Real Estate - NOVEMBER 21, 2016

Markets to watch

by Jody Barhanovich

One thing is coming through loud and clear from the U.S. and Canada 2017 Emerging Trends in Real Estate survey report: you can find opportunities in any of the markets, whether the market is number one–ranked Austin or number 78 Buffalo. It all comes down to your strategy, risk tolerance, return requirements and access to deals.

The survey interviewees identified trends for the U.S. real estate markets, which include the potential for faster economic growth, the perceived stability of core gateway markets and current pricing of assets in the market. Among the markets with the fastest economic growth is Austin, which ranks as the top U.S. real estate market. The top 78 markets included in the ranking are based on a 1-4 ranking, from the contributions of 30 focus groups directed by the ULI district council.

Austin has seen a growing population base made up of a millennial educated labor force. Since Austin has a small amount of investment opportunities, it makes for a very competitive and popular market, and although the cost of living and the cost of doing business in Austin have been on the rise, it has gone unnoticed. These seem to be common trends as well among other top U.S. real estate markets such as Dallas, Portland and Seattle. Other common trends among the top U.S. markets are good transportation access by air, rail, and road, and the growth of the technology industry.

As one of the strategies investors use to control downside risks, the attractiveness of property types among these markets is crucial information. At the top of the list stands industrial, supported by strong demand drivers, restrained construction and lower perceived risk.

Multifamily ranks second. After the market crash in 2008, consumers’ became wary of for-sale housing products. A general consumer preference to remain flexible in their lifestyle prompts multifamily buyers. With student debt, creditissues, and tightened bank requirements for home mortgages, multifamily is very popular among the the millennial generation as well.

Hotels rank third, but new supply demands, competition from shared lodging hosts and a flattening of growth in corporate travel have muted enthusiasm for this property type. In addition, rising wages and labor shortages in major markets are a huge concern for hotels.

The office sector ranked next to last. Most institutional investors interviewed felt that 2017 could be near the peak of the economic cycle, creating a good time to lighten up on the office portion of their portfolios. In addition, foreign capital has been leading the charge for prime CBD office, making institutional investors follow a different urban strategy in order to avoid competing with foreign and other aggressive buyers.

Coming in last is retail. Real Capital Analytics reported a 23 percent decline in shopping sector transaction activity, to $25 billion, through the first seven months of 2016. However, some institutional investors view high-quality retail as a defensive play and continue to add to their portfolios due to the possibility of consumer growth in the upcoming years.

The real estate asset class remains healthy despite elevated pricing and low cap rates. In the ongoing low interest rate environment, investors like real estate’s relative value, stability and income-generating capability.

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