Where to Find Opportunities in the Current Economy
Investors entered 2023 on uncertain footing, facing a different investment landscape compared to the start of the previous year. The front-loaded nature of real estate growth in 2022 decreased as economic growth and supply shocks drove inflation to record levels. Today’s commercial real estate landscape presents some challenges (and opportunities) for investors trying to navigate the uncertainty.
The Factors That Determine Where to Plant Capital
Overall, markets across the U.S. are down as transaction activity decreased, with investors pausing to reassess the risks they face and underwrite appropriately. While it is clear that sentiment is weak, this pause in activity has provided some real estate professionals with time to reposition their portfolios to ride out the current slump and plan for another period of sustained growth and strong returns, and others with opportunities to buy at discounted prices.
This report highlights the markets investors are targeting now and, in the future, based on factors such as population growth, economic growth, job growth, affordability, and real estate market conditions. These factors are only a selection of the growing number of inputs that drive asset performance in certain markets despite an increasingly complex investment environment.
These outlooks will largely be dictated by inflation and how the Fed responds throughout 2023. The big six markets – Chicago, Boston, Los Angeles, New York City, San Francisco, and Washington, D.C. – are facing a more pronounced inflationary cycle due to already inflated prices than the rest of the nation. Higher interest rates amid the spike in the cost of living are expected to weaken demand in these markets, pushing investors to explore options outside the big six mentioned above.
All Eyes Are on the South
It’s important to note that the markets mentioned are primarily located along the Sunbelt, with Northern New Jersey as an outlier. Following the pandemic-induced changes on what aspects are essential for business operations and residents, population and rapid economic growth along the Sunbelt increased. The Sunbelt holds approximately 50 percent of the national population (326 million), which is expected to rise to about 55 percent by 2030. From the affordable nature of the markets across the region to tax-friendliness and quality of life, the Sunbelt’s markets are expected to grow faster than any others in the nation.
The Top Three
Nashville
Nashville is ranked at the top of the markets to watch list as it holds one of the strongest office-job markets in the nation and benefits from expanding industrial, automotive, and healthcare industries. Several large corporations have announced headquarters relocations or expansion plans to the market for its business-friendly environment.
Dallas-Fort Worth
Dallas-Fort Worth took the number-two spot as many investors witnessed the fast-growing market’s ability to balance the continuous supply with corresponding absorption. Compared to other markets, DFW makes a point to adequately expand infrastructure alongside real estate development, the failure to do this is an impediment to growth.
Atlanta
Dubbed “The New York of the South,” Atlanta is poised to experience the most population growth in 2023, according to the National Association of Realtors. Atlanta’s metro area population increased by 1.55 percent in 2023 from 2022 and 1.73 percent in 2021 versus 2020.
An In-depth Look at the Markets
Nashville, Tennessee
Nashville has made monumental strides in growth, including population, construction, and employment. Household formation has more than doubled the national average, partly due to the numerous significant universities that call the metro home. Additionally, millennials account for a majority of the population growth, thanks to the ever-expanding job market.
“The quality of life that Nashville provides is a principal cause as to why people are moving here. There is a much lower cost of living compared to larger coastal markets, and wages continue to grow. Nashville attracts and produces talented workers, and large companies like Oracle and Amazon recognize that. These large companies are moving high-paying jobs to the market, bringing in talent while maintaining a strong quality of life for their employees.”
Hutt Cooke, Nashville Market Leader
The developers and investors interested in Nashville provide insight into the market’s trajectory. Buyers continue to make their way to the area, but with a different regularity than in 2021 and early 2022. Rising rates have impacted local deal flow in the market, but that hasn’t stopped the flight toward quality. All sectors of CRE are seeking top-quality assets, introducing the under-construction pipeline with spec builds and build-to-suits, with other projects waiting in the wings.
The industrial market continues to flourish from above historical norms, benefiting from the national logistics boom occurring since the onset of the pandemic. Nashville’s geographic position allows companies based here to reach over half the country’s population in roughly a day’s drive, helping the market attract third-party logistics firms, e-commerce companies, and retailers.
