Current Issue
Nov 16, 2007
By: Paul Rosta, Senior Associate Editor
This uncertain economic climate can make planning for the future tough. Yet both investors and corporate space users continue to make commercial real estate decisions. Investors may do so by choice when they see opportunity, or they may act out of necessity to fulfill allocations. Corporations, on the other hand, may take action for a multitude of reasons tied to their real estate holdings, to the nature of their businesses or to strategic needs that make immediate relocation necessary or at least better than staying still.
While the current volatility of the markets has to some extent broadened corporations’ search areas in
general, two clear trends do prevail: Primary, and therefore safer, markets are winning out over smaller, riskier locales (although corporations sometimes still choose some of the smaller markets that serve as job centers). And the South and West remain the most attractive draws.
Thus, while it can be difficult to identify cities that investors (see below) and especially
corporations (see page 33) are selecting across the board, an examination both of some of the popular choices and of the reasons behind those decisions will benefit decision makers.
Invstment
Flight 2008 to Low Risk Now Boarding
Call it what you will: a flight to quality, a flight from risk or a flight to location. By any name, a big change in investors’ geographic strategy is in progress. Fundamentals remain sound, and many U.S. cities will wrap up 2007 with record sales volumes, despite the slowing momentum that has dominated the market in recent months. But the skittish credit markets have created economic uncertainty that is likely to remain for some time. Thus, investors are revising the lists of qualities they desire to find in the cities where they spend their dollars, not to mention yen and euros.
In this newly conservative climate, caution has replaced the go-go spirit of the past several years, creating “the flight to quality that tends to occur in periods of uncertainty,” noted Greg Bates,
GE Real Estate managing director for direct investments. Investors nationwide will be adopting GE Real Estate’s conservative philosophy, which has not changed throughout the credit crunch: “We are extremely focused on acquiring good assets in good markets,” Bates said. In other words, opportunities in tried-and-true cities that promise stable returns will likely trump high-risk investments within secondary markets, even if these options offer high potential returns.
Specifically, the flight to quality is now translating into a strong gravitational pull toward the East and West coasts, according to Earl Webb, Jones Lang LaSalle Inc. CEO for the capital markets in the Americas. The Sun Belt cities, some of which overlap the coastal mainstays, are also attracting such
capital. By consensus, the markets pulling in quality-seeking investment include:
n New York City n Washington, D.C.
n Los Angeles n San Francisco
n Boston n Dallas
n Austin n Phoenix
n Denver n Houston
Uncertainty about the financial markets will slow the pace of transactions through early 2008 and possibly longer, yet that by no means will minimize the abundance of available capital or the willingness of investors to buy assets in such attractive cities. “There’s still a frenzy to be in high-quality assets in high-quality markets,” said Aden Kun, vice president for Buchanan Street Partners.
New York City remains the model for major investment markets. Steady job growth and an integral role in global finance are chief among the reasons that Manhattan properties remain the most coveted prizes for investors.
According to Real Capital Analytics Inc., Manhattan’s $32.6 billion worth of investment sales through the first three quarters of 2007 roughly match the value of the combined trades of the next three markets: San Francisco, Seattle and Washington, D.C.’s Northern Virginia suburbs, each of which on its own topped $10 billion.
Six other markets trailed further but are nevertheless making a strong showing, each exceeding
$4.5 billion worth of office sales:
n Chicago, with $9.4 billion
n Los Angeles, with $8.3 billion
n Orange County, Calif., with $6.5 billion
n Washington, D.C., proper, with $5.2 billion
n San Diego, with $4.9 billion
n Boston, with $4.7 billion
Given New York City’s stellar performance, it comes as no surprise that the metropolis took first place in the annual Emerging Trends in Real Estate survey conducted by the Urban Land Institute and PricewaterhouseCoopers. But New York City does not stand completely alone. Despite considerable geographic, economic and cultural diversity, the leading cities for investment have much in common: growing populations, significant barriers to entry for developers, plentiful intellectual and financial capital and access to worldwide markets via ports and airports.
That explains why
the Seattle metropolitan area—despite the facts that it ranks only 23rd in population among U.S. cities and that King County, which incorporates Seattle, is the nation’s 14th-largest county—pops up frequently in discussions about leading cities.
Greater Seattle is luring investors with its growing population, its influential position within the Pacific Rim shipping network and the presence of corporate giants like Microsoft Corp. and Google Inc. Seattle’s investment activity is growing at an even faster clip than overall investment velocity was just a year ago. Through the third quarter of 2007, for example, industrial sales velocity in Seattle increased 76 percent over 2006 levels to $1.8 billion, according to Real Capital Analytics. Nationwide, industrial velocity grew at only a
15 percent rate during the same period.
