Geographic hot spots for property due diligence paint an interesting picture of where future commercial real estate deals will be closing. Much like the Architectural Billings Index is an economic indicator of future commercial real estate construction, environmental due diligence is conducted prior to a property deal closing, and thus, a leading indicator of commercial real estate growth areas. EDR’s ScoreKeeper model estimates the national volume of Phase I environmental site assessments, a common type of environmental due diligence. The latest second quarter output reveals broader trends underway in commercial real estate. Up until very recently, the strongest-growth metros were the large (or primary) ones like New York City, Chicago, Boston, DC and Los Angeles. ScoreKeeper tells a different story about the fastest-growing areas of the country for commercial real estate today.
Metro Growth Leaders in 2Q15: Migration to Secondary Metros
Nationally, the volume of Phase I ESAs rebounded by a robust 17 percent over a disappointing first quarter, according to ScoreKeeper. Year-to-date volume was relatively flat year on year, but the real story of growth can be found at the secondary and tertiary metro level. Of the 100 metros (defined as metropolitan statistical areas or MSAs) modeled by ScoreKeeper, 53 outperformed the overall U.S. market in the first half of 2015 over last year.
As shown in the table below, the fastest-growing metro areas in the United States year over year in 2015 in terms of Phase I ESA volume were Portland, OR; Las Vegas and Salt Lake City, which grew by 23%, 23% and 22%, respectively. It is also worth noting that the strength of these three Western cities drove growth for the entire Western region to a healthy 11% growth at mid-year 2015, tying the North Atlantic region for the top spot.
The rest of the top 10 list is shown in the accompanying table, and includes Baltimore, Sacramento, San Antonio, Long Island, Philadelphia, Raleigh and northern NJ. Gone from this quarter’s ranking are past growth leaders like San Francisco, LA and Boston. This is indicative of a broader trend in commercial real estate: Gateway markets are still compelling, but investors are expanding their reach to secondary (and even tertiary) markets in their search for yield in cities where prices are lower, and competition, especially from aggressive foreign buyers, is less intense.
“The increase in capital will likely begin to move to more secondary markets in 2015.”
~PricewaterhouseCoopers, Emerging Trends in CRE, 2015
“As prime markets get more expensive, more capital will flow into secondary and tertiary markets.”
~Deloitte Real Estate, 2015 Commercial Real Estate Outlook
Portland, for instance, is currently a big draw to investors, some of whom have migrated south from popular Seattle, due to Portland’s appeal to millennials, a diverse economy and above-average population growth. Behind Vegas’ number-two rank this year is its new status as one of the “comeback kids” in commercial real estate along with hard-hit metros like Miami, Detroit and Phoenix. Real estate deal-making in these metros is still below previous peak levels, but they are starting to attract new development and investment activity for the first time in the recovery. A number of markets severely challenged by the recession have recently been recording sharp gains as late recoverers that are just getting back into the game, as evidenced by ScoreKeeper output.
It is also important to note that five of the ten metros that appeared on ScoreKeeper’s 1Q15 list of 10 fastest-growing metros are also on the 2Q15 list. Vegas, San Antonio, Sacramento, Portland and Raleigh are consistently showing strong growth quarter to quarter, a sign of active investor activity.
|TOP 10 METROS FOR PROPERTY DUE DILIGENCE IN 2015|
|Highest-Growth in Phase I ESA Volume (Yon Y)||Top 10 Ranked Metro in 1Q2015?|
|Las Vegas, NV||23%||1st|
|Salt Lake City, UT||22%|
|San Antonio, TX||19%||3rd|
|Long Island, NY||18%|
For More Information on ScoreKeeper
Additional information and analysis on industry trends and hot spots is available on the ScoreKeeper website with information on subscribing to State Profiles, Regional Profiles or Competitive Profiles.