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Welcome to the Commercial Real Estate Mastery podcast, where you'll learn the correct way to identify, negotiate, perform due diligence on, renegotiate, finance, turn around and operate real estate in today's market -- a market in which volatility creates opportunity, and sound principles defeat fads and bubbles. And your host is a 25-year commercial real estate veteran and co-owner of over $1 billion in real estate assets, Frank Rolfe.
I live in a small town in southeast Missouri, population of about 5,000 people. And the average American would say, "That's a very contrarian way to live. What an oddball. Who would want to live in a small town? Living in the big city is where everything's at." Or at least that was the popular thinking until around COVID. And then suddenly, in the year 2000, people started to realize, "Wait a minute, maybe I should move a little farther out. Don't like all the congestion, traffic issues, pollution, crime, bad schools, and high home prices. So, I think I'll venture out of my downtown apartment and maybe move out to the suburbs." But when they got to the suburbs, they realized, "Wait a minute, the suburbs are way too expensive. Maybe I should drive another 20, 30 minutes out from there." And where did that take them? Throughout America, it took them into places people had not been moving before, basically into smaller towns.
This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're gonna talk about this population shift, this movement out to small towns, and how that can create really big opportunities for you to make money in real estate.
So if you look back at the history of America, what do you see? Well, we were an agricultural society through the 1800s, but by the end of that century and by the early 1900s, America started becoming industrialized. People started building big factories, and they built trains and things to get you into the big city to work at the big factory. And they started building lots of housing in the middle of town by the big factory, and we became urbanized. So, there became an urban core right there where all of the industrial development was. And then back in about the '50s and the '60s, people said, "I don't want to live in that industrial area." And they pushed out a ring around that, which is called the suburbs. If you look at a typical map, what do you see? You'll see the urban center, and then you'll see suburbs totally circling, going in circles around that. But then people started moving farther out from that for the same reasons: because they were searching lower home cost, lower crime, maybe a more quaint school district. And so they started to move farther out. But if you look at any map in the United States, you'll see one thing they don't do is they don't go in a uniform circle.
Unlike the suburbs, which are pretty, pretty the same throughout America, when it comes to small towns that are thriving, where people are moving to, it typically is going into just one or two directions. If you look at Dallas, for example, Dallas, everything there moves to the north and to the east; nothing moves to the south and to the west. Why is that? Well, I think people kinda feed off their own energy. They start realizing that the nicer part of the small town area is to the north, and they just all start heading that away. But that's what creates the opportunity in commercial real estate, is if you start buying things ahead of people moving farther out, you look like a genius. Because as more people move there, just good old supply and demand. The demand outstrips the supply, prices go up and values go up. So if you want to be a good commercial real estate investor, then you need to be able to tell where the path of growth is going. What direction is the city expanding into? So that then begs the question, how do we do that? How can we right now guess where things are going?
Well, the answer is, there's quite a few things at your easy disposal to do that. The first one are these charts and lists of road construction projects. You can find them for your state, you can find them for your city, you can find them for your county, because roads are a very big-ticket item. And it takes a long time between the initial thought of, "Hey, let's build a road," and acting on that dream. If you look at how the highway projects go, it starts off with they have an idea, then they have public forums for public input about the idea of building the road, then they have to do some initial engineering; then they have to buy the right-of-way, then they have to let the bidding, then they have to build the highway, and then it opens. If you look at from the start to the finish of that process, it takes typically five to 10 years. That's a pretty long time. Yet you're able to get a crystal ball with 100% clarity that is always correct if you will simply access those lists of future road projects.
You'll find the same thing also regarding utilities. Not so much water; it's not really hard to expand out your water system. The sewer is the big one. Because if you're going to have more rooftops and more humans, you have to have the ability to process more sewer. And that's where a lot of more rural areas are having trouble is figuring out how to do that. So once again, they need a long lead time to build that sewage disposal property that allows them to handle a massive increase in population. But yet again, it's fully open to public view. It's full sunshine law transparency. You can talk to the sewer department, the water department, say, "Hey, are you expanding out your lines? What direction are you going in?" And once again, you can see it. It's been there all the time, public information. Most people just don't even know to look for it.
Another good thing you can do is to basically just go on Zillow and look at single-family home prices in all directions, and you can see a pattern. In Dallas, for example, you'll see the most expensive housing all goes north. The housing that goes south goes less expensive as you move away from the city. But in the good directions of Dallas, the housing is very, very expensive still. Even though you get farther and farther out, it still remains kinda pricey. Those are the areas you want to focus on. That's where you have the high demographic customers that will really push those real estate values up. So if you just track single-family home prices, it looks like a compass. You'll have the circle, the urban center, then you have a wider part of the suburbs going out to a point at the far-out areas. It will literally point you in the direction of progress.
Walmart's also been a great tool to analyze the future directions of humans, 'cause Walmart has the best due diligence system of any business in America. They're able to predict where humans are going at such an accurate level, it seems like they'll build a Walmart out in a field, and you check on it again three years later, there's a whole city built around it. They're pretty much following the same things I'm telling you, although they go even a little deeper. But the good news is just follow Walmart. Walmart puts stores where there are people moving in. Walmart puts stores where things are growing. Walmart puts stores where people have money to shop with. If you take a map and map out where all the Walmarts are, just do that right there on your computer, that will once again point in what direction the city is moving.
McDonald's is number two on that list as far as projecting the future. They're also very good at it. Not as good as Walmart. They don't have as much money at risk as Walmart. Typical Walmart store is 100 million in sales. Typical McDonald's is about 3 million. But nevertheless, you can tell a lot from that. You can even tell a lot from retail construction.
And then the final thing would be look at school rankings, because every school district in America is ranked. People know the big city ones are, but they don't realize all of them are. Everything in the state is ranked by school district. People tend to want to live where they have good schools. What are those school scores at? And typically, when you look at the school score, the better schools in the smaller markets also exactly tie to the higher home prices, which exactly tie to the road construction, which exactly tie to the utility construction, which exactly tie to Walmart and McDonald's construction. And then you finally unlock the mystery of where people are going.
Now, buying-things-in-advance of humans has been the number one rule of making money in real estate since real estate began. John Jacob Astor, America's first real estate millionaire, that's what he did. He bought raw land in an area he thought would grow. The area he thought would grow, in fact, turned out to be Manhattan Island. And we can't always predict Manhattan Islands 100 years ahead, but if you use the tools available to you right now, you can tell a whole lot of where the path of progress is going.
This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.