Secondary Fiddles
Investors’ newfound caution is generally expected to draw investment dollars away from secondary markets. That pattern is already emerging in the divergence between primary and secondary markets’ office cap rates. Secondary-market cap rates for the national office market increased
50 basis points during the third quarter. That was double the cap-rate increases within primary markets, according to Real Capital Analytics Inc.
Despite investors’ overwhelming preference for primary cities, though, some experts warn against counting out secondary markets too soon. Some smaller cities will continue to merit investor confidence because of job and population growth, noted Hessam Nadji, senior vice president & managing director of research services for Marcus & Millichap Real Estate Investment Services Inc. Many of those that he places on the list are in the South and West, including Tucson; Jacksonville; Raleigh, N.C.; Charlotte, N.C.; and Salt Lake City, which is adding jobs at a clip of 4 percent annually.
Earl Webb, Jones Lang LaSalle Inc. CEO for the capital markets in the Americas, said interest in secondary markets is limited to the apartment sector, the only area where fundamentals are noticeably improving as a result of the subprime mortgage debacle.
Secondary-city multi-family product may also be benefiting from recent investor caution, according to multiple experts. Relatively flat population growth in heartland cities like Minneapolis, Milwaukee and Indianapolis has kept a lid on construction for the past decade.
Back Offices Take Center Stage
When it comes to relocating back-office operations, only three things matter: “Labor, labor, labor,” said Eric Marsh, a senior vice president for CB Richard Ellis Inc.’s labor analytics group. One tricky balancing act is finding labor pools that are not yet tapped out. CB Richard Ellis, for example, recently helped DIRECTV Group Inc. tap Missoula, Mont., for its fourth call center. DIRECTV settled into the facility in September 2006 after Missoula got the nod over runner-up College Station, Texas, thanks in part to an incentive package from U.S. Sen. Max Baucus and state officials. But probably more important, DIRECTV liked Missoula because the city hosts no other call centers to compete for labor, Marsh explained.
Exacerbating the obstacle of labor access is what Marsh termed “the huge disparity between access to labor and what the real estate market provides.” Major developers rarely build speculative office product in tertiary markets, which often makes finding space a challenge.
Geographic considerations also provide opportunities to consolidate back offices. Next April, Reebok North America will move its back-office operations to Spartanburg, S.C., from Canton, Mass. That move will place Reebok’s support functions closer to facilities owned by adidas Group, its parent company. In 2009, adidas plans to open its second distribution center in Spartanburg, at a cost of $150 million.
By: Paul Rosta, Senior Associate Editor
This uncertain economic climate can make planning for the future tough. Yet both investors and corporate space users continue to make commercial real estate decisions. Investors may do so by choice when they see opportunity, or they may act out of necessity to fulfill allocations. Corporations, on the other hand, may take action for a multitude of reasons tied to their real estate holdings, to the nature of their businesses or to strategic needs that make immediate relocation necessary or at least better than staying still.
While the current volatility of the markets has to some extent broadened corporations’ search areas in
general, two clear trends do prevail: Primary, and therefore safer, markets are winning out over smaller, riskier locales (although corporations sometimes still choose some of the smaller markets that serve as job centers). And the South and West remain the most attractive draws.
Thus, while it can be difficult to identify cities that investors (see below) and especially
corporations (see page 33) are selecting across the board, an examination both of some of the popular choices and of the reasons behind those decisions will benefit decision makers.
Invstment
Flight 2008 to Low Risk Now Boarding
Call it what you will: a flight to quality, a flight from risk or a flight to location. By any name, a big change in investors’ geographic strategy is in progress. Fundamentals remain sound, and many U.S. cities will wrap up 2007 with record sales volumes, despite the slowing momentum that has dominated the market in recent months. But the skittish credit markets have created economic uncertainty that is likely to remain for some time. Thus, investors are revising the lists of qualities they desire to find in the cities where they spend their dollars, not to mention yen and euros.
In this newly conservative climate, caution has replaced the go-go spirit of the past several years, creating “the flight to quality that tends to occur in periods of uncertainty,” noted Greg Bates,
GE Real Estate managing director for direct investments. Investors nationwide will be adopting GE Real Estate’s conservative philosophy, which has not changed throughout the credit crunch: “We are extremely focused on acquiring good assets in good markets,” Bates said. In other words, opportunities in tried-and-true cities that promise stable returns will likely trump high-risk investments within secondary markets, even if these options offer high potential returns.
Specifically, the flight to quality is now translating into a strong gravitational pull toward the East and West coasts, according to Earl Webb, Jones Lang LaSalle Inc. CEO for the capital markets in the Americas. The Sun Belt cities, some of which overlap the coastal mainstays, are also attracting such
capital. By consensus, the markets pulling in quality-seeking investment include:
n New York City n Washington, D.C.
n Los Angeles n San Francisco
n Boston n Dallas
n Austin n Phoenix
n Denver n Houston
Uncertainty about the financial markets will slow the pace of transactions through early 2008 and possibly longer, yet that by no means will minimize the abundance of available capital or the willingness of investors to buy assets in such attractive cities. “There’s still a frenzy to be in high-quality assets in high-quality markets,” said Aden Kun, vice president for Buchanan Street Partners.
