Mid-sized cities and suburbs with urban-style, walkable amenities promise to be profitable bets for real estate investors, according to a respected annual investment forecast from Urban Land Institute (ULI).
“Emerging Trends in Real Estate 2016” taps the expertise of approximately 2,000 real estate experts, including developers and commercial property owners, to uncover investing opportunities in today’s shifting commercial real estate market.
Here are five significant trends to guide investment decisions:
1. Growth Shifts to Midsize Markets
Cities such as Dallas, Austin, Denver, Atlanta, Houston and Charlotte have become entrepreneurial magnets as startup founders reject New York and San Francisco for regions with lower costs of doing business. In turn, workers embrace cheaper housing and distinctive cultures that are “replicating pieces of what makes the gateway cities so attractive,” notes ULI.
Thanks to technology, these markets offer the benefits of a larger urban area at a significantly lower cost, concludes ULI. What the best investment prospects have in common are growing urban centers, an influx of desired workers and an attractive quality of life.
The investment forecast for 2016 predicts these second-tier markets will grow at a sustainable pace. Dallas, Austin, Charlotte, Seattle and Atlanta show the strongest market outlooks; Origin Investments has satellite offices or properties in all of these markets.
2. Suburbs Cultivate City Assets.
Many millennials are likely to migrate from urban playgrounds to the suburbs. That’s where the homes and good schools are. And in the top 40 metro areas, 84 percent of jobs are outside the center city. ULI’s America in 2015 opinion survey suggests an attitudinal shift in the 80-million-member millennial generation; in the next five years many plan to relocate from the city.
But they won’t be moving to the suburbs of their parents’ generation. Instead, three out of four millennials thinking about a suburban move want to live within 20 minutes of the city. These locations “access center-city job growth and act as employment nodes in their own right,” the ULI report notes. “And they have the advantage of being less costly than the densest coastal markets.”
Suburban office properties whose value will benefit are those in transit-oriented suburbs with housing options near commuter lines and Main Street shopping.
3. New Jobs Remake Office Spaces.
Cities large and small are enjoying employment growth with office work accounting for two out of five new jobs. As a result, ULI notes, “both central business district and suburban office absorption has been brisk,” with vacancies down 0.9 percentage points and rents up 2.9 percent year-over-year.
As the workforce composition shifts to knowledge workers, real estate investors can add value to commercial properties with space makeovers. Walls aren’t coming down just to cut square feet per employee. Some office experts see cool office space as a worker retention tool. Others think work itself is more collaborative, dictating a new mix of open areas and private or semiprivate configurations.
Also, co-working spaces have become a major office leasing force in some markets. “Workers hired on contingency now account for 11 million jobs,” according to the U.S. General Accounting Office. Landlords have embraced their new role as design and technology incubators, especially since subleased desks and premium suites provide a reported 30 percent operating margin.
4. Housing Holds Hidden Opportunities.
While developers have focused on the profit potential in high-end rentals, the luxury market is becoming saturated with units. Instead, ULI notes, real estate investors should look “under the equator” at below-median rents, which will be under pressure as growth shifts to cities and close-in suburbs.
Affordable workforce housing is emerging as not only as a real estate investment opportunity in growing job corridors but also as a cultural issue. Politicians will be under pressure to deliver solutions and will work with investors on flexible zoning, tax credits and private-financing options.
Urban markets will welcome more diverse housing options across different demographic sectors, including high-density “micro housing” and dormitory-style arrangements. “The concept of renting your own bedroom and bathroom in a group setting may well appeal to millennials even after they have graduated,” the report says.
5. Infrastructure Sustains Dividends.
Traffic congestion costs U.S. individuals and businesses $124 billion a year. Offsetting that cost will make commercial properties with shorter, easier commutes or high walkability scores more profitable in coming years.
Investing in sustainable amenities will also have a shorter payback. Rainwater management, greenery and permeable pavement that head off storm damage are also attractive amenities that tenants will view as an upgrade.
The private sector will take on more of what were once local government responsibilities. Some tech firms are providing bus service, paying the costs of freeway exits and even investing in educational facilities to attract and retain productive workers.
Communities that improve their infrastructure to remain competitive as business locations will trend upward. Developers and investors who step up their game may reap their just rewards.