Alphas, Betas and Momentum for Market Selection

February 05, 2019

Map of Local Market Alpha by metropolitan statistical area

Map of Local Market Alpha by MSA. Source: StratoDem Analytics

The StratoDem Research Suite generates alpha and beta calculations to provide information on economic performance of selected local areas – counties and metropolitan/micropolitan statistical areas (MSAs) – relative to the US as a whole. These measures are included in the StratoDem Research Suite alongside historical, nowcast, and forecast economic and demographic data for real estate teams to evaluate demand conditions for assets and portfolios and to create investment and development strategies. As a demonstration of applying these measures in a real estate research and/or market selection process, this article walks through the combined usage of MSA-level alphas, betas, and forecast growth momentum.


Alpha for economic performance in a selected MSA is calculated as the typical outperformance of annual real gross MSA product (GMP) growth and US average annual real gross domestic product (GDP) growth, adjusting for relative cyclicality (beta) of the local market. If positive, the local economy tends to outperform the US in normal economic conditions and, if negative, the local economy tends to underperform.

Beta for economic performance reflects the average relative cyclicality of GMP compared to GDP. A beta of 1.0 means the MSA economy moves roughly in line with the rest of the nation, while a higher value indicates a more cyclical local economy than the US and a value below 1.0 indicates lower cyclicality than the nation. Nowcasts are used for the current year, 2019, and forecasts are incorporated for the next five years, 2019 to 2024. Alphas and betas reflect the full time period available for all 401 MSAs covered by StratoDem Analytics, from 2001 to 2018.

Grouping MSAs by Beta

To begin an analysis of economic cyclicality across a large set of MSAs, it is beneficial to create three groups of markets – low beta, high beta, and markets tracking US performance. The MSAs closely tracking US economic performance have betas in the 0.90-to-1.10 range. MSAs with betas below 0.90 are in the low-beta group and betas above 1.10 are in the high-beta group.

Low-, mid-, and high-beta MSAs

Map of low-beta (purple), mid-beta (blue), and high-beta (green) metropolitan areas (divisions where applicable)
Source: StratoDem Analytics

There are 61 low-beta MSAs with a current population of at least 250,000, 24 of which have a population of at least 500,000. The five largest low-beta MSAs by 2019 population are Houston (StratoDem Analytics clients may click on each market name to drive to the metro analysis page in StratoDem Markets), Denver, Baltimore, St. Louis, and Portland, OR, which have betas in a narrow range of 0.84 to 0.89. The lowest betas among MSAs with a population of 500,000 or more are 0.57 in Wilmington, DE, 0.71 in Colorado Springs, CO, and 0.73 in Albany, NY.

There are 92 markets with a beta indicating that economic performance closely tracks the US and a current population of at least 250,000, 66 of which have a population of at least 500,000. The five largest US-tracking beta markets are New York, Chicago, Atlanta, Dallas, and Washington, DC. Large markets with a diverse industry base tend to perform in-line with national economic conditions as betas for these MSAs illustrate with Chicago, Atlanta, and Dallas at essentially 1 and New York and DC at 0.93 and 0.92, respectively.

There are 56 high beta markets with a current population of at least 250,000, 34 of which have a population of at least 500,000. Three of the five largest high-beta markets are in California – Los Angeles, Riverside/San Bernardino, and Anaheim/Santa Ana – and the other two are Phoenix and Miami. Phoenix (1.36), Riverside/San Bernardino (1.31), and Miami (1.27) have the highest betas among this group due to enhanced volatility from significant housing exposure during the Great Financial Crisis. Las Vegas and West Palm Beach have betas over 1.4 due to volatile housing-related economic performance over this period as well.

Low-, mid-, and high-beta MSAs in California

Map of low-beta (purple), mid-beta (blue), and high-beta (green) metropolitan areas (divisions where applicable) in California and Arizona
Source: StratoDem Analytics

Uncovering Growth Opportunities

The US economy has been in an extended period of expansion, albeit at a slower pace than prior expansions. Similarly, the real estate market cycle is long in the tooth with new supply, rent growth, and capital appreciation slowing. At this stage, investors and developers are more cautious about development costs and pricing for core assets and more willing to seek higher investment returns by moving out on the risk spectrum for value-add strategies.

When considering economic growth volatility of MSAs, low beta markets as well as those that tend to track the market could be attractive. However, this evaluation wouldn’t be complete without also examining market alpha – has GMP fared better or worse than the US over time – and forecast growth momentum – MSA economic and demographic growth forecasts relative to historical growth.

Using this combined analysis of market betas, alphas, and growth momentum from the StratoDem Analytics Engine, real estate investors and developers can begin to triangulate opportunities depending on their desired product type and risk appetite. These opportunities may be in locations not previously considered by large firms or funds, such as El Paso, TX, Milwaukee, WI, and Pittsburgh, PA.

As a sample in this piece, market alphas and betas are combined with the growth momentum in median household income (HHI). The growth momentum is the median HHI growth forecast from 2019-to-2024 less the historical HHI growth from 2014-to-2019. StratoDem Analytics is able to show this momentum from the current year using nowcasts for 2019.

