NEW YORK CITY—High CMBS issuance is no longer the exclusive province of 24-hour cities. Instead, says Trepp LLC, it's now seen in “an assortment of secondary, major and top-tier metropolitan areas.”
“As property investors increasingly focus on fast-growing '18-hour' cities, both major and secondary markets are experiencing accelerated growth rates,” says Manus Clancy, senior managing director at Trepp. “As a result, CMBS deals feature a growing volume of loans against properties in those markets.”
Pricing is one of the factors leading investors to venture outside the “big six” 24-hour markets of New York City, Los Angeles, Chicago, Washington, DC, San Francisco and Boston. But so is growth in key metrics outside the core markets.
Take employment, for example. “Major markets, such as Dallas, Houston, Philadelphia, Atlanta, Miami, Phoenix, Detroit, Seattle and Minneapolis, posted the highest absolute and relative growth in employment during the 12 months through March 2017, netting 580,000 new jobs for a 2.61% growth rate,” according to Trepp. “Secondary markets—meaning those with employment bases of 900,000 to 1.5 million—followed with a 2.39% growth rate in jobs. Both alternative market categories are now outperforming the gateway cities in job creation,” with the big six generating a total of 430,000 jobs during the 12-month period, for a growth rate of 1.48%.
While all six of the gateway cities figure in Trepp's rankings of the top 20 US markets in terms of economic growth and CMBS investment, they just barely crack the top five. San Francisco-Oakland-Hayward sits in fifth place, while the New York City/New Jersey metro area may rank first for the sheer volume of outstanding CMBS debt–$74.3 billion—but finishes last for overall growth metrics.
In fact, the leading growth market—the only one to finish in the top 10 for all nine of the metrics Trepp used to measure absolute and relative growth—is one of the majors. Seattle not only grew its employment base by 3.2% over the past 12 months, but it also saw a 7.8% year-over-year increase in CMBS issuance. Compare that to Y-O-Y growth in CMS issuance for Los Angeles (-35.2%) or New York (-27.1%).
Rounding out the top five behind Seattle were Las Vegas, Atlanta, Orlando and San Francisco. Three of the top five—Seattle, Las Vegas and Orlando—are in states that have no income tax, while Atlanta's home state is known for its business-friendly climate and low tax burden.
Moving further down the rankings, Trepp notes that metro areas like Phoenix, Dallas, Tampa, Boston, Charlotte, Denver, and Riverside-San Bernadino have healthy job growth to commend them. With the exception of Boston, each also posted Y-O-Y employment growth rates of more than 2.0%.
On the other hand, Trepp says, “These markets experienced varying CMBS loan performance; some outperformed while others struggled with rising delinquencies, below- average DSCR, or sluggish NOI growth.” Nonetheless, they may represent interesting opportunities for CMBS lenders, since some of the “lackluster” CMBS growth rates may be due to “loans with lower credit quality in the wall of maturities.”
Characterizing the markets at the bottom of Trepp's list are slower growth rates overall and varying levels of improvement for CMBS loan performance. San Jose, Philadelphia, Columbus, OH and New York all fall under this heading. “With the exception of Philadelphia, average occupancy decreased in each of these markets for the five major property types,” according to Trepp. On the other hand, they offer ”steady—although relatively slower—growth with less risk compared to some of the faster growing areas.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
