Commercial Investment Real Estate July/August 2019 | Page 12

MARKET
FORECAST
Secondary Markets Are
Becoming First-Choice
Investments
Smart money is looking outside major urban centers
for new opportunities.
by Keith Pierce
Where Are We in the Cycle?
The economy has been expanding for several years, which influ-
ences the commercial investment market in a few ways. First,
demand for quality product skyrocketed in recent years as rents
rose and investors realized value in the commercial investment
market, both while holding the assets and upon their exits. As
a result, pricing has done what pricing always does: It rises pre-
cipitously in response to increasing demand.
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July | August 2019
Given the length of the current expansion, a second dynamic
emerged recently. No one knows for sure what the next year or
two will hold, but many investors are beginning to hedge their
bets in advance of an economic slowdown. This has created a
rush to find high-quality product (e.g., office buildings along
with multifamily and industrial properties) that will hold or
increase its value in the coming years while providing a reliable
revenue stream. The competition for these investment properties
is also elevating prices. According to research from Transwestern
Commercial Services, average price per square foot for Class
AAA office buildings in gateway markets increased 19 percent
over the past two years, to an average of $623 per square foot.
Running Out of the Usual Suspects
Many investors are struggling to find enough high-quality assets
under these conditions. As a result, many fund managers are
apprehensive about spending capital in cities and sectors that
may have already peaked in price.
Over the past couple of years, investors have started to consider
alternatives. Self-storage facilities, for instance, have grown in
popularity due to a reputation for holding value and providing a
reliable, consistent source of revenue. Even bundled single-family
assets are being purchased and managed by real estate investment
trusts in search of steady revenues and healthy returns.
Regarding locations, both U.S.-based and international
investors are taking another look at second-tier markets such
as Atlanta, Dallas, and Phoenix — thriving Sunbelt cities with
strong population and job growth, but without the same level
of price appreciation as Boston, San Francisco, or Washington,
D.C. Investors see opportunities in these cities for more attractive
COMMERCIAL INVESTMENT REAL ESTATE
T
he commercial investment market is always searching
for properties that offer reasonable costs of entry and
attractive returns upon exit. For many investors, office
properties have long been a staple of asset allocation.
They offer good returns throughout most of the real estate cycle,
and historical data support rent growth expectations over the
long term. The risks may be greater than industrial or smaller
retail properties, but the rewards are correspondingly substantial.
Traditionally, larger funds have focused attention on gateway
cities around the world. These are typically, but not always, coastal
cities or national capitals with large populations and a diverse,
often high-paying range of industries. Major companies are often
headquartered in gateway cities, providing access to a large, well-
educated talent pool. Tokyo, Hong Kong, London, and Paris are
examples of global gateway cities. The U.S. has New York, Los
Angeles, San Francisco, Boston, and Chicago. For years, these
cities have been considered safe bets and the most profitable for
office investors.
Recently, investors have placed more bets in secondary mar-
kets and, perhaps more surprisingly, in suburban properties in
those markets.