For commercial real estate investors, understanding metropolitan statistical areas (MSAs) is key to finding properties in areas that will see strong growth. The U.S. Census Bureau characterizes an MSA as an area that comprises one or more counties with a city whose population totals at least 50,000 residents.
Initially developed in the early 1900s, the government created the MSA concept as a standardized way to define specific areas and collect data. In general, MSA refers to a geographic area with a large population center and high social and economic integration.
What Is a Metropolitan Statistical Area (MSA)?
A core area with adjacent communities, which has a population of 50,000 or more, MSAs typically have a minimum population of 50,000. An MSA aims to effectively measure the size and scope of metropolitan areas for statistical purposes.
These areas can include anything from large cities like New York City to smaller ones like Carson City. For example, New York-Newark-Jersey City will be an MSA with a population of more than 19 million by the end of 2021. By contrast, Carson City in Nevada had a population of almost 59,000 in 2021.
An MSA can be defined by either its geographic boundaries or economic activity. For example, the Dallas-Fort Worth metroplex is considered one MSA because of its physical size and population. Alternatively, the San Francisco Bay Area is also considered to be one MSA because of the high level of economic activity that takes place there.
How Does an MSA Relate to Commercial Real Estate Investing?
In commercial real estate, an MSA is usually a city or group of cities forming a large market for office, retail, or industrial space. The term MSA is often used in two different ways:
- As a geographic unit of analysis: To analysts, an MSA refers to a geographic area used for statistical purposes. For example, when researching the office market in Atlanta, an analyst might define the MSA as including Fulton, Dekalb, and Gwinnett Counties.
- As a market definition: An MSA sometimes refers to a market defined by specific economic characteristics. For example, when describing the Houston apartment market, an analyst might consider all apartment properties within Harris County as part of the Houston MSA.
In the U.S., the National Association of Realtors (NAR) collects housing data for all metropolitan areas.
Why Is a Real Estate MSA Important in Commercial Real Estate?
MSAs are relevant to commercial real estate because they measure market conditions, such as employment and income growth. These areas can provide a more accurate picture of regional economic activity than other geographic units, such as counties or states.
Ultimately, an MSA offers a more comprehensive picture of what’s happening in a particular region. It allows real estate investors to better understand each submarket’s nuances within that region. By knowing your MSA, you can maximize your returns.
What Are the Advantages of Investing in a Real Estate MSA?
There are many benefits to investing in commercial real estate in an MSA. First and foremost, MSAs tend to be more stable than other markets because a large and diverse economy supports them. MSAs offer investors a more comprehensive range of potential tenants and higher rental rates.
Another advantage of investing in an MSA is its proximity to employment centers. MSAs are often located near major transportation hubs, making them accessible to businesses and consumers. This lets people who don’t live in the urban core commute to their places of work.
Investing in an MSA can prove profitable for borrowers who need to finance large commercial real estate projects. In a major metro area, lenders are typically more willing to offer better pricing and terms on commercial real estate loans. They are also more lenient with borrowers’ net worth and liquidity requirements.
Plus, investing in a metro area extends the ability to expand your business beyond the city limits. The economic activity in a metro area is much greater than in a smaller city. This can make it easier to expand your company’s reach and improve your bottom line.
Which Factors Potentially Impact the Value of an MSA?
Several factors come into play when determining the value of an MSA for commercial real estate purposes. Some of these factors are specific to the MSA itself, while others are broader economic indicators.
The first factor to consider is the population of the MSA. A larger population generally means more potential customers and a higher demand for commercial space. The second factor is the population density of the MSA. A more densely populated area will also tend to need more businesses.
Another critical factor is the overall economic health of the MSA. If the economy is doing well, businesses will expand and look for new space, driving up prices. On the other hand, companies may downsize or close altogether if the economy is struggling, leading to lower costs.
Also, it’s important to assess specific industries within an MSA. Some industries are more likely to locate in certain MSAs than others, depending on factors such as the availability of skilled labor or proximity to suppliers or customers. An MSA with a strong presence in a particular industry may see higher prices thanks to high demand from that sector.
How To Find the Right MSA To Invest In
There are many factors to consider when it comes to finding the right MSA for your commercial real estate investment. One key factor is the strength of the real estate market.
A strong labor market, often categorized by the number of jobs produced yearly, is typically an indicator of a healthy real estate market. Here are additional tips to help you find the right MSA for your needs:
1. Know Your Investment Goals
Before you start searching for an MSA, it’s essential to know what your investment goals are. Are you looking for short-term profit or long-term growth? What type of property are you interested in? Knowing your goals will help you narrow your search and find an MSA that meets your needs.
2. Do Your Research and Due Diligence
Once you know what you’re looking for, it’s time to research potential MSAs. Look at population and job growth trends, as well as the area’s overall economic health. Do your due diligence on the types of properties available and the average rental rates. This information will help you assess whether an MSA is a good fit for your investment goals.
3. Consider Location and Accessibility
When choosing an MSA, it’s essential to evaluate the location. You’ll want to select an area accessible to potential tenants with reasonable transportation options. In addition, assess the quality of life in the area, as this can impact how easy it is to attract and retain tenants.
4. Work With a Professional Advisor
Finding the right MSA for your commercial real estate investment can be complex. A professional advisor could help you save time and money regarding your investment portfolio.
Bottom Line on Real Estate MSAs
Metro areas are grouped for census and statistical purposes, and an MSA is composed of several linked towns and communities. The principal city and the surrounding areas must have at least 50,000 people to be considered an MSA.
MSAs are used in commercial real estate investments to provide an objective and standardized way to measure and compare market conditions and investment opportunities across different geographic areas; whether you are looking for retail space or an office complex, the size of the market matters.
MSAs are beneficial when evaluating potential investment opportunities in multiple markets. This is because they allow for effective comparisons of crucial factors such as population density, income levels, and job growth rates.
Additionally, MSAs can be used to assess risk in a particular market by gauging market saturation (i.e., the number of properties relative to the population) and trends in prices, rents, and vacancy rates.
Consider the different market characteristics and local demographics before investing in an MSA. After all, your investment’s success depends heavily on your property’s location, so thorough market research is essential.
