On “a long glide path to a soft landing” is the way experts at the Urban Land Institute (ULI) characterize U.S. real estate going into 2018.
In 2017, that long glide path also involves a shift in real estate investment dollars and population growth away from prime gateway cities toward a mix of secondary markets.
Seattle, Austin and Salt Lake City lead a list of 78 locations identified as “markets to watch” in ULI’s Emerging Trends in Real Estate 2018, an annual report compiled in conjunction with PwC US, an audit, consulting and tax services firm.
Top metros are still on the list, but secondary locations are moving higher in the ranking, which also includes many places adjacent to primary markets. For homebuilding prospects, Indianapolis, Westchester County, Spokane, Wash./Coeur d’Alene, Idaho, Salt Lake City and Cincinnati are the top five.
“The growing interest in smaller cities by real estate investors is influenced by their relative affordability, coupled with a concentration of young, skilled workers,” said Mitch Roschelle, PwC partner and co-publisher of the report. “The diverse, robust economies of these smaller cities make them very desirable to investors.” In the last five years, the investment outlook for secondary markets increased nearly 12 percent compared to a 6-percent decrease in the investment outlook for primary markets.
This growing trend of smaller markets displacing larger ones as investment hubs represents “a new course for urban development that is reshaping cities across the nation,” said ULI Global Chief Executive Officer Patrick L. Phillips. “These cities are positioning themselves as highly competitive, in terms of livability, employment offerings and recreational and cultural amenities.”
Infographic that lists the Top 10 cities identified by the Urban Land Institute’s Emerging Trends in Real Estate survey as being a city that will emerge in 2018.This year, Salt Lake City and Fort Lauderdale jumped into the Top 10 for the first time in the study’s history as investors look to replicate the level of success found in Denver and Miami with their competitive costs of living and high quality of life. Salt Lake City is the smallest market ever to make the Top 10.
Among the top 10 markets to watch, only two prime gateway cities — Los Angeles (No. 7) and Boston (No. 10) — made the cut. Texas cities have been leading markets to watch, but did not capture the top position this year. Although Seattle topped this year’s list, Austin and Dallas-Fort Worth were in the Top 10. Also notable is Miami’s position, which moved from 25 to 11 this year. Other Florida cities, Orlando and Tampa/St. Petersburg, were also in the Top 20.
Houston, which was the top market in 2015, fell to 60, because of the fallout in the energy sector. Manhattan experienced the largest year-over-year negative move to No. 46, due to the high cost of assets and oversaturation of construction in the area, with what many interviewed said were “too many cranes in the skyline.”
Another change reflected this year is the attitude of experts toward the pace of the recovery and the current real estate cycle. Even a moderate growth in the GDP of 2.0 is considered a good thing. “For perhaps the first five years of this recovery it upset me that we didn’t see faster growth, but it’s not a bad thing that we are growing at a 2 percent GDP,” said ULI panelist Mary Ludgin, managing director and head of global research at Heitman, noting that slow measured growth means less risk that the economy will overheat. And, she adds, “the Fed hasn’t had to stomp on the brakes.”
Still, slow economic growth could pose a problem for some secondary cities as development creates more demand for improved infrastructure. “I don’t think slow economic growth will be good for secondary cities, because civil infrastructure depends on wealth expansion, especially in growing markets,” said panelist Christopher Ward, executive vice president and chief executive for AECOM’s metro New York region. “Just look at Seattle’s clogged roads, Austin’s mass transit crisis and Salt Lake City’s lack of public transportation.”
Looking ahead, one of the challenges facing real estate is meeting the needs of the diverse range of ages and demographics in the mix of homebuyers, ranging eventually from Gen Z to Baby Boomers.
The Top 10 Markets in Emerging Trends in Real Estate 2018:
- Seattle, WA
- Austin, TX
- Salt Lake City, UT
- Raleigh/Durham. NC
- Dallas-Fort Worth, TX
- Fort Lauderdale, FL
- Los Angeles, CA
- San Jose, CA
- Nashville, TN
- Boston, MA
Slow and steady, doesn’t mean there aren’t changes ahead for real estate. The biggest shift, however, will be seen both in investment dollars and population away from major metros to secondary markets such as Austin, Seattle, Fort Lauderdale and Salt Lake City.