Seattle is the only market I’ve ever seen advance from secondary to primary market status. There are a few other secondary cities that are nipping at its heels, led by Austin, Denver and Nashville in the U.S., and Sao Paolo, Brazil and Montreal, Canada in the Americas. Other cities that are clawing their way to the top include Tampa, Phoenix, Las Vegas, Minneapolis and Bogota, Colombia.
Last year had the lowest overall CRE investment returns since the Global Financial Crisis, with NCREIF reporting a 7% overall return and only industrial, at 13%, exceeding its historic return average. Given the declining return environment, it is no surprise that our soon-to-be-released Americas Investor Intentions Survey 2018 reveals that investors on this side of the Atlantic are racing to find the next Seattle by increasing their focus on the higher-yield potential of high-growth secondary markets. According to the survey, investors are also moving further out on the risk spectrum to look for more opportunistic equity deals.
Markets like Tampa Bay, Nashville, Montreal and Portland all rose substantially in investor interest this year, not only for their superior current yields (higher cap rates) than the majors, but for the single most important factor of all: higher projected office-using job growth. Investing in markets with the fastest job growth may not only lead to greater NOI growth but to additional cap rate compression even in a rising interest rate environment. The investors we surveyed clearly agree with this assessment, as “strong economic fundamentals driving rental value growth” grew in preference by 47% of surveyed investors in 2018 from 18% in 2017.