Market Measures: What Makes the Biggest U.S. Cities Tick (or Not) for Real Estate Investment

The characteristics driving real estate investor interest in the biggest U.S. cities.

The first half of 2012 saw a significant shift in real estate performance among the biggest U.S. cities, resulting in some big changes in which ones are (or should be) attracting investors. A larger discussion of this shift and rankings of the cities appeared in the Special Report: The Best and Worst Cities for Investment in the September 2012 issue of Commercial Property Executive. Following are details on changes in each of the cities.

Atlanta: The city continues to struggle, according to Emerging Trends’ mid-year update, although Real Capital Analytics ranked it 11th based on first-half 2012 sales volume (down 13 percent year-over-year).

Austin: Buoyed by strong technology and education bases, and economic diversity. One of the top markets for industrial buyers, according to Emerging Trends’ mid-year update, thanks to overly strong job gains, leasing demand and rental growth.

Boston: Will continue to be a heavyweight, thanks to its plethora of universities and resulting educated workforce, strength in biotechnology and above-average job growth.

Charlotte, N.C.: Has shown consistent positive growth, and has seen an influx in capital, driven by a stability in finance and banking as well as growth in energy.

Chicago: Remains a Big Six market, ranking third on Real Capital Analytics’ list of top markets in the first half of 2012 based on sales volume, up 2 percent over 2011, and fourth on Jones Lang LaSalle’s list, with 4.3 percent growth over first half 2011. But it has lost 200,000 jobs in this economic cycle.

Denver: The expansion of the energy sector has driven new growth. Transaction volume was up 27 percent in the first half of 2012, year-over-year, according to Jones Lang LaSalle Inc.

Detroit: Has seen a big gain in interest among investors, but that’s an increase from the bottom of the list. It’s starting to show some signs of life but has a long way to go.

Houston: Its base in energy is sees job growth, as are other industries thriving there, including information technology, healthcare and education. The city’s job growth is above the national average, according to Emerging Trends’ mid-year update, at 3.7 percent year-over-year versus the 1.5 percent national average, with another 2.3 percent growth expected in 2013.

Las Vegas: Has seen some growth but at this point is really considered a tertiary market. Values have continued to decrease. “I don’t think people are ready to take on that kind of risk overall.”

Los Angeles: Number two on both Real Capital Analytics’ and Jones Lang LaSalle’s ranking based on first half 2012 volume, but it has remained flat as an investment market. Prices are almost back to pre-recession levels.

Miami/South Florida: The city and region have improved as an investment market and were termed “a decent market to look at.” But improvement has been slow: Job growth is expected to rise by only about 20 basis points in 2013 and remains down by almost 70,000 jobs. And the housing market remains soft, with foreclosures close to 19 percent.

New York City: Overpriced but still attracting investors, both foreign investors, who tend to be focused on the big gateway markets and tend to make New York a perennial, and institutional investors. Cap rates are in the 5 and sub-5 range, with office and apartment cap rates compressed the most. Midtown South in particular continues to perform well, as does Downtown.

Phoenix: Has seen growth, driven by education and leisure, and in-migration from California. But “you’re going to have to determine if you’re ready to take that risk.”

Pittsburgh: Has reinvented itself as a medical hub and is getting a boost from shale gas.

San Diego: Driven by professional and business services, with growth primarily in submarkets such as Rancho Bernardo and Sorrento Mesa. The flight to quality phenomenon continues to play out, with a shift to Class A properties (510,000 square feet of absorption in the past year) from Class B properties (165,000 square feet given back). Emerging Trends’ mid-year update found that it continues to struggle.

San Francisco: Sales volume increased 13 percent in the first half of the year on a year-over-year basis, according to Real Capital Analytics, as it experiences a “mini tech boom.”

San Jose/Silicon Valley: The city and region have experienced economic growth, driven by the technology sector. One of the top markets for industrial buyers, according to Emerging Trends’ mid-year update, thanks to overly strong job gains, leasing demand and rental growth.

Seattle: Has seen improved job growth, primarily in the technology sector—with expansion among companies like Google and Amazon—as well as manufacturing, led by Boeing. Job growth is at about 1.2 percent.

Washington, D.C.: The office sector is weak right now, and prices are high. The federal government has decreased jobs by 52,000 in the past year, and government contractors are likewise rightsizing as they are asked to sign 30- to 60-day continuances instead of multi-year contracts. Parts of the city are performing well, such as NoMA (North of Massachusetts Avenue) and City Center. But a lot is waiting on the results of the election and the “fiscal cliff people are talking about at the end of the year.” Some believe neither party will make much of a difference and that the days of “big government,” as it relates to space usage, are over.

Sources: Marisha Clinton, director of research for the capital markets at Jones Lang LaSalle Inc.; Ryan Severino, senior economist for REIS Inc.;  Chuck DiRocco, director of real estate research for PricewaterhouseCoopers; Dan Fasulo, managing director for Real Capital Analytics Inc.; plus research from Jones Lang LaSalle, Real Capital Analytics and the PwC/ULI Emerging Trends mid-year update.