Second-Tier Global Cities: CRE’s New Rising Stars

JLL's latest Investment Intensity Index reveals the rise of 'New World Cities' as attractive markets for global commercial real estate investment.
Photo courtesy of JLL Investment Intensity Index March 2016 report

Photo courtesy of JLL Investment Intensity Index
March 2016 report

Though the world’s most globalized metro areas still take an outsized slice of global CRE transactions (the top-10 cities accounted for nearly 30 percent of global investment over the last three years), over the past 10 years a rising group of 32 ‘New World Cities’ has steadily increased its share of global real estate investment volumes, according to a new report from JLL.

The latest JLL Investment Intensity Index, released last week, documents the rise of the New World Cities from a 10 percent share of global CRE investment in 2006 to more than 20 percent in 2015. The Index measures the volume of direct commercial real estate investment in a city compared to the city’s economic size.

New World Cities, per JLL, are typically small to medium-sized cities with transparent, open real estate markets, favorable infrastructure and livability platforms, and dynamic economies.

“With pricing at near-record levels in many gateway cities, New World Cities can offer better value for investors and are establishing themselves as consistent and liquid markets,” Jeremy Kelly, director of Global Research Programmes at JLL, said in a prepared statement. “A broad range of investors now recognize the inherent strengths of New World Cities as dynamic clusters of business activity that offer scalable real estate investment opportunities.”

Of the top 20 cities in JLL’s Investment Intensity Index, four are so-called Established World Cities: London (1st), Sydney (4th), New York (11th) and Paris (13th). The rest are all New World Cities: Oslo (2nd), Munich (3rd), Honolulu (5th), Copenhagen (6th), Auckland (7th), Frankfurt (8th), Silicon Valley (9th), Melbourne (10th), Stockholm (12th), Boston (14th), Dublin (15th), San Francisco (16th), Austin (17th), Edinburgh (18th), Brisbane (19th) and Berlin (20th).

The perhaps surprising level of investor interest in Australasian cities (with four on the list) is being driven, according to JLL, by “improving market fundamentals, active technology sectors and attributes relating to transparency, liveability and sustainability.” Strong local technology sectors also provide much of the pull for Silicon Valley, Boston, San Francisco and Austin, the report said.

The rise of the New World Cities stands in some contrast to a recent relative decline of some Emerging World Cities, says the report. While Shanghai and Beijing continue to attract significant amounts of global capital, direct CRE investment into emerging markets overall fell by one-third in 2015 to 5.5 percent of total global volumes of $704 billion. Mexico City, Sao Paulo, Johannesburg and Moscow were among the Emerging World Cities hit by factors such as China’s slowdown, lower commodity prices and the volatility of emerging market currencies.

“This is not a ‘flash in the pan’ trend,” Kelly concluded. “[T]he increased investor interest in these adaptable, transparent, mid-sized markets is now a structural, rather than cyclical, feature of the real estate investment market. As the world re-calibrates in the wake of a Chinese slowdown and other economic uncertainties, we expect these cities to continue to punch above their weight as real estate investment destinations.”