Detailed inspection of this MSA reveals early signs of trends not yet apparent at the macro level.
SERIES NOTE
This series examines due diligence factors in markets representative of their region:
Local factors are broad and evaluate the market's type and size (i.e., primary, secondary, tertiary, rural, remote), economic drivers, size of the buyer pool, and typical typical buyer profiles.
Hyperlocal refers to a specific neighborhood, its submarket, investment dynamics, and other neighborhood-level intelligence.
Unique diligence factors are specifics to check to ensure the environmental health and safety of the property.
Real estate investors are familiar with "Location, location, location." That adage tells us
more than we might think. It represents three due diligence factors critical to the success of any investor: local, hyperlocal, and unique diligence factors.
The second installment in the series focuses on Tampa, Florida, which continues to appeal to buyers across a broad spectrum.
LOCAL
Tampa is typically categorized as a primary or secondary market. It continues to attract a variety of buyers, including executive, luxury, and retirement, as well as workforce housing, urban, and suburban. Long-term rental is not as prevalent as it is in other markets, but short-term rentals can perform quite well. Various waterfront submarkets exist, with the level of waterway access generally having a material impact on price and demand.
Here are some important trends that we're seeing, based on aggregated data from all properties analyzed (but not necessarily purchased) by lenders and investors on RicherValues, either by clients conducting their own analysis or by ordering our evaluation reports.
STEADY MARKET DEMAND. Although the market demand scores declined from January to September 2023, like most markets, the demand has held quite steady since then, through August 2024 (see Fig.1).This is great, especially compared to most markets, which have seen notable declines during this period. Although inventory levels jumped to 2.9 months in September 2023 from the lows they had seen (0.9-2.1 months), they have moderated since then, mostly hovering from 2.8 to 3.8 months. Historically, many industry professionals consider five to six months to be a healthy range, but is also the tipping point at which markets switch from sellers' markets of low inventory to buyers' markets of high inventory.
FINDING DEALS IN AREAS OF HIGHER PRICE VARIATION. As we saw in our first study of the Atlanta market, investor activity continues to move into areas of greater price variation. After enjoying some local pockets of simpler deals (i.e., properties located in neighborhoods where home prices show less variation and are easier to evaluate) from January to September 2023, investors and lenders are moving back into areas that exhibit more price variation. The implication is that lender/investor deals being analyzed are beginning to require greater levels of diligence within the valuation world to ensure they accurately quantify the deal.
Figure 2 shows the FSD (forecast standard deviation) score from January 2023 to August 2024. You can think of the FSD score as a "reverse confidence score." It measures the accuracy of analytical models that were used to determine a property's value. A lower score means the model has more effectively identified sales price drivers, yielding greater confidence in the valuation. A higher score indicates an area has greater variation in sales prices and it was harder for the models to determine what specifically is driving price; therefore, a human touch is likely needed to sort through the details and ensure valuation conclusions are accurate.
A SHIFT AWAY FROM $250,000-$400,000 AFTER REPAIR VALUE (ARV). A quicker shift than we're seeing in Atlanta, the percentage of deals analyzed by lenders and investors that fall within $250,000 to $400,000 based on ARV has dropped significantly in recent months, with deals from $450,000-$750,000 as well as under $250,000 showing greater market share (see Fig.3).
Although inflation may have pushed some properties into the higher value ranges, from growth in the under $250,000 range, we can infer that shifting appetites or perhaps shifting availability of deals are the primary drivers rather than inflationary issues.
By comparison, the buying power in Tampa is not as strong as a market like Atlanta, but it remains noticeably better than other Florida markets such as Miami Figure 4 provides a look at the average home specs per value band in the three markets mentioned.
HEAVIER CONSTRUCTION. Similar to Atlanta, the Tampa market saw a huge surge of light rehab deals from May to November 2023 in properties in moderate/maintained [C4/C3.5] condition, with heavy and new construction dropping to near or below 20% of total deals evaluated (see Fig.5).
On the other hand, throughout 2024, the percentage of deals in poor to very poor condition [C5/C5.5],generally noted as heavier construction deals, have increased to 40-50% of deals evaluated by lenders and investors. Part of this could bedriven by the higher prevalence of weather damaged homes for flood, wind, roof, and other damage, specifically in this and other coastal markets; this is less common in other markets. This also indicates that overall investor confidence in the long-term prospects of the market is strong.
