Investors have long considered the prime business centers of the U.S.—traditionally New York, Los Angeles, Boston, Washington D.C., San Francisco and Chicago—the best cities to invest in real estate. These “gateway markets” are safe, liquid and have traditionally been high-performing, retaining their pricing even in tough economic conditions. That makes them attractive markets for investment.
In fact, pension funds, university endowments and other institutional investors create strategies to invest primarily in the gateway markets. Historically, these markets’ low volatility and healthy fundamentals lends their real estate portfolios a bond-like stability and makes for fewer surprises over the life of their ownership.
But “gateway markets have become the victim of their own success,” National Real Estate Investor noted. It’s easier to find opportunities for investment dollars in non-gateway markets with greater growth potential and more attractive pricing—a philosophy that we have always ascribed to at Origin. Our analysis of real estate market trends using a proprietary objective econometric model suggests that up-and-coming cities will outperform traditional favorites in years to come. In a companion post, we list the economic fundamentals that correlate with a growing market.
Origin’s Real Estate Market Forecast
Our results indicate continued strong prospects for our current markets (Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston and Raleigh) and are informing our expansion into new markets. Not surprisingly, high valuations continue to put the global gateways at a disadvantage—all scored poorly in our econometric model. Los Angeles came in at number 18, followed by Chicago (20), Boston (21), San Francisco (22), New York (23) and Washington DC (24). Chicago, Origin’s home base, scores better than the other gateways, save for LA, due to its relatively affordable housing and living costs and lower price volatility. The objective scoring confirms the economic strength of fast-growing cities such as Nashville, Minneapolis, Orlando and Tampa.
Based on our analysis, here are the 10 best cities to invest in commercial real estate today, and the keys to their continued prospects:
10. Denver. Prices are rising in the mile-high city, where Origin has been investing since 2015: a 5.7% rise in office rents, in CBRE’s recent survey, and increases of 6% for houses and 12.8% for condos, according to the Denver Metro Association of Realtors. And millennials are swelling riverfront and lakefront neighborhoods that overlook the Rocky Mountains. Denver’s diverse economy in energy, technology and financial services allows them to find jobs quickly.
9. Minneapolis. An educated workforce—70% with some college coursework—fills high-tech manufacturing and financial services jobs. Minneapolis-St. Paul is a regional arts hub with a low cost of living. Stable prices make the Twin Cities ideal for core and value-add real estate investment.
8. Las Vegas. Our quantitative analysis prompted us to research Las Vegas, which has emerged from a slow recovery less reliant on entertainment and construction. Amazon distribution and return centers have spurred a housing rebound, and Nevada has no corporate or individual income tax. Thanks to its slow recovery, there’s lots of room for rent growth in this market and is prompting our team to keep evaluating a possible expansion into this promising metro area.
7. Austin. Fact-checkers confirm Austin’s potential: This Texas town should roughly double in 30 years. University research contributes to a tech innovation culture, the state capitol lends stability and the music scene keeps Austin young. Origin began investing in Austin in 2014. Nearby San Antonio is also nearly as attractive, coming in at 13th in our ranking.
6. Phoenix. Retirees are not the only group driving Phoenix area growth: One-fifth of the population is between the ages of 20-35, according to Census estimates. Late to rebound from last decade’s recession, workers and employers now find the Valley of the Sun a step up from the costly West Coast gateways of Los Angeles, San Francisco and even Seattle, which has helped spur Origin’s decision to enter this market. Office vacancy is tightening, according to CBRE, especially in walkable Scottsdale and Tempe neighborhoods.
5. Charlotte. The longtime financial services hub is now a tech nexus, named the nation’s top tech town by the CompTIA training organization. Charlotte is also a power in energy and healthcare. The scenic surroundings make North Carolina a millennial magnet. Origin’s 2014 and 2015 investments within the University Research Park attracted tenants like Duke Energy, Red Ventures and Web.com. Cambridge Corporate Center sold after just four years, indicating continued high office real estate demand.
4. Orlando. Aerospace and defense contractors such as Lockheed Martin, Siemens and Northrop Grumman—supported by NASA and the University of Central Florida—are leading a broad-based economic expansion. Tourism, biotech and financial services all contribute to commercial and multifamily real estate demand, which is why we will begin investing here.
3. Houston. This city of 2.3 million could replace Chicago within a decade as the nation’s third most populous city. Houston’s economy is more than oil production, as indicated by Origin’s 2012 investment in a surgical center that resold in four years at a 25% internal rate of return. With a rebound in the energy sector and strength in healthcare and banking, private equity real estate investment will benefit from the absence of institutional investors who left Houston with the oil bust.
2. Atlanta. The world’s busiest airport propels Atlanta as a global destination and logistics center, anchored by Delta Airlines and UPS. But it’s also a technology hub rivaling Boston and Denver, and a bioscience center anchored by the Centers for Disease Control and Prevention. In addition to a low cost of living and thriving cultural life, Atlanta reflects movie industry glamour: More major motion pictures are shot there than in Los Angeles. Four apartment and office investments in 2012 set Atlanta’s continuing role as Origin’s most active investment market.
1. Dallas. No market is adding more residents and jobs than the Dallas Metroplex—146,000 new residents in the most recent Census estimates and 115,000 new jobs in current Bureau of Labor Statistics tallies. While Bank of America dominates the Dallas skyline with a 72-story tower, Fort Worth is a high-flying home base for American Airlines and Lockheed Martin. In 20 years or so, the area will be bigger than Chicago. Origin has held Dallas properties since 2014.
For the foreseeable future, high valuations will push cap rates lower in the gateway cities. With prices rising faster than rental income, there are only two paths to high returns: value-add investments and market growth. We try to find the intersection of value and growth. Our attention to economic fundamentals helps us find the best cities where we can create real wealth for our private equity investors. Besides looking for future opportunities in these markets, Origin also hopes to enter growth cities such as Tampa-St. Petersburg (ranked 12th) and Nashville (ranked 14th), which show consistent high demand for multifamily and commercial real estate.