It seems like every real estate conference or association “state of the market” event that I attend these days has an overriding theme. All of the money (Equity and Debt) is focused on Core Urban Environments. I have even written about the dynamic myself in a recent blog entitled Capital and Workplace Strategies Collide. Many investors are proclaiming that the suburbs and secondary markets will not keep pace with the returns in the “Core” technology markets. I ask a simple question, “What returns?” If the demand is that hot, the cap rates are typically much lower in those markets.
“Double the Return of Core Market Opportunities”
At last weeks SIOR conference in Century City I attended an investment session where brokers present their investment offerings. Many of the attendees are from Non-Core Markets and are presenting properties with cap rates more than double that of Core Market opportunities. Sure, there is more risk in these secondary and suburban markets. Or is there?
If I look back over my career it seems that every time capital gets focused on one segment, it is all but over for that segment. The capital will over-invest and push values to unsustainable highs and the excess liquidity will cause oversupply problems. On the other hand, the lack of capital to the secondary markets will artificially constrain supply and create opportunity.
“The real reason you shouldn’t bet on the Urban Core… Demographics”
I believe that certain core markets that have huge business drivers will continue to attract talent, and capital. But I don’t think the sharp focus on downtown cores makes a lot of sense. Although many downtown cores have seen an incredible resurgence during the last decade, the population that has driven that growth is now maturing. And a lot of the money that made the re-development of the Urban Cores possible (in the form of government-funded tax credits and the like) is also likely to disappear. So I would offer that the urbanization trend may in fact be a fad. A great article by demogapher Joel Kotkin demonstrates that the shift to the suburbs is already happening and is supported by the results of the 2010 census.
So, didn’t a lot of companies, and others, follow the younger workforce to the Urban Core? And, if the new workforce is now moving to the suburbs, wont those same companies follow them back? How will this affect the capital that is hell-bent on “Living in the City?” Only time will tell. I’ll be watching from the Suburbs…
John,
Interesting take on where the Real Estate market may go. Urban renewal has been all the buzz for some time, and seems to move from city to city as the new trend. Phoenix did it years back, and then, as you hint at here, it seems that development eventually moved back out to the edges.
We saw it with the Cardinals and Coyotes stadiums going to Glendale on the west side, as the prices, traffic, permitting etc in the downtown Phoenix and Tempe areas had risen and become increasingly complicated. The population growth had shifted from the central valley to the west side, so the decision was made to follow, knowing that it would be inconvenient for some farther east, but that the population growth in the chosen area would make up for that long term.
Of course businesses followed these projects and created a new business center, closer to the homes and families of the people who work and spend their money there.
Thanks Mark. Only time will tell.