Over the past several years, the above-average economic and population growth has helped boost Nashville’s retail market, allowing property owners to raise rents briskly. In fact, Nashville’s retail rents have increased at one of the fastest rates in the country over the past 12 months, with annual rent growth coming in at an impressive 7.8 percent.
Dallas-Fort Worth, Texas
Many experts deem DFW as one of the best markets for overall real estate prospects. Over time, the economic fabric of DFW has become more diversified, with a global reach that resembles that of a big six market. Employment growth is expected to outperform the national benchmark over the next five years. Meanwhile, household incomes continue to rise. Over recent years, median household incomes have grown about four percent annually and are now tracking near $80,000.
“The Dallas-Fort Worth market is a top performer for several reasons. First, it has a strong and diverse economy, with major industries ranging from healthcare and finance to technology and logistics. This diversity helps to mitigate the impact of economic downturns in any one sector. The market also benefits from its central location in the United States, making it a hub for transportation and distribution. This has led to a thriving logistics industry, with major companies such as FedEx and UPS having significant operations in the area. Another factor contributing to the strength of the DFW market is its relatively affordable cost of living and business-friendly environment. Finally, the DFW market has seen significant population growth in recent years, with projections indicating continued growth in the future. This growth has fueled demand for housing, commercial real estate, and other services, contributing to the overall strength of the market.”
Andrew Gross, Dallas Market Leader
Robust economic underpinnings have fostered a healthy commercial real estate market. Outperforming demand and rent growth across all CRE sectors have driven interest from investors, pushing sales volume and asset pricing higher. The most substantial shift in growth on record occurred over the past two years. While investors remain keen on the long-run structural advantages of DFW, deal volume was curbed by rising interest rates, which have weighed on investor sentiment. Despite this, continuous supply and leading absorption levels make DFW one of the country’s fastest-growing and balanced markets.
Development within the multifamily market is strong, tracing robust population growth in the region. The trend runs counter to several other major Sunbelt markets whose pipelines are starting to settle after swelling the past two years. Healthy job growth and continuous in-migration are two primary drivers of apartment demand in the metroplex. Since 2010, the market has added about 200,000 new multifamily units, growing its inventory by 33 percent, the most among major markets in the country. The DFW industrial market is also undergoing a massive expansion, as developers can work quickly, thanks to abundant and relatively cheap land. The metroplex is in an excellent position due in part to its central location in the U.S., excellent highway and rail networks, and world-class airports.
Atlanta, Georgia
In recent years, the Southeast has transformed into a hot spot for population and business growth, positioning its real estate to be one of the best performing in the country. The transitionary growth has reached beyond well-known metros and into secondary cities across the market, helping commercial real estate accomplish record-level investment activity. In 2023, the market has
downshifted slightly after a record run of tightening vacancies and escalating leasing activity.
Few retail markets, for both owners and tenants, are enjoying success like Atlanta. Space is absorbed quickly, investment demand is present, rent growth is healthy, and pricing power remains with landlords. Interest rate hikes, inflation, and rising debt costs haven’t deterred investors from buying in Atlanta, primarily centers with high-profile national retailers with good credit. Tenants are still willing to pay higher rents in well-located centers near Atlanta’s varied pockets of strong buying power, growing neighborhoods, and recovering office markets. Unanchored strip center cap rates were up 74 basis points, while the cap rates for grocery-anchored centers have risen by 50 basis points as investors flock to those investments. Retail vacancy decreased to the lowest figure in Atlanta’s history, 3.5 percent, after almost 2.8 million square feet were absorbed in 2022, twice as much as in 2021.
Atlanta remains one of the country’s least expensive major industrial markets, commanding significant rent increases but still discounted compared to other large West and East Coast distribution markets. In the multifamily sector, absorption is flat across an inventory nearing 500,000 market-rate units.
