Here’s What’s Next For Secondary Cities In the Southeast

The Southeast is booming amidst pandemic unrest elsewhere in the country, with a growing share of employers packing up and heading to greener pastures in secondary gateway markets across the region and investors following suit. And that bodes well for the future of cities like Nashville, Raleigh, and Orlando, according to a recent CBRE podcast featuring brokers Frank Fallon and Will Yowell, Highwood Properties CEO Ted Klinck and Johnson Development’s Geordy Johnson.

Whereas Atlanta was once (in the not-so-distant past) the center of population growth in the Southeast, today many recent college grads are heading for cities like Nashville, Raleigh, and Orlando, Fallon says. And capital is following suit, with investors previously focused on the West Coast or East Coast turning an eye toward the Southeast, with less regulations and lower taxes.

“We get kidded a lot about how simple it is,” Fallon said. “Well, here’s what it is. It’s population growth, which means consumers in your market, which means consumers are buying goods out of these warehouses.  And that’s what drives this primarily, is the goods coming out of the warehouses.”

Fallon also echoed his own observation of a trend that’s been on many investors’ minds over the last year: secondary markets are the new primary markets. He says he recently placed a deal in Raleigh for twenty-year-old product at a 4.2 cap rate on a five year lease.

The office market outlook isn’t quite as rosy, though CBRE Vice Chairman Will Yowell said he’s personally not seen Atlanta experience the kind of growth in HQ relocations and major regional office presence as he has over the last six to nine months. 

“That’s just a testament to these companies really being focused about attracting that talent,” he said. “And that’s starting to play out very much in the interest that we’re seeing of capital and investors looking at assets in the Southeast.”

In particular, activity from international capital has been “off the charts,” Yowell said, with a tremendous amount of Asian capital flowing to the region. Investors from Europe and the Middle East are focused not only on primary markets but also secondary growth cities like Charlotte, Raleigh, and Nashville.  And while cap rates aren’t as low as for industrial product, they’re still among the lowest Yowell has seen in his career, in the very low 5s

Ted Klinck, chief executive officer of Highwood Properties, noted that smaller firms leasing space within the company’s portfolio have been coming into the office more, while larger firms have been largely remaining at home. But a growing number are calling into the firm’s customer service line to talk about their plans for a return to office, he said, buoying his outlook for the next phase of 2021. He predicts a “slow, gradual pickup” in activity over the next 30 to 90 days. 

“I keep reading about this hybrid working model, how employees want increased flexibility and the ability to work from home for one or two days a week,” he said. “And I do think that’s going to happen with a lot of companies. But it’s too early to know what a hybrid model is going to be…I think it’s going to be different for different companies, different industries, maybe even different departments within companies. But it’s going to take a while to figure out and then a while to play out as well.”