Historically, the six primary markets in the commercial real estate sector have performed well: New York City, San Francisco, Washington D.C., Chicago, Los Angeles, and Boston (a few experts consider Dallas and Houston to be members of this group as well). These metros may be unrivaled when it comes to population, the number of transactions, and impact on the economy, but opportunities in these cities are also very competitive and can be costly for commercial real estate businesses. In the next 5 years, PwC projects that the populations of New York City, Chicago, and Los Angeles will grow at a rate of just 0.2%. In comparison, other up-and-coming US cities are predicted to grow at an accelerated rate of 1.6%.
Because of this trend, more and more investors are turning to secondary markets. While market classification can be hard to pin down, CRE professionals generally agree that a secondary market has a population of 2 to 5 million people and shows favorable economic indicators such as job growth, a higher cap rate, and encouraging economic drivers such as rent inflation. Markets with these strong economic fundamentals are attracting new investment in droves, with one CBRE survey indicating that 76% of investors cite rent growth as the biggest factor in their investment selections.
Read ahead to find out which secondary markets to watch in 2019.
Austin was a top contender for the Amazon HQ bid, and while it ultimately didn’t secure that development project, Apple plans to build a new corporate campus in the city, potentially creating 15,000 jobs. Austin had an impressive 2018, with an annualized 7.9% growth rate ending the third quarter. The only thing undermining Austin’s 2019 market performance is its inability to outperform its own history. It’s projected that the city will continue to expand but may see a slight slow-down in revenue due to low unemployment. Despite a saturated job market, Austin’s expanding size makes it a top market to watch, and the large population of students attending its University of Texas campus make the student housing market one of the best performing in the nation, with 100% occupancy in many units and year-over-year growth.
Orlando sees more tourist activity than any other destination in the country, with 72 million annual visitors in 2017. With rising rents and a projected 2.3% population growth for 2019, this sunny metro shows no signs of slowing down. The hospitality sector in Orlando is thriving, thanks to the popularity of the city with tourists and the presence of theme parks such as Disney World and Universal Studios nearby. Baby Boomers consider Orlando a top destination for retirement, further stimulating the local economy and increasing demand for housing. Housing in Orlando is still below the national average, leaving plenty of room for rent growth in multifamily assets as retirees and professionals looking for amenity-laden luxury living flock to the city for its entertainment and lifestyle. Overall, a robust local economy and comparatively low cost of living make Orlando an attractive market for investors as rents are sure to rise in the coming years.
The Nashville market is in the expansion phase for all asset classes except hotels, which have reached maturity. Whether looking for potentially higher returns or to secure investment in a stable asset in the face of possible downturn, Nashville is poised to offer value through diverse market development. Nashville leads in ten-year job growth at 25.9%, the highest in the southeast according to CBRE. It also has the 5th-highest regional average household income, keeping the local economy hearty and strong. Tourism is also consistently high in this metro, keeping vacancies low in hotels and spurring further economic development. Because many assets have yet to mature, Nashville is an attractive market for continued growth in 2019.
Secondary markets are robust but not oversaturated, meaning they have the potential for future expansion. As the CRE cycle enters the hypersupply phase, cap rates are squeezed and profitability may begin to plateau in primary markets. Under these conditions, investors turn to firms that know which secondary markets are performing well and can find value for their investors amidst uncertainty. Keeping a pulse on secondary markets ensures that you are well-positioned to gain the trust of investors and secure capital.
For further reading on secondary markets, check out this blog post: Is Poor Infrastructure the Achille’s Heel of Secondary CRE Market Growth?