Cities are central to property performance and the largest cities are seen as hugely important by investors. But the pandemic has turned many received ideas about real estate on their head and we think that performance in these large gateway markets will remain relatively weak after Covid-19.
Real estate is heavily clustered within city economies, but it is not always easy to identify why some locations do better than others. Over the past decade or so, many investors felt they had found an answer in targeting the so-called gateway markets.
Gateways are large, well-connected urban hubs and include both global centres, like London, New York and Paris, and smaller, but still significant, regionally orientated markets, such as the other big US cities and several European capitals.
In our analysis of European and US markets, we considered 12 gateway cities in depth: the global markets of New York, London and Paris, and regional centres in Boston; Chicago; Los Angeles; San Francisco and Washington, DC; Amsterdam; Munich; Milan and Madrid.
Pinpointing the defining characteristics of these cities is more art than science, but there are some clear themes. They are generally seen as attractive by virtue of their scale. They have large and dynamic economies, and hold big populations, as well as topping the rankings for levels of real estate investment. They are also regarded as less risky, and this is reflected in the persistently lower yields seen in these locations.
But claims that gateways have consistently performed better are hard to justify. The evidence is more persuasive if we look at capital growth in the early 2000s or the immediate post-GFC period, when gateways had a clear lead. But this is likely to have reflected the circumstances of the time. The first half of the past decade, for instance, saw battered investors retreat into core markets, as pricing was highly favourable and there was a heavy aversion to risks elsewhere. Gateway economies also rebounded unexpectedly fast in the early 2010s, generally outpacing national recoveries and those in second tier markets.