Strongest MSAs for Median HHI Growth Momentum by Beta Group

MSA Beta Alpha 2019 Population 2019 Households 2019 Median HHI 2019-2024 HHI Growth Forecast 2019-2024 HHI Growth Momentum*
Low Beta
Buffalo, NY 0.76 -0.29% 1,142,495 468,648 $56,913 3.0% 0.9%
Pittsburgh, PA 0.80 -0.04% 2,333,781 976,794 $58,943 1.0% 0.7%
El Paso, TX 0.82 -0.67% 858,665 279,768 $46,164 6.6% 0.7%
Tracks US
Tacoma, WA 1.00 1.52% 902,641 343,504 $66,950 13.6% 2.8%
Chicago, IL 1.03 -0.86% 7,390,096 2,729,440 $69,966 4.6% 1.4%
Milwaukee, WI 0.96 -0.50% 1,585,856 632,036 $58,885 4.0% 1.1%
High Beta
Detroit, MI 1.30 -1.68% 1,757,305 659,364 $48,038 3.3% 1.9%
Grand Rapids, MI 1.13 -0.32% 1,080,394 406,256 $61,859 7.7% 0.4%
Los Angeles, CA 1.11 0.36% 10,312,959 3,614,067 $71,203 6.0% 0.0%
* HHI Growth Momentum is the forecast median HHI growth rate for 2019-2024 less the median HHI growth rate for 2014-2019
Source: StratoDem Research Suite, data as of January 23, 2019.

Out of all the low beta MSAs with 500,000+ population, only five are expected to experience stronger HHI growth over the next five years than in the prior five years. Buffalo is expected to have the strongest momentum, at 0.9%, although the 3.0% growth forecast is modest. El Paso has the strongest HHI growth forecast, but tends to underperform US economic growth by 0.67%. Pittsburgh has a modest HHI growth forecast, ranks second for momentum among these low beta markets, and has nearly equivalent average, historical GMP relative to US GDP.

For MSAs closely tracking US economic performance, the top MSA – Tacoma – for median HHI growth momentum stands out for its high alpha, at 1.52%. Tacoma is also forecast to experience strong growth in median HHI, likely benefiting from neighboring Seattle. Chicago tracks the US as a large, diverse economy, but a smaller market to the north – Milwaukee – offers similar tracking with less negative alpha relative to the US. Depending upon the property type/subtype under consideration, median HHI growth momentum of more than 1% may be attractive in these midwest markets.

The three high beta MSAs in the table are the only ones with positive median HHI growth momentum and, in the case of Los Angeles, momentum is negligible, at 0.02%. Los Angeles does, however, stand out with modestly positive alpha. Detroit and Grand Rapids are expected to gain momentum in median HHI growth over the next five years. While Detroit has seen some economic improvement in recent years, this has come after decades of decline, making it an interesting opportunistic play for those with enough tolerance for the risk.

Exploring Opportunity Zones in Selected Markets

An Opportunity Zone (OZ) is a census tract identified as an economically-distressed community where new investments may be eligible for preferential tax treatment by the 2017 Tax Cut and Jobs Act. The tax legislation and follow-on IRS guidance identify 8,700 OZs across the country and rules tax deferment using a Qualified Opportunity Fund.

In the StratoDem Analytics Engine, these census tracts are flagged to allow for demand analysis specific to OZs. There are more than 600 OZs with median HHI that is already above the US median and 2,600 are forecast to outpace US median HHI growth over the next five years. Among the MSAs identified in the table, Los Angeles contains 274 census tracts identified as OZs, Pittsburgh has 81, and Tacoma has 12.

To dig into just one market highlighted in this piece, below is a household density map of most Opportunity Zones in the Pittsburgh MSA. Note that there are additional OZs in the MSA, but outside the area shown, because the image was enlarged to highlight closer-in areas. This map highlights the 2019 density of households with household income of $75,000 or more, which exceeds the MSA-level median HHI of about $59,000.

Density of Households with $75,000+ HHI in Pittsburgh Area Opportunity Zones, 2019

Density of Households with $75,000+ HHI in Pittsburgh Area Opportunity Zones, 2019

Source: StratoDem Research Suite, data as of January 23, 2019.

Pittsburgh OZs with higher density of these households have darker blue shading and include Bluff, Crawford-Roberts, and Middle Hill near the Central Business District (CBD). Other neighborhoods with strong concentrations of these households include Marshall-Shadeland, Crafton Heights, Swisshelm Park, and Carrick. Some of these neighborhoods, such as Marshall-Shadeland in the northern path of growth and established, family-oriented Swisshelm Park, may already be attractive for residential and/or commercial real estate activity, making the OZ designation an added incentive for near-term investment and development.


Conducting an analysis of economic and demographics to understand the demand characteristics and outlook for real estate still relies on the same tried-and-true metrics. Historical data provides an important foundation and can be manipulated to uncover relative performance of a local area with alphas and betas. The ability to derive nowcasts in the StratoDem Analytics Engine brings this research process as current as possible and enables the most accurate and geographically granular forecasts available. Additional information available at the census tract level, such as OZ identification, only enhances the demand analysis to uncover the potential for excess alpha.

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