Worth the Investment: Only a Handful of Markets

It’s all too predictable—the U.S cities with the top investment prospects in commercial real estate. Year after year in the Emerging Trends survey—leading the list are Washington DC, New York or San Francisco. Boston and Seattle again in the 2011 report are in the top five. Add two Southern California markets—Los Angeles and San Diego— and more recently two Texas cities—Houston and Dallas and you’ve almost automatically filled out your top ten. After that investor enthusiasm wanes considerably. As one of our interviewees said in this year’s report, there are really only eight or nine cities that investors focus on today—the global pathway markets which attract brainpower jobs or the 24-hour metropolitan areas where young people look to build careers. Typically they happen to be the same places, usually cities with attractive natural barriers to entry along the coasts. At the very least you need a major international hub airport nearby to gain any credibility. Emerging Trends is published annually by PricewaterhouseCoopers and the Urban Land Institute—the 2011 edition, which I authored, was released earlier this month.

 Only two markets rate reasonably strong prospects for next year:

• Washington DC is always the survey number one during rough economic times—the federal government provides a great buffer and this market holds value better than any other.
•  Thanks to TARP and various federal infusions to its bedrock financial sector, New York (ET #2) shows the greatest gains in this year’s survey. Never bet against it—the city is the country’s ultimate center for money and culture, drawing commerce from around the world.

Three cities register decent long-term prospects without dramatic upturns next year: 

• The quintessential West Coast 24-hour market and important global gateway, San Francisco never strays too far from the head of the rankings (this year at #3) despite volatile rent swings. 
• Boston ranks fourth, living off its academic prowess—all those bright students and professors in the metro’s scores of fine colleges and universities provide a foundation for economic stability. 
• Seattle suffers from a temporary demand outage and office overbuilding, but its diversified corporate makeup (high tech, aerospace, import-exports, e-commerce) signal a solid rebound once the national economy shows more improvement. 

Houston and Dallas always look good to developers—Texas’s friendly business environment (low taxes, cheap land, and limited regulation) keep corporations coming, but it’s hard to hold value with a continuing stream of new projects seemingly always in the pipeline… Southern California is expected to come back, doom and gloom headlines aside. Emerging Trends respondents won’t count out alluring coastal markets along the Pacific—Caalifornia may have budget problems, but it still ranks on its own as one of the world’s largest economies. The further you move away from the ocean and into the desert, the worse outlooks get, especially in Inland Empire housing bust markets.