You know we are in the mature part of the cycle when institutional investors start hashing over just what is a secondary market. What they are really concerned about and trying to rationalize is buying assets in higher risk urban centers with suspect tenant depth and limited exit strategies when times go bad. And oh, by the way, that's just about everywhere outside the leading 24-hour cities. It's just a matter of degree of how risky some of these other places are.
Most savvy domestic investors realize that buyers are now significantly overpaying in the handful of primary gateway markets. They have stepped aside and let the foreigners do the deals. It's a bit like the trophy hunting by Japanese in the late 1980s. Just this time various Chinese, South American, and Middle East investors are doing the hold-no-bars acquiring. What did the Waldorf sell for? $2 billion. And the penthouse at One 57, overlooking Central Park and everything else? $100 million plus. The stratospheric pied de terre on the top French Fry building at 432 Park will likely garner at least as much--is anybody going to dare to live in it anyway?
So among the major gateways which are unquestionably primary markets, New York is too rich for the blood. San Francisco, DC, and Boston also are too dearly priced for any comfort. Chicago is a primary 24-hour market, but demand is flimsy. West LA is not 24-hour, but is pretty solid. I would characterize Seattle as a smaller gateway with increasing 24-hour dynamics, and it is overbought at this point. Miami is another smaller gateway (to Latin America). It's arguably not a primary market for office, but certainly is for industrial, retail and apartments-condos. Back in 2009 I said this market was a clear buy--you knew purchasers would return in droves for those half empty condo shells. Well that's happened. Now South Florida is a hold or sell market.
Although not 24-hour cities, I count Dallas and Atlanta as primary gateway markets, because of their huge airports, which funnel passenger and commercial traffic from around the country onto international flight paths. Houston is also primary, just because of its size and growth track. But all three of these traditionally boom-bust markets have low barriers to entry and struggle to develop 24-hour characteristics, which support core real estate investing. Houston's recent boom may already be going bust in an overbuilding spree, torpedoed by recent oil price declines.
Philadelphia and Detroit are still big MSAs but they are not primary real estate markets, based on tenant demand (weak) and investor interest (tepid to be charitable). Denver has a world class airport and is developing into a more 24-hour downtown, but it cannot rank with the others—despite regional growth, there is not a big enough population mass in surrounding states and it is not an international gateway.
In the Sunbelt, Austin, Nashville, Charlotte and Raleigh all enjoy population growth and investor interest—let's call them top tier, secondary markets. On the West Coast Phoenix, San Diego and Portland I'd also rate top tier. In the Midwest-Industrial Belt, Minneapolis, St. Louis Columbus, Indianapolis, and Pittsburgh qualify as (very) slow growth, but decent secondary markets.
After that you really take your chances as an institutional buyer--better to leave these other markets to locals, who are willing to hold for the very long-term.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