Austin, Texas
The expansive Austin market remains a top market for people to work and live. It is home to a booming tech industry and plentiful employment opportunities, attracting many young professionals. Even with employers, particularly in the tech sector, cutting back on labor costs, the economy continues to add jobs and grow at an annual rate of 4.2 percent. Since 2010, the market has experienced over 25 percent growth in population, with 120 to 150 people moving to the capital daily. Austin has a hefty development pipeline across multiple CRE sectors to accommodate population growth, boasting the third-largest construction pipeline in the country. However, many professionals anticipate supply-side risk as these deliveries become available.
While the Austin market has not been immune to softening in demand, the multifamily sector is still outperforming many other markets nationwide, thanks in part to the resilient labor market. Annual multifamily net absorption as a share of inventory leads the nation’s largest 50 markets, with roughly 6,700 units absorbed within the last 12 months. Further, the market has approximately 15.6 percent of the market’s existing inventory underway, equivalent to around 42,000 units.
Again, motivated by a lower cost of doing business, access to a growing talent pool, and one of the fastest-growing populations in the country, industrial users continue to make Austin a destination for their relocation or expansion plans. Approximately 17.5 million square feet of space is currently under construction, primarily speculative development.
Austin hasn’t reached the end of the runway yet in terms of expansion. The market is facing its fair share of growing pains as the rapid-fire population continues, resulting in limited land availability, price increases, affordability concerns, and infrastructure challenges. Austin won’t be slowing its roll any time soon as creative developments, redevelopments, and relocations continue to pop up.
Tampa, St. Petersburg, Florida
Tampa’s economy has been quite strong in recent years, and its labor market remains one of the strongest in Florida. Job growth has been the market’s biggest success story over the past decade, but population growth has been equally impressive. Oxford Economics predicts a population gain on average of one percent from 2022 to 2026. The market, however, doesn’t come without its fair share of challenges, including a below-average medium-income level of $65,000, which trails the U.S. average by 10 percent. Despite this, the market has many factors to help offset the large spread, including no state income tax and one of the nation’s most affordable housing markets.
“It seems like every day you hear Tampa being mentioned in the news. From being named one of Time Magazine’s top 50 “World’s Greatest Places” or hearing national and global corporations being bullish on the Tampa market, Tampa has certainly seen its fair share of recognition. Despite some market headwinds, the commercial real estate market continues to see impressive activity in all facets of the market.”
L.B. Sierra, Tampa Market Leader
Retail, multifamily, and industrial have experienced vigorous growth over the past few years. Unprecedented levels of multifamily demand have fueled rent growth by roughly 25 percent through the beginning of 2022, but following a recent significant supply wave, the apartment vacancy rate has increased to 7.5 percent. Tampa’s industrial market has seen historical net absorption rates and strong rent growth. The sector is in a great position as Tampa connects to major distribution hubs throughout Florida.
Raleigh/Durham, North Carolina
In 2022, the Raleigh/Durham market was ranked the fourth fastest-growing city in the U.S., according to the Kenan Institute’s report known as the American Growth Project. The growth is attributed to increases in employment, with companies moving into and hiring from the area. The market is known for its “research triangle,” a powerhouse for biotech, technology, life sciences, manufacturing, and finance, even amid possible cuts in the industry nationwide. This created growth in itself, but with that growth, a rising cost of living followed, pushing many to rent instead of buy. Over the past decade, Raleigh has gained more than 260,000 residents, nearly tripling the national growth rate, according to Carolina Demographic. In the next 15 years, the region expects to expand by another 125,000 residents.
Underpinned by the growth, Raleigh/Durham’s commercial real estate is reaping the same benefits. Retail rents have increased across all asset types at rates well above the national levels, though rent growth may have peaked in late 2022, and moderation is expected for the rest of 2023. Vacancies remain incredibly tight at just 2.5 percent and an availability rate of just 3.4 percent. Growth is robust for power centers, grocery stores, and other necessity-based retailers. A significant trend across the industry is properties being purchased for redevelopment purposes into higher uses. New construction is expanding south and east into outlying communities.
