Qualitative Factors for Real Estate Investment

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As is the case with other types of alternative investments, there are a series of qualitative factors that determine success in real estate investment. Real estate, more so than many other types of alternative investments, can be very dependent on local market considerations. For instance, the characteristics that are required to be successful in an urban area in Europe are very different from those that are required in a suburban Washington, D.C., market. Qualitative considerations include access to significant buyers and sellers of properties, experience in local zoning regulations, and knowledge of how to position properties to appeal to local market needs. Often, these issues are so important in determining the success in local real estate markets that national or international real estate investors seek exclusive local market partners in order to facilitate their market penetration. Adept local market partners can make the difference between success and failure in executing an expansion into certain geographic regions. These qualities cannot easily be modeled, as is the case for quantitative macroe-conomic factors. Nevertheless, many qualitative features can be of greater significance than quantitative factors in the performance of local real estate investments. For example, manager skill can be a significant qualitative factor in certain strategies of real estate. Particularly as it pertains to opportunistic real estate, manager skill can be the single most important determinant of success. In these types of properties, new development and repositioning properties can have high risk and uncertain return expectations. Manager skill in creating unique solutions for these types of properties and securing tenants often is distinctive and may be repeatable. Therefore, securing investment capacity with these operators is coveted.

Additionally, local markets often have their own economic factors that are more important in determining the occupancy and rental rates for properties than are national economic trends. Industry sectors may have a greater impact in certain local markets than is the case nationally. For example, the state employment for the U.S. automobile industry may be of greater importance to the real estate market in Detroit than is the national level of employment. Another financial consideration for local markets is tax abatements or deferrals. In some instance, municipalities seek real estate developers to build in areas that can benefit from job creation and new business. These localities may provide financial incentives for developers to built new structures or refurbish existing structures in order to accomplish the goal of an improvement in the local economy. Many of these factors may not be revealed by a standard quantitative factor analysis of real estate.

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