4 Things That Are Pushing Investors Out Of The Big Coastal Markets
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New York. San Francisco. Youngstown?! The Rust Belt may not be the first place coastal investors think of as a place to put money, but maybe it's time they did. High prices and cap rates that have stubbornly stayed compressed have left some looking inland. Here is a look at four major reasons for the exodus.
1. Community banks are an investor’s friend
Local community banks in smaller, noncoastal cities have a vested interest in seeing their communities thrive and are always looking to bring in new sources of capital to invest in commercial properties.
“Community banks have been very competitive with pricing and structure,” Eastern Union Senior Managing Director Marc Tropp said.
Tropp also noted that about 65% of the financing deals his team arranged in 2018 were through local banks.
These banks can identify a good investment because they know the local market. Case in point: Tropp’s team recently worked with an investor who was interested in a shopping center in an unfamiliar secondary market. As the team reached out to local lenders, a board member of one bank recognized the address of the center and commented that it’s where his wife goes for haircuts — in other words, it is a real place, with context and a community around it.
“I don’t need to explain what the submarket is," Tropp said. "It’s in their backyard."
2. Quicker returns in farther-flung markets
The era of historically low interest rates is slowly but steadily coming to an end, with another rate hike anticipated at the end of 2018. But the extremely low cap rates found in major coastal markets aren’t going away anytime soon, Tropp said.
While cap rates are often in the sub-five range in the top-tier markets, Tropp notes that in many of the markets where his team has brokered financing deals, such as parts of Ohio and Pennsylvania, they remain in the 8% to 10% range. Tropp’s team recently worked on a deal for a retail center in Youngstown, Ohio, at a 9.75% cap rate, as well as a 44-unit Class-B residential building at an 8.75% cap rate.
3. Many secondary markets have strong, growing economies
Midsize cities like Austin and Denver have received ample buzz as growth centers and millennial magnets, but Tropp said investors should not sleep on cities in the Rust Belt and Midwest. Columbus offers an instructive example, with an 11.7% jump in population since the 2010 census, per U.S. Census Bureau figures. Columbus, now the 14th-largest city in the country, made Amazon’s list of 20 finalists in its second headquarters search, alongside Pittsburgh and Indianapolis.
4. Value in affordability
As coastal cities grow less affordable for young professionals, some are leaving for smaller cities where housing prices are more reasonable. And as telecommuting becomes a more widely accepted norm, living in more expensive cities has lost its luster for some. Tropp said he personally knows three people who left New York for Pittsburgh and Baltimore. They each kept their high-paying, New York-based jobs and now telecommute.
This feature was produced in collaboration between Bisnow Branded Content and Eastern Union. Bisnow news staff was not involved in the production of this content.