More than four years after the onset of the financial crisis, a number of commercial real estate market fundamentals are improving, however, one aspect that has remained largely stagnant is meaningful recovery in areas outside the top U.S. markets. According to a study conducted by PricewaterhouseCoopers and the Urban Land Institute, “In today’s problematic market, always-fickle capital also proves highly selective and concentrated. It’s interested in real estate, but only in a relatively narrow segment of the property markets, bidding up prices on the best commercial assets in the more secure wealth islands.”
Indeed, PwC/ULI’s Emerging Trends in Real Estate 2013 report, which was released in mid-October of this year, suggests that gateway cities such as San Francisco, New York City, Boston and Washington, D.C. will continue to be solid bets for investment and development. Their established 24-hour characteristics, diversified economies and prominent locations with geographic barriers along global pathways combine to offer relative stability.
Moreover, Texas continues to be a hot growth market, with Austin and Houston taking the fourth and fifth spots, respectively, on PwC/ULI’s Top 10 U.S. Markets listing for 2013. San Jose, CA and New York City snagged spots three and two, respectively, while San Francisco, CA jumped to the top of the list. The survey ranks markets based on investment, development and homebuilding prospects. Washington, D.C. had topped the Emerging Trends list in recent years, but fell seven spots this year in part because of uncertainty over potential federal budget cuts.
Other moderately strong investment pockets, according to PwC/ULI’s Emerging Trends survey, include Seattle, which it notes has a diverse economy and good quality of life. For 2013, job growth here is projected at 1.2%, 50 basis points above its 10-year average. The Dallas-Fort Worth region is also expected to post strong job figures, with an anticipated 230,000 new careers added between 2007 and the end of 2013. Of all the markets included in the Emerging Trends survey, it ranks behind only its Texas neighbor, Houston, as a job provider. Next year unemployment rates are forecast to fall to 7.2%, 1.2 percentage points lower than the U.S. rate of 8.4%. Though market fundamentals in Orange County, CA – which boasts a total population of more than three million people spread across 34 cities – have been strained, investors still believe in the area. Emerging Trends survey results point to increases in the county’s rating value and ranking as an investment prospect. It ranks ninth in the investment and homebuilding categories, both improvements from last year. Similarly, the Raleigh Durham region showed improvement from last year, indicating strong investor confidence. A very affordable cost of living, substantial job growth and a diverse employment base have continued to stimulate the economy here, said PwC/ULI. For 2013, Raleigh tops the survey’s forecast for highest ratio of net migration to total population and is one of the top five in GDP per capita, indicating to investors that this market is “one to watch.”
Similarly, while loans collateralized by real estate in primary markets have seen good results utilizing bulletin board type of loan auctions and other loan sale strategies, those backed by properties in secondary and tertiary markets are reportedly experiencing sluggish sales and a lack of interest. Without active trading of these predominantly non-performing loans, a meaningful recovery will continue to wane if held for longer than necessary.
While secondary and tertiary real estate markets around the country are suffering, there is a light at the end of the tunnel as evidenced by a number of recently completed loans sales transactions. These sales speak directly to investors’ willingness to kick the tires and make business decisions. One example that has had a significant impact on local communities is the sale of a portfolio of 75 loans totaling $35MM all collateralized by industrial, office, convenience stores, hotel, multifamily and retail properties located in Georgia, Florida, South Carolina, Alabama and Tennessee. All of the cities were relatively small and included the likes of Fort Myers, FL; Nashville, TN; Largo, FL; and Covington, GA. The largest city was Jacksonville, FL. In addition, loan balances were less than $5 million. These are precisely the types of loans that continually are being touted in the industry as untradeable. All of the loans sold in the portfolio over the established reserve prices and were transacted with six different bidders.
The same success can be seen with many of First Financial Network’s community banking clients. Loan sales conducted for these clients consist mainly of loans with balances less than $5 million collateralized by various categories of commercial real estate located in smaller communities. There is an active buyer base for these types of loans as evidence by FFN’s 2011 pull-through rate of 98.10% of all loans marketed.
Successful dispositions of small balance, CRE loans in secondary and tertiary markets requires a hands-on approach and depth of marketing expertise that simply cannot be accomplished via email or mass marketing techniques.
A broad-based transaction market recovery may be protracted as conduit lending, which investors depend on to finance non-trophy assets in tertiary markets, is yet to see a meaningful recovery. For those looking to secondary and tertiary cities, the Emerging Trends in Real Estate report cautions investors to focus on income-generating properties and partner with local operators who understand tenant trends and can leverage their relationships. Markets grounded in energy and high-tech industries show the most near-term promise, while places anchored by major educational and medical institutions should perform better over time.
Likewise, loan sales transactions in secondary and tertiary markets require a high touch approach, backed by deep understanding of individual markets and investor acquisition criteria, to ensure success. Many highly qualified investors, both local and national are interested in this market sector but long term relationships are paramount to garnering participation. The culmination of these deals will be key to our underlying economic health.
Bliss A. Morris is founder and CEO of First Financial Network. She may be reached at [email protected]. The views expressed here are the author’s own.