Emerging market trends 2018: Seattle comes out on top

A slow sustainable growth pattern in the U.S. real estate market is emerging. The annual gross domestic product (GDP) growth is estimated at 2 percent, and 1 percent job growth according to a report released by PwC and ULI.

Professionals have grown comfortable with the cycle of commercial real estate that has been established throughout the past 5 years and are now dedicated to expanding horizons. What that means is growth in smaller and secondary markets. This growing interest in the smaller cities may be due to their relative affordability in combination with a high concentration of young and skilled workers. These cities offer a fairly diverse economy, which is extremely valuable to investors.

Seattle was named as the nation’s top market for investment in the report. The ranking is the result of flourishing job opportunities, diverse economy, and educated workforce. After ranking fourth last year, Seattle beat out the 3-year trend of Texas cities taking first place. Austin, which came in first place last year, went down a notch to number two. Dallas/Fort Worth, which was 2016’s top pick, is now in fifth place.

Houston, in 2015 at the top of the list, plummeted to 60th due to disruption of the energy industry, but the report was produced before the hurricane devastation earlier this year. Manhattan experienced the largest year-over-year downward slide to number 46, due to a high cost of assets and oversaturation of construction.

Salt Lake City and Fort Lauderdale ranked 3rd and 6th respectively, were ranked in the top ten for the first time since the report jumped into the top ten for the first time in the 39 years the study has been run. Investors look to these newly ranked cities to recreate success that was found in Denver and Miami. Both Denver and Miami have a high degree of success as measured by competitive living costs and quality of life. However, Salt Lake City is the smallest market ever to make the top ten.

The intrigue in secondary markets isn’t unfounded. The smaller markets have dominated population growth in the past decade due to higher levels of in-migration than gateway cities. Post-recession, people moved to gateway markets as a safety insurance. But other than New York, these gateway cities have been low performers in terms of expectations.

If the gateway cities are not faring well in the best of times, how do the markets of less strong and established cities go? It doesn’t seem that a slow economy will translate successfully to a second city market. Civil infrastructure is dependent on the expansion of wealth, especially within growing markets. Transit seems to be the largest downfall for many of these cities. Salt Lake City lacks public transport, Seattle has extremely clogged roads and Austin has a mass transit crisis.

Top trends identified by the report include the following:

  • Generation Z will affect the future of retail and work space: Stores will need to transform to meet the technologically driven ethos of this new generation with omni-channel marketing and shopping experiences that translate to social media. While millennials have driven the move toward open, collaborative workspaces, generation Z appears to want more structure and privacy, suggesting a return to more personal or traditional office space.
  • Housing shortages loom: Housing shortages will most certainly grow in desirable markets Generations Y and Z comprising over 150 million members, plus baby boomers remaining in their homes longer. Homebuilders will have the opportunity and are able to introduce innovative products to meet these needs, but they will face obstacles in the form of labor shortages and the high cost of building materials.
  • Multifamily remains a strong investment:  As young generations move out of their parents homes, there is a growing need for more affordable rental apartments, multifamily housing prospects remain strong, especially in secondary markets like Pittsburgh, Salt Lake City, and Fort Lauderdale.
  • Senior housing momentum will grow: The largest segment of growth is in senior housing. Current offerings do not meet the needs of the growing senior population, projected to grow by 25 million in the next 15 years. And though many Baby Boomers are staying in their homes longer, the large generation is approaching a point where many are reaching the age that they need assisted living.

The top ten markets are as follows:

  1. Seattle, Washington
  2. Austin, Texas
  3. Salt Lake City, Utah
  4. Raleigh/Durham, North Carolina
  5. Dallas/Fort Worth, Texas
  6. Fort Lauderdale, Florida
  7. Los Angeles, California
  8. San Jose, California
  9. Nashville, Tennessee
  10. Boston, Massachusetts

The 2018 report includes interviews with and survey responses from more than 1,600 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.


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