By Mitch Roschelle, Partner and Co-Chair, Emerging Trends in Real Estate, PwC –
Following the economic downturn of 2007 to 2009, the real estate industry has recovered slowly but steadily. Many factors are contributing to this, among them the availability of capital, poised infrastructure development, job growth, and the lifestyle habits of the younger generations. But I’d like to highlight two lesser-known trends that promise to ha
ve an even bigger impact on the real estate industry.
First, as detailed by the just-published “Emerging Trends in Real Estate 2016”, small businesses are now the country’s most powerful job creation engine. Secondly, as these small businesses seek workers and lower-cost business environments, formerly “secondary” cities are emerging as the top real estate markets in the country.
Let’s get the most significant macro finding out of the way first: a strong overall confidence in the health of the industry. Real estate market participants offer a “thumbs up” about company prospects and profitability over the next 24 months.
But here’s the thing: It’s promising new markets, fueled by small business growth, that’s contributing greatly to this confidence.
As the U.S. first began to recover from recession, companies large and small did their part to drive job growth, but today businesses with fewer than 50 employees are punching well above their weight, accounting for 43% of all job growth in the U.S., versus a 17% share at companies with more than 500 employees.
Sure, landlords still chase after the big multinational companies with strong credit quality and a need for vast square footage. But the industry is starting to realize that the fastest growing segment of the tenant population is now small established businesses, start-ups, entrepreneurs, and an abundance of quite small operations seeking aggregated space that accommodates several firms en suite.
How is this impacting the emergence of formerly “secondary” cities as top real estate markets? Simply that both businesses and workers are attracted to those cities where the cost of living and doing business are relatively low.
In fact, relatively lower-cost cities are outpacing the rest of the county by 2 to 1 in the creation of jobs, and in turn are offering better real estate investment, development, and homebuilding opportunities. We’re now seeing the top tier filled with such cities as Atlanta, Nashville, Portland, OR, and Raleigh-Durham, while high-cost markets like Los Angeles, Washington, D.C., New York, and San Francisco are falling out of the top tier.
This may sound counter-intuitive, but I’m going to say it: Jobs chase people, not the other way around. People, seeing the affordability of smaller cities, are moving there, followed closely by small businesses seeking workers and a lower cost of doing business.
In particular, the “villes”—that is, such cities as Nashville, Knoxville, Louisville, Jacksonville, and Gainesville—have great promise. In fact, I believe Nashville—ranked seventh among top markets overall, and second for development—is poised to become the new Austin, with a vibrant combination of entrepreneurism, culture, and affordability.
These and similar markets have seen more moderate cap-rate compression, providing an opportunity for superior yields. Meanwhile, investors have become more sophisticated. They’re increasingly focused on more precisely defined areas and asset characteristics within a submarket or neighborhood.
Here, I’m going to go out on a limb and give you a sleeper pick: Detroit. It’s not a small city, of course, but Motown offers an unusual combination of affordability, a rich history, and a significant pool of highly educated workers.
That’s what I love about this business: It’s always full of surprises.
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