Due diligence is essential when considering purchasing a commercial income property, and even more so when that property is an NNN.
Since the profitability of NNN is heavily tied to the business which occupies the property, investors would do well to consider an often overlooked factor – the demographics of the area. Below are 7 demographic factors that affect the success of NNN lease investment.
Population Growth Trends
Statistics show that the cities with the strongest and fastest population growth are most likely to become hot markets for both residential and commercial income properties.
Tracking growth trends within a particular area allow savvy investors to predict which neighborhoods are set to explode, and which are on the way out. With this information, it becomes much easier to snap up a prime real estate and either hold it or use value-adding strategies to increase equity.
Population growth is usually a result of several factors, so it’s a good idea to look at the factors that contribute to population growth as well.
For example, the rate of unemployment, cost of living, quality of schools, and demand in the residential real estate market are some of the factors that impact population demand.
Age and Spending Habits
The average age of the population gives clues about the spending habits of those in the area. Typically the older the population, the more money they have to spend. That’s because a younger demographic is still saddled with school debt, has less job security, and makes less money.
Older age groups, on the other hand, particularly those with children who have already left the house, have more disposable income. Drug stores, medical buildings, assisted living services, and other businesses that cater to an aging population do well surround by this demographic.
On the other hand, consumers over the age of 65 spend less on apparel, entertainment, and fast food stores.
Thus businesses such as clothing stores, QSR’s, bars, movie theaters, and other entertainment-related businesses do well with an adolescent to college age demographics. Toy stores, stores with baby care items, daycares, and similar retail properties do well in an area with a large population of young children.
It’s wise to make sure the business occupying the property you are interested in fits in with the area’s demographics.
Leakage Factor
Leakage occurs when consumers are spending more money in other neighborhoods then what is being spent at local businesses. Using sources like the U.S. Economic census, you can estimate consumer demand by store type. Once you have this number, you can then determine the potential sales for a particular area.
If there are more actual sales than potential sales, there is a sales surplus, and if there are more potential sales than actual sales, the area is suffering a sales leakage. The latter can occur if people are shopping more outside of the area, or if they are buying less than expected for people of their income levels.
Occupational Concentration In the Area
Whether or not a neighborhood is composed of blue or white collar workers or a mix of both is used to determine what types of products the market is likely to buy.
Specialty apparel stores and office supply stores, for example, are found in affluent areas, while used car stores, on the other hand, are more likely to be found in blue-collar neighborhoods.
Educational Levels
Education levels correspond to income levels; as the level of education increases so does income. Populations with a college degree or higher tend to prefer shopping at a boutique, non-chain retail stores, while those without a college degree shop at chain stores and discount retail outlets.
Housing Ownership vs Rentals
Higher rates of ownership are important not only in terms of disposable income, but also for specific types of retailers, such as home improvement stores, furniture stores, garden stores, appliances, and more.
Average Household Income
Household income is directly correlated to a demographic’s spending habits. When doing due diligence on an NNN income property, it’s important to look not just at the average household income, but also to determine what the minimum amount of households is for the chosen income range.
Some types of retail stores do best in higher income areas, some in lower income areas, while others, such as discount stores, do better when there is a mix of high and low-income populations.
Demographic information can provide a wealth of information about a potential NNN location. However, to get the most from the data, you should compare the data to nearby neighborhoods, as well as similar neighborhoods in another city or state.
This will help you discover both local and national trends and will give you valuable information on how your area compares to others like it.
