MSA: Metropolitan Statistical Area in Commercial Real Estate

A Metropolitan Statistical Area, also known as an MSA, is an important factor for those considering investment in commercial property. Understanding what they are and what factors contribute to their creation can influence lending decisions and opportunities.

What Is a Metropolitan Statistical Area (MSA)?

A metropolitan statistical area is a government-designated area for a specific urban region. The U.S. Office of Management and Budget (OMB) sets and defines MSAs throughout the country. As of 2023, there are 383 MSAs in the United States. In addition, there are 7 located in Puerto Rico.

Most of the time, MSAs comprise several counties or cities within a close area. Typically, these locations are interconnected demographically and often in how people live and operate within them. Typically, MSAs aim to make it easier for companies and government agencies to better understand the area’s statistics, needs, and goals. They help define an area larger than cities.

What are the Different Types of MSAs?

There are several different types of MSAs. Most of the time, one MSA is made up of several cities or communities. Most are based around a specific large city. For example, New York City, Boston, and Los Angeles are all MSAs.

However, the MSA is also made up of smaller cities located around the larger city. In some areas, they also encompass other cities and a grouping of counties.

One key defining feature of MSAs is that they typically will have to have a city population of 50,000 people or more. This provides a regional view of the area.

Understanding the difference between an MSA and a CSA is also important. A CSA is made up of two or more MSAs. These are often called micropolitan statistical areas.

These areas have an employment interchange measure of at least 15. That term relates to the number of people who live within the smaller area but who work within the larger entity.

How Does an MSA Relate to Commercial Real Estate Investing?

Commercial investors must understand MSAs in order to utilize the valuable information they offer. In some situations, it will be easier to obtain commercial financing for a property located within an MSA than for a property located outside of such locations. Borrowers who wish to obtain financing for purchasing or upgrading property within an MSA may find more favorable terms and conditions. This often means better loan terms, including lower DSCRs, higher loan-to-value opportunities, and better pricing.

Within these areas, there tends to be less overall risk and more transparency on the property. As a result, lenders may be willing to negotiate terms in areas where the borrower’s net worth may not be as high as normally desired or the liquidity requirements are not fully met.

The benefit of purchasing real estate within an MSA for commercial borrowing is based on risk. For lenders, property within a densely urban area like this carries less risk for the property to go unoccupied for any length of time. That ultimately means borrowers are less likely to fall behind on their loans.

In situations where a default on the loan does occur, the area may be more easily sold to recoup the investment. From the lender’s point of view, selling real estate in an area like this is likely to be faster and easier than selling the same property in a more remote or less dense region.

What are the Advantages of Investing in an MSA?

There are significant advantages to commercial investors who purchase property within an MSA. Specifically, MSAs are a more stable environment from the real estate market standpoint. They have a larger and more diverse economy that allows them to handle more unstable economic conditions better. More so, MSAs tend to offer a wider range of tenant options and, in most areas, offer higher rental rates because of the higher demand.

MSAs provide core benefits simply because they are within prime employment areas. Most will have large transportation hubs within them or nearby, which makes the area desirable for businesses, industry, and consumers. This type of location also makes it possible for individuals to commute into the area for work. Again, this helps to contribute to the overall stability of the MSA.

As noted, investing in commercial real estate within an MSA is desirable because of the easier access to more affordable funding. Borrowers tend to have easier qualifications in these areas as well. Overall, from an investor standpoint, MSAs tend to be desirable locations to purchase property.

What are the disadvantages of investing in an MSA?

There are a few drawbacks to consider in some areas. For example, some federal commercial lending programs, such as those from HUD, aim to support the growth and development of more rural areas. These areas tend to be outside of the MSAs. These loan options, then, may not be as accessible for those looking to invest in those areas.

Also, note that MSAs tend to be located in areas where taxes are higher. These areas are larger and tend to have more local support needs – driving up the cost of property taxes. Investors must take into consideration the higher risk.

Like with all types of investments, MSAs can be a good option from an overall standpoint. However, it is also necessary to consider the investor’s individual goals. Look carefully at each property. One without desirable features, even within an MSA, may not be worth the purchase price.

3 Factors that Impact the Value of an MSA

Before investing in an MSA, consider several factors that contribute to the value of these properties within the MSA.

• Consider the population of the MSA. Just being defined as an MSA does not mean the location will be desirable for all types of populations. Consider if there is a higher range of potential customers in that area. Also note that while more potential customers exist within the MSA, that does not mean their needs are not already being met.
• The economic health of the MSA. Next, consider how the economic health of the region is. When the economy is doing well, that leads to the expansion of businesses and those seeking new space. This pushes tenant prices up in favor of property owners. However, falling economic conditions will have a negative impact on the property.
• Industries within the MSA may differ. Consider the type of industries located within the MSA. These will differ from one area to the next and can define the type of support that any area needs. Some industries demand a higher price than others within other sectors.

Wrapping up

MSAs are a core component of any commercial investor’s decision on where to buy property. Property investors must consider factors beyond just being within the MSA, though, including the market itself and the geographic area. With core benefits, including often better pricing and access to commercial loans, investors may find that buying within an MSA is a more desirable route to take than buying outside of it. Yet, this depends on the investor’s goals and the type of property being purchased.