New York City remains the model for major investment markets. Steady job growth and an integral role in global finance are chief among the reasons that Manhattan properties remain the most coveted prizes for investors.
According to Real Capital Analytics Inc., Manhattan’s $32.6 billion worth of investment sales through the first three quarters of 2007 roughly match the value of the combined trades of the next three markets: San Francisco, Seattle and Washington, D.C.’s Northern Virginia suburbs, each of which on its own topped $10 billion.
Six other markets trailed further but are nevertheless making a strong showing, each exceeding
$4.5 billion worth of office sales:
n Chicago, with $9.4 billion
n Los Angeles, with $8.3 billion
n Orange County, Calif., with $6.5 billion
n Washington, D.C., proper, with $5.2 billion
n San Diego, with $4.9 billion
n Boston, with $4.7 billion
Given New York City’s stellar performance, it comes as no surprise that the metropolis took first place in the annual Emerging Trends in Real Estate survey conducted by the Urban Land Institute and PricewaterhouseCoopers. But New York City does not stand completely alone. Despite considerable geographic, economic and cultural diversity, the leading cities for investment have much in common: growing populations, significant barriers to entry for developers, plentiful intellectual and financial capital and access to worldwide markets via ports and airports.
That explains why
the Seattle metropolitan area—despite the facts that it ranks only 23rd in population among U.S. cities and that King County, which incorporates Seattle, is the nation’s 14th-largest county—pops up frequently in discussions about leading cities.
Greater Seattle is luring investors with its growing population, its influential position within the Pacific Rim shipping network and the presence of corporate giants like Microsoft Corp. and Google Inc. Seattle’s investment activity is growing at an even faster clip than overall investment velocity was just a year ago. Through the third quarter of 2007, for example, industrial sales velocity in Seattle increased 76 percent over 2006 levels to $1.8 billion, according to Real Capital Analytics. Nationwide, industrial velocity grew at only a
15 percent rate during the same period.
Secondary Fiddles
Investors’ newfound caution is generally expected to draw investment dollars away from secondary markets. That pattern is already emerging in the divergence between primary and secondary markets’ office cap rates. Secondary-market cap rates for the national office market increased
50 basis points during the third quarter. That was double the cap-rate increases within primary markets, according to Real Capital Analytics Inc.
Despite investors’ overwhelming preference for primary cities, though, some experts warn against counting out secondary markets too soon. Some smaller cities will continue to merit investor confidence because of job and population growth, noted Hessam Nadji, senior vice president & managing director of research services for Marcus & Millichap Real Estate Investment Services Inc. Many of those that he places on the list are in the South and West, including Tucson; Jacksonville; Raleigh, N.C.; Charlotte, N.C.; and Salt Lake City, which is adding jobs at a clip of 4 percent annually.
Earl Webb, Jones Lang LaSalle Inc. CEO for the capital markets in the Americas, said interest in secondary markets is limited to the apartment sector, the only area where fundamentals are noticeably improving as a result of the subprime mortgage debacle.
Secondary-city multi-family product may also be benefiting from recent investor caution, according to multiple experts. Relatively flat population growth in heartland cities like Minneapolis, Milwaukee and Indianapolis has kept a lid on construction for the past decade.
Back Offices Take Center Stage
When it comes to relocating back-office operations, only three things matter: “Labor, labor, labor,” said Eric Marsh, a senior vice president for CB Richard Ellis Inc.’s labor analytics group. One tricky balancing act is finding labor pools that are not yet tapped out. CB Richard Ellis, for example, recently helped DIRECTV Group Inc. tap Missoula, Mont., for its fourth call center. DIRECTV settled into the facility in September 2006 after Missoula got the nod over runner-up College Station, Texas, thanks in part to an incentive package from U.S. Sen. Max Baucus and state officials. But probably more important, DIRECTV liked Missoula because the city hosts no other call centers to compete for labor, Marsh explained.
Exacerbating the obstacle of labor access is what Marsh termed “the huge disparity between access to labor and what the real estate market provides.” Major developers rarely build speculative office product in tertiary markets, which often makes finding space a challenge.
Geographic considerations also provide opportunities to consolidate back offices. Next April, Reebok North America will move its back-office operations to Spartanburg, S.C., from Canton, Mass. That move will place Reebok’s support functions closer to facilities owned by adidas Group, its parent company. In 2009, adidas plans to open its second distribution center in Spartanburg, at a cost of $150 million.
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