GREATER INVESTMENT IN HIGHER DENSITY LOCATIONS. In most MSAs, there's a constant fluctuation between deals in the inner core (urban/suburban) areas versus outer areas (lower density suburban and outlying). Tampa has shown some interesting patterns during the past 20 months: a general and sustained trend of evaluating deals in more urban, higher density locations and a decline in deals in standard, suburban areas (see Fig.6).
This can be a common market response when inventory is low, although it could also be due to a greater ability to achieve a profitable increase in value for a given amount of renovation or construction. Often it can be harder to make the numbers work in suburban neighborhoods, which might have less downside price variation (i.e., fewer acquisition opportunities at low enough prices).
For additional color, Figure 7 shows some popular neighborhoods with greater investor activity within the top six ZIP codes, which include five urban and one suburban ZIP code as measured by population density.
HYPERLOCAL
As with any MSA, it's important to understand a specific location by gathering neighborhood-level intelligence on the immediate area, submarket, and investment dynamics. The metrics you search for should be measured to help quantify hyperlocal activity, supply/demand balances, investment activity, and other factors.
Here are common factors that can affect real estate and lending at the hyperlocal level:
MARKET DEMAND. These are important in basically every hyperlocal area in the country, and include inventory, renovation activity, and other factors.
VINTAGE. Considerations include age and historic or development districts-old does not mean historic!
NEIGHBORHOOD. Standard items in most markets include school districts, golf course/country clubs, etc. In Tampa, these could reflect community access to waterfront docks/harbor.
ASSET QUALITY. Various pockets of Tampa can have a wide variety of housing stock, so it's important to do an apples-to apples comparison and not simply rely on geographical proximity. What is the subject property, and what is the makeup of its direct street/block? How does this compare to the surrounding blocks and ,where does it change? Pay attention to vintage, roof sizes, stories, lot size, and other factors.
CRIME STATISTICS. Local crime maps and other reports are a quantifiable way to evaluate hyperlocal areas, including Tampa.
UNIQUE DILIGENCE FACTORS
Tampa has experienced sustained infill redevelopment and renovation for more than 10 years, and the area has tended to be pretty "analysis friendly" (if that's a term), meaning we haven't found too many unique diligence pitfalls.Still, here are a fe"v key items that are common for conducting diligence and valuation assessments in Tampa and the surrounding areas:
WATERFRONT ACCESS. If you're looking at property anywhere near the Bay, then waterfront access is often a major factor, and it's not a binary yes/no question. First, does the subject have/not have waterfront access? If yes, does it offer direct "deep water" access, or is its hallow water only? In addition, does a private boat dock exist, and what's the potential to expand/build a larger one if desired? Additionally, how much direct waterfront frontage does the lot have? If the lot doesn't have direct access, does it participate in a community dock or harbor; if so, how strong are the amenities, how far are they from the subject, and will this impact value positively or negatively?
BACKYARD AND LUXURY OPPORTUNITIES. In many markets of Tampa, houses are about selling the allure and lifestyle to buyers (e.g., luxury pools and outdoor living spaces). Some key questions include: Does or can the subject offer any backyard and outdoor living opportunities? If yes, will they be more generic in character or are there opportunities to provide unique allure, to attract buyers to the neighborhood at a premium?
HURRICANE PREPARATION. These data fields are generally not reported within MLS, except by reading listing comments, but the presence of recent renovations and preparations for hurricanes, such as shutters, roof, and other construction preparations can sometimes add key value, either in achieving a higher sales price, or in attracting buyers more quickly. Although it can take more effort to quantify this item, it's generally worth conducting the diligence. This short look into a popular MSA provides an example not only for lenders active in Tampa but for all lenders. This market-based approach provides the opportunity to break down the thought process and see how local, hyperlocal, and unique diligence factors all play a role in making smart lending decisions, whether by offering more competitive terms in attractive, lower-risk areas or by passing on a deal altogether.
By Rodney Mollen
Private Lender, The Official Magazine of AAPL
Fall 2024, p. 58-62
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