Demand for e-commerce and other distribution operations is strong, particularly towards the western side of the metro. The market’s robust pipeline will likely cause a further rise in the vacancy rate, though it is expected to stay below the region’s historical average. Investors have shown strong interest in Durham, and sales volume is near an all-time high, despite current market conditions.
Miami/ Ft. Lauderdale, Florida
South Florida has always been highly dependent on tourism but has evolved, and Miami now ranks as one of the world’s top cities. South Florida’s high rankings and growing population have spurred the startup network for tech and new businesses in Miami and Fort Lauderdale. Oxford Economics forecasts that Miami will see job growth of 1.2 percent in 2023. The luxury single-family housing market is a significant driver for the growth seen in both metros, translating into immense development in commercial real estate.
“The South Florida commercial market is a top performer nationwide as it continues to benefit from the migration of people, companies, and significant wealth from other parts of the country as well as internationally. What makes South Florida an enticing market is not just the massive population and job growth, but also the high volume of real estate assets with attractive returns and safety for the capital of domestic and international investors. The lack of income tax, high tourism and robust consumer spending will continue to keep South Florida among the top commercial markets across the country. As such, it is poised for continued growth and success in the future.”
Devon Dykstra, Fort Lauderdale Associate Market Leader
The retail market has seen 1.7 million square feet delivered over the past three years, and there are currently 590,000 square feet underway. The industrial market has delivered 13.2 million square feet or a cumulative inventory expansion of 5.3 percent over the past three years. The multifamily market has delivered 12,000 units over the past three years or a cumulative inventory expansion of 9.9 percent from 2022 to 2023. There are also 13,000 multifamily units currently underway, representing the largest under-construction pipeline in over three years. Retail rents rose 10.7 percent on an annual rate during the first quarter of 2023 and have posted an average yearly gain of 6.5 percent over the past three years. Industrial rents in Miami rose 17.3 percent and Fort Lauderdale 16.4 percent annually during Q1 2023.
In the office space, the average square footage leased has increased from 500 square feet to 2,500 square feet due to the migration of out-of-state firms to the region. Trends such as co-working office spaces have also played a significant role in filling tenant demand.
With South Florida’s industrial, office and retail sectors holding steady, growth is expected in 2023. In 2022, Blackstone invested $1.3 billion into industrial properties in Miami-Dade County, an indicator that South Florida’s commercial real estate market will continue to perform in 2023. Additionally, Prologis acquired $1.1 billion worth of industrial properties, pushing asking rents to record highs in the county.
Phoenix, Arizona
The Phoenix MSA has a population of approximately 4.95 million, a slight increase from the previous year of over 4.6 million. In addition to the population growth, a diversifying economy, relative affordability, and business-friendly regulation have strengthened Phoenix’s value proposition. These characteristics attract more than 200 people to the market daily. Phoenix remains one of the nation’s best-performing markets for employment growth recording more than 75,000 job additions in 2022. As Phoenix continues to boom, many out-of-state investors, particularly from California, have expanded their portfolios due to proximity, higher yields, and stronger cap rates.
“The growth of The Valley is similar to the “Path of Progress” that occurred in Southern California in the 1980s and 1990s. Los Angeles got expensive and crowded, which pushed its growth to Orange County. As Orange County grew, the Inland Empire became a desired location for businesses and homeownership. As Southern California experiences high taxes and restrictions on development, the “path” is now into Arizona, particularly the Greater Phoenix market. This is the beginning of this growth pattern and should keep Arizona’s economy expanding for decades.”
Bob Osbrink, Phoenix Market Leader
Multifamily supply is outpacing demand, as absorption moderated and construction activity ramped up, causing vacancies to rapidly increase. As a result, annual rent growth has turned negative, and concession usage has increased. However, the long-term outlook for fundamentals is positive due to Phoenix having the country’s strongest employment and household growth and low levels of single-family inventory.
