Situs RERC – Metro Investment Rankings 2Q 2017

Situs RERC ranks 48 metros from a relative value vs. price perspective to determine the top investment opportunities in the primary, secondary and tertiary markets. The Situs RERC Metro Value vs. Price Index combines investor survey data and CRE fundamentals data. This index is forward-looking, and helps to determine where investors will receive the best relative value based on current pricing in the primary, secondary and tertiary markets.

The Situs RERC Metro vs. Price Index presents only the relative ranking of metros within the primary, secondary and tertiary markets based on values versus prices and does not necessarily imply that these metros offer great investment opportunities in and of themselves. The rankings are relative, not absolute.

The overall rankings presented in the following commentary reflect the aggregation of the metro’s rankings across the four property types. A weighted average reflecting each property type’s portion of market value across industrial, apartment, retail, and office sectors is used in the calculation of rank. See below for a complete list of our metro rankings.

Primary Markets
Among the primary markets, Dallas, Seattle and San Francisco, respectively, earned the top three spots overall, from a relative value vs. price perspective. According to CBRE, Dallas has been enjoying an annual employment growth rate twice the national annual rate over the last five years, and the average per capita personal income is estimated to be approximately 7 percent above the national average. Relatively low prices, strong population growth, income growth and job creation are driving the demand for commercial real estate in the area. The population and job growth should continue as Texas draws employers because it has no income tax. Likewise, Dallas’ position as a logistics hub will continue to thrive as e-commerce flourishes. Moreover, Dallas has become a hot spot for data centers due to low construction and utility costs in the region. The metro ranks on top among the primary metros due to its strong economic fundamentals.

Seattle ranks second in the primary markets. Originally Seattle was home to companies like Amazon, Microsoft, Zillow and Expedia. Now it has a talent pipeline that has been attracting other tech companies to the metro, including Google, Facebook, Apple, Twitter and Salesforce. The mix of these companies continues to attract highly educated professionals who earn higher salaries. As such, Seattle office market has become one of investors’ favorites in the country. Additionally, the absence of a state personal income tax and its relative affordability have been driving Seattle’s population growth, which is a benefit for the apartment and retail sectors. Moreover, Seattle’s geographic location as a large port city with direct access to Asia adds strength to the sustained growth of the metro.

Despite the concerns over affordability, San Francisco came in third among the primary metro rankings. CBRE reported that San Francisco’s annual employment growth has been twice the national rate over the last five years and the metro enjoys per-capita personal income that is more than 100 percent above the national average. The San Francisco market continues to be dominated by technology, a sector that is still very healthy. However, new supply coming into the office space has worried investors because not all the space has been pre-leased. The metro’s thriving technology industry, along with some of the country’s most prestigious educational institutions in San Francisco’s backyard, should continue to provide stability to the market.

At the opposite end of the primary metro rankings are New York City and Houston. CBRE reported New York City’s per capita income to be more than 30 percent above the national average. However, the metro continues to lag in the primary metro rankings due to slow population, wage and job growth projections, which are connected to concerns over affordability. As one of the favorite markets for investors from around the world, New York’s prices have pushed much higher and are at a point where cracks are beginning to show. CBRE predicts the rent growth to decline for the office, apartment and retail sectors. The apartment sector is showing weakness as it deals with the supply glut.

The struggle in the oil and gas industry continues to push Houston to the bottom of the primary metro rankings. More specifically, the office sector has suffered as a result of a declining workforce in the so-called Energy Capital of the World. Tepid population and employment growth in the metro has hampered other CRE sectors, alike, and the uncertainty in the energy sector will continue to suppress Houston compared to other primary metros.

Secondary Markets
High competition and aggressive cap rates in the primary markets have been driving investors to the secondary markets for higher yields. Orlando, Austin and Raleigh topped the secondary metro rankings from a relative value vs. price perspective. Strong population and personal income growth predictions are the primary reasons that Orlando ranked highest in the secondary markets. Strong population and predictions for personal income growth helped Austin rank second in the secondary market rankings. With employers such as IBM, Apple and AT&T, the capital city enjoys sustained job growth prospects in high-tech industries.

Raleigh’s third position among the secondary markets was secured by the high-tech and pharmaceutical jobs in the metro. The University of North Carolina at Chapel Hill and Duke University provide a pipeline of well-educated individuals ready to step into these jobs. CBRE’s Tech Talent Scorecard, which ranks cities based on outlook for tech job growth and growth in office and apartment rentals, ranked Raleigh-Durham seventh in the US. CBRE forecasts a strong population growth in the metro, which should continue to support CRE.

Honolulu and Northern New Jersey (Newark) continued to be the least attractive metros in the secondary markets. Both metros ranked worst in the office, retail and apartment sectors. Honolulu suffers from high prices and a lack of space, while Newark suffers from low income and high crime rates, pushing the metros to the bottom of the list.

Tertiary Markets
Like secondary markets, the tertiary markets offer diversification of assets and markets for investors. While tertiary markets do not offer the scale as the primary and secondary markets do, the investors may be able to achieve higher cash flows and returns. Additionally, tertiary markets are not as saturated, providing the investors low barriers to entry. Tucson, Columbus and Richmond earned the first, second and third ranks overall, respectively, among the tertiary markets.

Cushman & Wakefield reported that Arizona continued to outpace the nation in job creation, and saw outstanding wage and income growth as a result of a tighter labor market. With employers such as the University of Arizona, Raytheon and the U.S. Border Patrol, Tucson’s job, population and wage growth should move hand-in-hand with the state. Cushman & Wakefield added that Tucson’s healthcare sector should continue to evolve and improve as Tucson Medical Center, Banner Health and Tenet Healthcare Corp. complete their projects in the metro. As such, businesses in this border state will have to keep an eye on debates around national healthcare, immigration and trade policies.

Employers such as JP Morgan, Nationwide Insurance and Kroger has helped drive Columbus’ job and population growth. Additionally, Columbus’ geographic location that allows an easy access to trade hubs and strong manufacturing sector will continue supporting the metro. Despite its third ranking among the tertiary markets, Richmond’s growth predictions are not as bright as other markets. CBRE predicts the capital to suffer from declining population, income, and wage growths.

New Orleans and Pittsburgh take the bottom spots in the tertiary market rankings. Bounded by Lake Pontchartrain and the Mississippi River, space in New Orleans is limited for new developments. Additionally, the legacy of Hurricane Katrina still lingers. The lack of economic growth put New Orleans at the bottom of the list. Pittsburgh has suffered from sluggish employment growth over the last five years and the CBRE forecast for the next few years looks grim, too. However, the presence of top students and research professors at Carnegie Mellon has attracted companies like Apple, Facebook, Google and Uber to the metro. The tech firms, along with the highly skilled and highly paid workers, may lift Pittsburgh from its low rank.

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