CRE Investors Turning to Secondary Markets

The investment sales market for commercial real estate is shifting away from the major markets of New York City, Washington, D.C. and Los Angeles, and moving towards second-tier markets like Austin, Texas, Charlotte, N.C., and Seattle.

The investment sales market for commercial real estate is shifting away from the major markets of New York City, Washington, D.C. and Los Angeles, and moving towards second-tier markets like Austin, Texas, Charlotte, N.C., and Seattle, Wash.

These markets, according to recent analysis by the CoStar Group, which shows how, due to geographic pricing disparities, investors believe are the smarter moves heading out of the recession.

“What we see across the country is investors are searching for yields. They are willing to take lower risks as they search for yield and are now shifting from primary markets to secondary markets,” Walter Page, CoStar’s director of research for Office, told Commercial Property Executive. “For example, total sales growth for Austin increased 350 percent over the past two years.”

During that same period, sales in New York dropped by 10 percent, D.C. by approximately 12 percent, and Denver and Boston by 25 percent. 

Following Austin in terms of growth, Charlotte saw increases of 310 percent, Seattle of nearly 150 percent and East Bay at 130 percent, as investors are feeling safer now than they were two years ago.

According to Page, the core markets are cooling, but it’s the same thing you see following any economic downturn.

“In these secondary markets, there’s no construction of any significance as 60 percent of office construction is focused in five markets—Boston, New York, Houston, San Jose and Washington, D.C.,” he said. “The other 40 percent have very little so the risk is removed. People want to go to secondary markets as they see a lot of upside in rents and values relative to long-term trends and replacement costs.”

The CoStar report further predicted that people can’t expect big returns out of the Northeast markets because they have been priced up so much in the past, so a common theme among investors is, “Where can I go next?” 

Significant portfolio sales in Austin and Seattle over the last 12 months are indicators of that answer. Investors looking for a bit higher yield are starting to feel that, in these secondary markets, the recovery is far enough along that it makes sense to take business here.