Investors Pour into Small Markets, Drive Price Momentum
Robust Demand in Markets Like Jacksonville, Denver, Nashville Suggest Continued Investment Upside for Smaller Markets
Commercial real estate investors priced out of major U.S. markets have
expanded their scope to secondary and tertiary markets to find
properties yielding more generous returns, a trend typical of
late-inning property cycles.
But the robust demand for real
estate and the current cycle's longevity set this growth period apart
from past ones and suggest that smaller markets will continue to reap
investment for some time.
to the CoStar Commercial Repeat Sales Indices (CCRSI) in September,
property price momentum in smaller markets increased an average of 16.5%
over the 12 months ended Aug. 31 of this year, far outpacing the
average growth of 3.5% in major cities. Additionally, a 19.8% average
increase in the pricing of smaller, lower-priced assets over the same
period further indicate that more investors are targeting a wider range
of properties across more markets, according to CoStar.
dynamics associated with the pursuit of assets in secondary and tertiary
markets have to do with the fact that a tremendous amount of equity and
debt is looking for yield," said David Blatt, CEO of CapStack Partners,
a New York-based investment bank and advisor focused on real estate and
other asset classes. "While price in primary markets is a factor in
terms of getting value for your dollars, yield is a stronger driver for
many of these buyers."
Blatt and other observers suggest that
investors are avoiding more speculative cities that tend to suffer most
at the onset of a downturn. Instead, they favor markets enjoying
increasing population and jobs and that have the diversified economies,
infrastructure and other underpinnings that support more growth.
the economy has been gaining momentum, we've seen a lot of smaller
metros really gaining momentum, too," said John Chang, first vice
president of research services for Calabasas,CA-based Marcus &
Millichap. "Weve seen the performance of metrics for apartments, office
and retail centers all improving, which has created a compelling case
for investment. Setting aside a 'black swan' event, it appears that this
growth cycle still has momentum."
Metros on the radar span the
nations regions and include Denver, Nashville, Portland, Dallas and
Pittsburgh, observers say. Buyers are interested in all property types,
from industrial properties in the Midwest to facilitate ecommerce
distribution, to creative office and mixed-use redevelopment
opportunities in old industrial areas experiencing gentrification, they
What's more, many investors remain enamored with
multifamily properties, particularly Class B and C assets that are rehab
candidates or that have been recently renovated.
markets, that strategy is accounting for about 70% of apartment
transactions in Jacksonville, FL, where sales volume is expected to
exceed $1 billion this year, said Brian Moulder, a managing director
with Walker & Dunlop Investment Sales.
Moulder was part of a
Walker & Dunlop team that represented Atlanta-based Cortland
Partners in its $74.5 million sale of the 616-unit Aqua Deerwood complex
to Investcorp International in July. The sale price represented a
capitalization rate of 5.25%. Cortland Partners acquired the 31-year-old
property about six years ago and overhauled it, he said.
asset is in a great location and submarket, and it will probably be a
long-term hold," added Moulder, who is in Walker & Dunlops Orlando
office. "Weve really seen institutions that have not come to
Jacksonville in the past entering the market, and they are getting
better returns than they would in bigger Southeast markets like Miami or
In another recent Jacksonville deal, Fairfield
Residential sold the Harbortown Apartments (pictured above) at 14030
Atlantic Blvd, to Praedium Group for $57.3 million in July.
in Charlotte, NC earlier this year, New York-based developer Gamma Real
Estate paid $43.2 million for Stone Ridge apartments, a 314-unit
complex built in 2000. The acquisition exemplifies a strategy that many
investors are pursuing in the market: targeting properties with
nine-foot ceilings and up-to-date floor plans for extensive renovations,
said Jordan McCarley, executive managing director with Cushman &
Wakefield's multifamily advisory group in Charlotte. He along with Marc
Robinson, vice chair in the brokerages office, represented the local
seller in the deal.
"Over the last 12 to 18 months, we've seen a
changing landscape in terms of a new buyer pool that really wasnt here
previously," McCarley said. "It's not all institutional, but they are
bringing a lot of investment demand and interest to the market."
Partners, through its recently created investment advisory platform,
also has entered the Southeast with a mandate to partner with local
operators and acquire value-add and opportunistic apartment assets. The
firm is targeting Nashville and Atlanta, Blatt said, and expects to
close its first couple of acquisitions by the end of the year. We
certainly like the drivers in the region and the fact that were seeing
growth on a macro level, he explained.
Indeed, employment in
metro Nashville grew at annual rate of 4.2% last year and 3.4% in 2015,
for example, well above the national average of 1.7% and 2.1% for the
years, respectively, according to the Bureau of Labor Statistics.
Moulder and McCarley also credit job growth for increased investment
activity in their markets: In 2016, employment grew 2.7% in Jacksonville
and 4.2% in Charlotte, according to the BLS.
creation is tapering in Denver, it is still outperforming the nation,
and along with population growth, continues to attract new investors.
Employment grew 2.6% last year, a dip from each of the previous two
years by about 130 basis points, according to the BLS. To capitalize on
the healthy investment interest, Chicago-based JLL recently launched a
new office sales initiative covering the Denver and Texas regions.
other efforts, the brokerage is quietly marketing a $200 million
suburban office portfolio in Denver that features several major credit
tenants, and many well-known institutional investors are showing
interest, says Michael Zietsman, an international director with JLL who
is leading the new endeavor. The assets should sell at a capitalization
rate of around 6.75%, some 100 basis points higher than a similar
property in a major market, he said.
"Were definitely seeing big
institutional funds and offshore tenants looking at what we consider to
be non-gateway markets," Zietsman added. "Not only are buyers finding
better yields, but the growth dynamics in these markets are pretty
For lenders like Los Angeles-based Thorofare Capital,
funding deals in Denver has become a primary strategy, said Felix
Gutnikov, a principal with the firm. In September, Thorofare provided
$30.3 million in short-term bridge financing to Mass Equities to acquire
industrial buildings on 7.8 acres in Denvers booming River North Art
District (RiNo) neighborhood near downtown.
Based in Santa
Monica, CA, Mass Equities is planning a $200 million mixed-use
redevelopment on the site, and Thorofares loan replaced a financing
commitment that fell apart last year.
The RiNo loan followed
Thorofare's first investment in the market last fall, a roughly $20
million senior loan to fund the purchase of an office building, Gutnikov
said. The company also is bullish on Portland and is funding senior
housing, self-storage and student housing deals in other small markets,
"We're not averse to going into secondary and even
tertiary markets, but it depends on the buildings location - we get much
more granular in smaller markets," he said. "We want to know what
street the property is on, what the visibility is, and whether it's on
the right side of the street."
Joe Gose is a freelance business writer and editor based in Kansas.
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