Metro Watch: Ground-Truthing 2014 Forecasts with ScoreKeeper Results

Is Property Investment Gaining Traction In Secondary Markets?

2014 got off to a slower-than-expected start for many environmental due diligence consulting firms. Real estate recovery continues to be uneven across U.S. metropolitan areas, and growth rates from metro to metro can vary widely. In the 54 metropolitan areas tracked by EDR’s ScoreKeeper model, Phase I environmental site assessment volume was up a modest four percent year-on-year in the first two months of 2014, ranging from 63 percent growth in Nashville to a 25 percent decline in Vegas. Up until very recently, the strongest-growth metros for real estate investment were the large (or primary) metros like NYC, Chicago, Boston, DC and Los Angeles. Investors view these metros as the safest, best places to park their money—places where a return on investment is an easier bet.

At the dawn of 2014, analysts predicted that this would finally be the year when interest in properties bled outward from the primary metros into the midsized (or secondary) metros as investors sought higher yields and less intense competition for the choice, low-risk properties. One such forecast was “Emerging Trends in Real Estate 2014,” a highly respected and widely read real-estate industry forecast published by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) (note 1). As the end of the first quarter nears, it is worth exploring whether these forecasts are taking root.

Metros to Watch

In the Emerging Trends report, there are two findings that bear repeating. For evidence that the overall commercial real estate property market is improving, take a look at the progression of markets over the past four surveys shown in this table:

PwC_1

Back in 2011, the PwC/ULI study characterized only two metros as having “good” or “better” investment prospects. Now, three years later, the list has expanded to 11 metros. This reflects investors’ preference for a more diverse set of markets beyond the low-risk favorites of the early recovery years. Notably, metros hit hard by the collapse of the housing market like Miami and Orange County made this year’s list and are looking better to investors than they have in a long time.

Emerging Trends also ranks U.S. metro areas as “Markets to Watch” for investment, development and home-building in the coming year (see the top 25 in accompanying table). Notwithstanding some moderate reshuffling, the top five metros have been essentially unchanged over the past few years. Below that top echelon, however, it is encouraging to see significant jumps in the rankings of secondary metros like Portland and San Antonio that are seeing more interest from investors as they get more comfortable with risk-taking.

PwC_2

 

This trend was just reinforced in an analysis published by the National Association of Industrial and Office Properties (NAIOP) listing 33 metros that could soon see a boost in commercial real estate investment. NAIOP voiced its expectation that we will likely see the same trends from primary markets start to take hold in secondary markets  like Columbus, Kansas City, Tampa Bay, Austin and others (note 2).

Ground Truthing with ScoreKeeper

Are secondary metros more active this year? Considering the close correlation between property transactions and Phase I ESA activity, the answer is yes. EDR’s ScoreKeeper model estimates Phase I ESA activity in the 54 top commercial real estate markets tracked by EDR’s former sister company, PPR (the PPR54 Index). Aggregate January and February Phase I ESA growth for the PPR54 index, accounting for about 60 percent of all national Phase I activity, was up a modest four percent year-on -year. Yet, analyzing activity on a metro level:

•    30 of the PPR54 metros modeled by ScoreKeeper experienced Phase I ESA growth this year that was equal to or stronger than the aggregate index (see accompanying table).
•    16 of these are on the PwC/ULI list of “Top 25 Markets to Watch” in 2014.
•    15 of the 33 metros listed by NAIOP as poised for a boost in commercial real estate investment also made the list.
•    9 of the 11 metros on PwC/ULI’s list of metros with “good” or “better” investment prospects this year also made the cut.

SKMetro_3

Bottom Line

As the market moves into the second quarter of 2014, commercial real estate investment and sales activity could begin to pick up in more of the secondary markets as investors move up the risk spectrum and get more comfortable investing in smaller metros. Such recovery is dependent on continued economic recovery and access to capital in these areas.
Although transactional activity is still strong in primary markets like New York, Miami and Los Angeles, it is difficult to sustain the double-digit growth these areas have seen in recent years. The biggest gainers in 2014 could be found in markets like Austin, Cincinnati, Memphis, Pittsburgh and other secondary markets.

This trend will be good news for the overall market as it suggests a much more widespread recovery, as well as for environmental consultants working in metros that, until recently, have not had  the interest of investors or the necessary access to capital for property investment.

NOTES:
1.    The PwC/ULI Emerging Trends 2014 report, now in its 35th year, is a study jointly undertaken by PwC and the Urban Land Institute based on outreach to more than 1,000 contacts in the real estate world. The report is worth a read for interesting metro-by-metro summaries and statistics on every primary or secondary metro in the country.

2.    Another report of interest to any firms looking for growth in secondary markets was  released by the NAIOP Research Foundation. The findings suggest that commercial real estate investment and sales activity could begin to pick up in the coming year in many of America’s secondary markets.