Top Cities: James Kuhn

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 James Kuhn, President, Newmark Grubb Knight Frank. Be sure to read the full responses of the other executives, as well!

The traditional investor wants to buy in a supply-constrained environment, and the traditional five supply-constrained markets are Washington, Boston, New York, San Francisco and L.A. in office and to a lesser extent multi-family.

What happens when those investors can’t buy in those markets because the pricing gets too high? Where do they go next? When I talk to investors, I say the following: Those are your five markets. Would you rather be in a secondary location in those markets or would you rather be in a primary location in other markets? There are a lot of people who say, ‘I would rather buy multi-family in Brooklyn than I would like to go buy multi-family in Atlanta, because they’re still supply constrained markets.’

My view today is that there are two industries driving the demand side: energy and technology—I call them the ICE markets, for “intellectual capital and energy.” When I look across that span, I say, If you are priced out of the supply-constrained markets and you are looking to buy multi-family, office and retail in a city, there’s Seattle, which has become very popular for investors because of the intellectual capital and the presence of companies like Amazon, Microsoft, Starbucks, Nordstrom.

Another market that’s become popular because of energy is Pittsburgh because of the Marcellus Shale. There are some people who say, ‘I don’t want to buy in an environment where it’s easy to build.’ On the other hand, when you have tremendous growth and you don’t necessarily want to hold for 10 years, you look at markets like Houston, Pittsburgh, Denver, because of what’s happened in the hydrofracking world and the shale deposits. You’ve had tremendous growth. Houston is now on people’s list where it wasn’t five years ago because the growth in the shale business coupled with the diversification of Houston today. And Pittsburgh and Denver are also diversified.

And then I always like to throw in my sleeper market that nobody else likes but I like, and that’s Oklahoma City. I don’t mean that you’re going to go in and buy 10 million feet of office space, but what’s interesting about Oklahoma City is the reason that Seattle got so popular is the three or four companies taking up space. In Oklahoma City, you have Chesapeake Energy, Devon Energy, Continental Resources and Sand Ridge. Four very large energy companies in an energy market that I think will continue to produce the need for housing and shopping and retail and some office.

The market that’s perplexing is Chicago, because Chicago thinks it’s supply constrained but it’s not. A lot of the urban environments around the country have figured out that they need to revitalize their downtown. … Chicago, because of Google coming into one of the old Merchandise Mart buildings, has certainly raised the bar for multi-family in that area. But you find people who like Chicago and a lot of people who don’t like Chicago. It’s not in the top five supply-constrained markets, and it doesn’t have energy and technology driving it.

There are some people who would tell you right now there’s risk in Washington, depending on where you buy, because of government. But I believe that Washington will always be one of the top three investment markets for core investors, along with San Francisco and New York, so even if there are some financing issues because of government tenants and things like that, I think still you haven’t seen any pricing compression. I just think there’s less velocity. Boston and L.A. are behind those three markets, but with L.A. you do have to make a distinction. West L.A. has always been a supply-constrained market and downtown L.A. has not been. They’ve done a lot to revitalize downtown, but I don’t think it’s there yet. It’s sort of analogous to what they’ve done in New York with Midtown and Downtown.