Top Cities: Greg Vorwaller

CPE asked a number of investment sales brokerage executives about the cities they recommend that their clients consider. Excerpts of their responses appeared in the September 2013 Special Report. Following is the full response from Greg Vorwaller, global head of capital markets for Cushman & Wakefield Inc. Be sure to read the full responses of the other executives, as well!

Not much has changed among investors’ city preferences, a lot of it having to do with their view of risk and their continued focus on risk mitigation, given the slow pace of recovery in the economy. As a result, they want to invest in those cities that have a depth of diversity in terms of their business mix and what that means for job creation. We continue to see the vast majority of investor activity directed toward the primary markets, especially those on the coasts. Those cities would be Boston and New York, and to a lesser extent DC, given what’s going on with sequestration—although investors who have a long view continue to have appetite for exposure in DC. Atlanta, which has begun to demonstrate resiliency in its economic and job creation base. Chicago. Houston and Dallas, given their relative weightingy to the energy industry. Then you’ve got the other large coastal cities like Los Angeles and San Francisco.

In contrast to last year, where we are also beginning to see added investor interest would be cities like Phoenix, which is beginning to show signs of economic growth, reflected in the improvementin the residential market. Denver, because of quality of life and exposure to the energy sector but also it’s proving to show a great deal of resiliency in this economic cycle due to improved levels of diversification in its economic base that would include a fair amount of representation in the services, as well as telecommunications and information technology sectors. And we’ve also seen a fair degree of activity on a relative basis in the Minneapolis marketplace. So if you think about it, that notion of risk aversion would be reflected in the fact that investors want to bet on the CBDs that have historically demonstrated fairly high degrees of liquidity, so that if for whatever reason they elected to liquidate—notwithstanding the short-term economic conditions that might exist—over the long term those markets could be underwritten to attract sufficient interest in order for owners to liquidate their positions.

Those buckets that may be more fitting of a categorization of secondary might be Charlotte, Raleigh-Durham, Indianapolis, Memphis, Nashville. Depending upon how those markets have performed during this economic cycle, those are markets that have shown some relatively strong rates of growth and recovery, and as a result those are markets where you tend to find a fair degree of shift from some investors that have been previously active in the primary markets who may feel comfortable making a shift into the secondary markets in search of better relative yields. Primarily those that would have a value-added orientation, whether they be private equity funds, value-added investment vehicles sponsored by pension fund advisors or high-net-worth individuals or investment syndicates of high-net-worth individuals that have the investment capacity to borrow at fairly healthy levels. What’s been most facilitating to improve levels of activity in those secondary markets is the fact that the lending marketplace is fairly functional, all things considered. You’ll find lenders, especially CMBS, who have migrated into those secondary markets because they can get the relative yield premiums that they desire versus the competitive  deal terms commanded in the primary markets.

Given the growth in the pipeline that we’ve experienced over the past couple of months, opportunities continue to emerge in the primary markets, part of it being driven by loan maturities, some of which have been extended, others perhaps driven by the recent rise of 10-year ratesTo the extent that  owners in their hold-sell analysis have determined that they might like to monetize their investment position, there is a concern about continued increases in long rates, which could influence investor behavior and pricing. And so rather than run the risk of diluting paper gains that they have enjoyed on their holdings, they’re making the decision to sell now vs. wait and take the risk of diluting their paper gains.