The retail market conditions are the tightest they’ve been in recent memory. The MSA may be approaching a supply-constrained market, not because demand is slowing but because retailers are struggling to find space. The construction pipeline remains muted as construction costs are higher and financing for speculative construction is constricted. These dynamics support healthy rent growth; market rents have risen 7.7 percent over the past 12 months. In the industrial sector, the market faces one of the most aggressive construction pipelines in the U.S., with 45.6 million square feet scheduled to be delivered in 2023. This underlying demand is driven by Phoenix’s strong momentum in various industrial-related sectors. Plus, The Valley plays a crucial role in national supply chains, boasting a rapidly expanding consumer base and advanced manufacturing industries.
Charlotte, North Carolina
Nicknamed the Queen City, this rapidly growing Sunbelt market is attractive to many professionals and developing businesses. The market has witnessed massive inbound migration, averaging nearly 100 new people moving to Charlotte each day, and the population is projected to grow by 50 percent by 2030. The area’s robust economy, lower cost of living, and business-friendly government drive the steadily increasing population. Charlotte is a global hub for businesses with thriving healthcare and financial services. The market is home to the headquarters of three of the nation’s six largest banks – Bank of America, Wells Fargo, and Truist. The relative strength of the financial industry bolstered the market economy through the most recent economic downturn. But, of course, there is a lot more to Charlotte than just business.
Charlotte’s commercial real estate marketplace draws investors and tenants across the county. It is bolstered by demographic tailwinds that bring in new residents with greater education and higher incomes, further fueling economic activity in the region. Charlotte’s apartment inventory is expanding fast, and the market’s construction pipeline, on a percentage basis, remains in the top
10 among U.S. metros. There are currently 30,000 units under construction, representing 14.4 percent of the existing inventory. However, the supply surge led to a slowdown in rent growth heading through early 2023. The industrial market has seen great success due to its proximity to major markets and recent investments in infrastructure. The market expanded its industrial inventory by more than 15 percent. The retail market saw bolstered consumer spending. A recently released census report shows that Charlotte’s market grew by 1.2 percent, making it the seventh-fastest growing large metro in the county, levering the brick-and-mortar retail space despite economic uncertainty and the shift to online shopping.
Northern New Jersey, New Jersey
The Southern and Western portions of the U.S. have been the focus of demographic shifts in the country. Still, the Northeast also sees promising migration numbers, especially in the Northern part of New Jersey. Despite New Jersey being ranked as one of the top outbound states of 2022 due to a high cost of living, the northern portion of the state is among the most popular destinations for renters and has one of the strongest industrial markets in the nation. Like many suburban markets throughout the U.S., the metro has benefitted from robust demand due to residents relocating from more densely populated areas, like New York.
The Northern New Jersey multifamily market sees record-high occupancy rates, gross deliveries, asking rents, and asset pricing. A primary driver is the high home prices and surge in mortgage rates, pushing more would-be buyers toward the apartment rental market. According to a recent Yardi RentCafe analysis, North Jersey is the most competitive rental market in the U.S., outpacing the Sunbelt. North Jersey outranked many other major markets regarding the number of days apartments were vacant, occupancy percentage, number of prospective renters competing for a given apartment, percentage of lease renewals, and share of new apartments completed.
Northern New Jersey has also performed remarkably well as the growth of e-commerce and retail distribution networks boosted the need for more logistics space. Already strong, fundamentals were accompanied by increasing cargo volume to the port of New York and New Jersey, helping to propel the metro into the national limelight as importers increasingly sought out the East Coast as a more stable alternative to California Ports. In addition, the population’s enormous purchasing power made Northern New Jersey’s logistical demand necessary as the market boasts one of the strongest retail markets in the country. The retail market has attracted interest from owners and tenants due to the stable consumer base with some of the nation’s highest average incomes. In addition, retailers are right-sizing their spaces and building their logistics network to accommodate shopper preferences gravitating to buy online and pick up in-store business models.
Key Takeaways
Numerous dynamics, on both macro and micro levels, are affecting the short-term and long-term outlook for CRE markets. Fast-growing and business-friendly secondary markets are pushing through an economic slowdown and are prime for CRE investment. Real estate professionals are more willing to consider markets outside the big six, and the perpetual search for new opportunities ensures constant flux in how markets are viewed over time.
