A Tale of Four Metros

Are you in Chicago? Houston? Seattle? Boston? Here are the latest ScoreKeeper stats on the health of these four property due diligence markets.

Last month, we touched down in Chicago, Houston and Seattle—then a few weeks later, Boston—thus ending our fall Due Diligence at Dawn workshop tour (which became Due Diligence at Dusk at our evening events in Seattle and Boston).

My track, titled RISK MANAGEMENT TRENDS IN THE 2ND ACT OF MARKET RECOVERY, covered the latest developments in commercial real estate (recovering slowly) and property lending (even more slowly). For those who missed it, here are the five key take ways from my market recap, followed by Capsule Metro Summaries for each city.

1.    The jobs market was the shining star of 2014.

I’m happy to report that we are now 80 percent back to the economy’s pre-crisis employment levels. And, 2014 brought the strongest stretch of payroll gains we’ve seen since 2006. A strong jobs market is absolutely critical for a strong property market so this was not an insignificant trend of the past year.

2.    Market fundamentals have stormed back.

Across all property types, commercial real estate fundamentals now paint a positive picture: lower vacancy rates, higher rents and property pricing, and better returns on investment for buyers. Fortunately, the market is also still enjoying a low interest rate environment, so it’s not surprising that major investors are increasing their 2015 allocations to commercial real estate.

3.    Construction is back!

The recent uptick in new construction marks the start of a new development cycle…FINALLY! The construction of office buildings, hotels and apartment buildings picked up first in New York, San Francisco and Boston, but now the cranes are dotting the landscape of smaller metros like Atlanta, Chicago, Las Vegas and others. It’s because these areas are finally seeing a pickup in employment. It’s because land prices and construction prices are going up and retailers in particular have expansion plans to meet. It’s because of business being just comfortable enough that they’ll commit to expanding their footprints again. Such a welcome—and recent—change from just a few years ago, when construction loans on half-finished apartment or office or retail projects were defaulting. Texas, Louisiana, New York and California are seeing the highest levels of construction spending this year.

4.    Secondary metros are back, too!

Much like the Architecture Index is viewed as a barometer of where construction is heading, EDR’s ScoreKeeper data on Phase I ESA hot spots indicates how investor interest is shifting. 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. The latest results reflect that interest in properties is bleeding outward from into secondary markets. It’s become very difficult to get deals done in the primary metros. Prices are expensive and competition is fierce, especially from foreign investors. It’s also not unusual for consultants to be given a turnaround time of less than a week on deals in these areas. Now, we’re seeing secondary metros like Cincinnati, Austin, Portland and Seattle experience double-digit growth in Phase I ESA activity—well above the U.S. average.  Many of the metros on the top 10 list are late recoverers that are just getting back into the game. The Texas economy is booming so it’s not surprising to see three TX metros on the list. Given the shifting sands in commercial real estate, it’s important to track how investor targets are changing in response to market forces.

Top10Metros

5.    Loan origination volumes are improving.

As interest in properties ramps up, it’s critical for buyers to have access to capital—and access is growing, although the pace of increases in 2014 was a bit disappointing. In talking to lenders, I hear them universally cite strong competition to originate new loans and beat out other banks. The good news is that as property valuations continue to increase, it will encourage more originations. Lenders unfortunately should get used to the intense competition as it is unlikely to abate any time soon. It’s also worth noting that refis will tick back up as the market faces a new wave of loan maturities in 2015 and 2016.

MBA_forecast

These five trends all bode well for transaction-driven property due diligence in 2015. Here’s a look of reasons to feel good about doing business in any of the four metros we visited this fall:

Capsule Metro Summary: BOSTON

4th largest Phase I ESA market in the country
Ranked 9th in US as “Metro to Watch” for CRE investment in 2015
5th best metro for hotel investment
7th for office investment
8th for retail

Capsule Metro Summary: SEATTLE

9th fastest-growing Phase I ESA market in U.S.
12th largest Phase I ESA market
Ranked 8th in US as “Metro to Watch” for CRE investment in 2015
Strong tech-focused economy will support good investor demand
2nd in U.S. for industrial investment
3rd for hotels
4th for office investment

Capsule Metro Summary: HOUSTON

6th fastest-growing Phase I ESA market in U.S.
9th largest Phase I ESA market
25% growth in Phase I ESA volume in 3Q14 over 3Q13
The #1 market in the U.S. as “Metro to Watch” for CRE investment in 2015

Capsule Metro Summary: CHICAGO

3rd largest Phase I ESA market in U.S.
Benefitting as investors look outside NYC, LA and San Fran
Ranked 18th in US as “Metro to Watch” for CRE investment in 2015
Top industrial market in U.S.

FOR MORE INFORMATION

Interested in seeing similar stats for your metro(s) of interest? Simply email a request for a sample ScoreKeeper State Profile in a particular state.