Traditionally, gateway cities have been viewed by commercial real estate investors as more lucrative than the slower tertiary and secondary markets.
However, with the strengthening of the economy, both domestic and foreign investors have begun to turn to secondary markets for the higher yield and easier availability that is difficult to find in the primary markets.
A look at the market reveals a voracious demand for office properties and apartment buildings, with an expected growth of more than $7 billion for 2016 – a 45% increase from last year.
Combined with the urbanization movement and CAP rates that are almost double those of primary markets, cities like Austin, Seattle, and Nashville are becoming the darlings of the commercial real estate market.
The Emergence Of The 18-Hour City
Primary cities with their 24-hour lifestyles have long held an attraction across age groups. But as the number of baby boomers and millennials hits record highs, non-traditional cities that offer a lower cost of living, doing business, and a booming nightlife have become residences of choice for a great number of people.
As a result, the growth in investment and development in second-tier cities like Nashville, Denver, and Austin have led to an increasing number of companies wooing desirable job candidates to these cities with the promise of live/walk/play lifestyles.
It may seem strange that in this jobless growth economy there are actually companies actively searching for employees.
However, a close look at who actually makes up the labor force makes it clear that the labor crisis in the U.S. isn’t because there aren’t enough jobs for people.
The baby boomer generation is leaving the workforce in relatively large numbers. Add in the fact that there are fewer children 16 and older than there are adults 60 and older, and it soon becomes clear that there are not enough people for the jobs.
Urban development that leads to a plethora of growth in housing, retail, walk to work offices, and dining has revitalized numerous neighborhoods, drawing increased development and raising the quality of life for residents. This, in turn, attracts foreign investors who view secondary markets as a relatively low risk without the competition and higher costs of gateway cities.
What Are The Best Types Of Properties To Invest In Secondary Markets?
Due to the lower cost of living and doing business in secondary markets, retail commercial properties are expected to deliver particularly favorable returns.
According to research from CoStar and PwC, the potential investment for retail properties in 18-hour markets is expected to be double that of gateway markets.
Big box retailers viewed as hip, globally responsible, and green-friendly are particularly successful in these up and coming urban areas, but sensibly designed mixed-use properties are also gaining in popularity.
Multi-family properties are right behind retail in terms of investment potential, and as more families move to multi-generational living spaces and baby boomers age, the possibility for profit with spaces designed to accommodate their needs is also there.
Another important thing when deciding what type of income property to invest in is to examine the data for each secondary market. Different cities offer potential in different types of commercial real estate, due to the specific composition of each one.
Nashville, for example, is a secondary market that has rapidly become one of the top ten secondary markets.
According to a survey by Price and Cooper and the Urban Land Institute, investors expect office properties to be the best investment property. A strong local economy, high demand, and plenty of available capital mean there is plenty of potential for renovation and development.
To Sum Up
The city on the top of the list according to survey respondents is Dallas/Fort Worth.
There is a positive environment towards businesses, and the local economy, with a healthy mix of jobs in industries like aerospace, telecommunications, healthcare, and finance, means that high wage jobs are able to support a strong commercial real estate market.
Due to the high population growth, which has been twice that of the national rate for several years running, supports good returns in housing. Plus, rising house prices and relatively high rents in an area where many young people prefer to rent, means multi-families that offer amenities geared to millennials should do well.
