Investors go beyond top US cities for yield
Published 15/10/2015 | 02:30
US commercial real estate investors are looking inland.
The Dallas-Fort Worth area of Texas, prized for its diverse job market and success luring companies that are relocating, ranked as the top area for commercial-property investment in a survey of almost 1,500 real estate executives, according to a report by the Urban Land Institute and PricewaterhouseCoopers. Austin, Texas, and Charlotte, North Carolina, followed - while the big coastal cities of New York, San Francisco and Boston, traditional magnets for buyers, were deemed less attractive.
"Real estate investors shifted from being defensive to more on the offense," Mitch Roschelle, a partner in PwC's real estate advisory practice, said in an interview. Buyers "are realizing that they need to go to those markets that are really creating jobs. The big gateway markets, while they're creating jobs incrementally, they're not creating as many jobs."
Six years into the economic recovery, investors are turning to secondary and tertiary markets from the primary ones mostly on the coasts, where prices have soared. Cities that Roschelle terms "the Villes" - including Nashville, Tennessee; Louisville, Kentucky; Knoxville, Tennessee and Jacksonville, Florida - are luring young people with smaller-scale retail, restaurants and nightlife similar to trendy sections of New York and San Francisco, and with affordable home prices and jobs that are more mobile.
"If you want to start a family, you're going to do that in places where you can afford to do it," he said.
Heitman, a real estate investment firm with more than $34n under management, found that inland markets were offering the potential for superior returns following the recession, as the credit crisis lowered the threat of overbuilding, said Mary Ludgin, the Chicago-based company's head of global research.
"In 2010 and '11 and '12, our view was overbuilding was not going to be the issue," she said. "Let's go where the tenant demand is. Let's go where the job growth is happening."
In Nashville, Heitman is developing a mixed-use project and has invested in medical offices, Ludgin said. The city benefits from the presence of Vanderbilt University and a growing health-services industry, she said. Pop-music star "Taylor Swift by herself helped make Nashville cool with a generation of people," Ludgin said.
Dallas has benefited from a growing economy that has diversified away from oil and into finance, medicine, technology and education. That's in contrast to Houston, which fell to number 30 in the ranking from first last year, based largely on what's seen as overbuilding given falling oil prices.
Cities such as New York and San Francisco are now seen as providing slower and steadier growth, compared with more aggressive returns in secondary markets, Roschelle said. Investors worry whether those markets' high costs will prevent them from attracting the workers needed to keep their economies vibrant, according to the report.
For now, major U.S. markets are outperforming smaller ones. While prices in big cities have exceeded their pre-crisis peak by about 33 percent, smaller cities have yet to pass their record and are about two years behind the recovery of top markets, according to a Moody's/Real Capital Analytics Commercial Property Price Indexes report.
Large cities remain alluring to major investors. Jon Gray, global head of real estate at Blackstone Group, which has the biggest property business in private equity, said Tuesday that the firm is bullish on rental housing in New York and Miami. It and partner Fairstead Capital recently acquired Manhattan apartment buildings with almost 1,000 units for $690 million. In the Miami area, Blackstone's Invitation Homes unit owns about 5,500 single-family homes for rent.
To the north, property investors in Canada are more defensive than they were last year with economic growth slowing, PwC found in its outlook for that country. Buyers are favouring markets such as Vancouver and Montreal over Calgary, which is heavily reliant on oil and gas. (Bloomberg)