. Stretched income means rent growth is harder because tenants cannot absorb it. Stretched income also means higher delinquency risk when something goes wrong.

The Midwest generally has healthy income to rent ratios. Many coastal markets do not.

Supply Pipeline

Look at multifamily permits and units under construction in the market. If the supply pipeline is large relative to the existing inventory, rents are about to come under pressure.

CoStar and the local government planning departments publish this data. We pull it for every market we evaluate. If permits over the next two years exceed 5 percent of existing inventory, we are cautious.

Markets in the Sun Belt overbuilt from 2021 to 2023. The supply pipeline took years to absorb. Operators who bought into those markets at peak prices are still working through it.

Regulatory Environment

Rent control. Eviction moratoriums. Inclusionary zoning requirements. Tenant rights legislation. Each of these can fundamentally change the economics of operating in a market.

California, New York, Washington, Oregon, and some other jurisdictions have moved toward stricter tenant protections. These can be appropriate for tenants but they make operations harder and pricing less flexible.

The Midwest generally has a more landlord-friendly regulatory environment. That is not an ideological statement. It is an operational one. Predictable rules let you underwrite predictably.

Insurance and Tax Trajectory

Property insurance has tripled in Florida and parts of Texas in the last five years. Property tax growth in some Texas markets is 8 to 10 percent annually.

These line items are headwinds against NOI growth. A market where insurance and taxes are stable lets your rent growth flow to NOI. A market where they are not eats your operating performance.

Pull historical data on insurance and tax growth before underwriting any new market.

Cap Rate Spread to Cost of Capital

The final test. Can you buy assets in this market at a cap rate that exceeds your cost of capital. If agency debt is 6.25 percent and stabilized cap rates are 5 percent, you have negative leverage. The deal does not work without aggressive rent growth.

Markets with positive leverage on day one are investable. Markets that require rent growth to overcome negative leverage are speculative. Pick which game you are playing intentionally.

What Makes a Market Investable Right Now