2018 Best Commercial Real Estate Markets to Invest In: Part I

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With a new year among us comes new opportunity for investment, particularly investment in commercial real estate. In this post, I will discuss 4 large US markets which I believe to be ripe for commercial real estate investment. When determining a market’s attractiveness for investment, I looked to a few main fundamentals and indicators.

  • Job and population growth
  • Access to a talented workforce
  • Diversification of the industries that drive the market’s economy
  • Rent growth
  • Inventory deliveries, absorption, and vacancy rates

I looked to these indicators because they help to paint a clear picture for a real estate market’s health, rent growth expectations, resiliency in an economic downturn, and overall future demand. All of these factors are major macro contributors to real estate values and investment returns.

My post includes the following markets, which are stacked in alphabetical order and are not ranked amongst each other for which is better.

  • Atlanta
  • Austin
  • Denver
  • Durham

             

Atlanta

Over the 5-year period from 2012 to 2017, about 180,000 households were created in the Atlanta metro area. This represents one of the largest gains in household creations of any US city over the 5-year period. Much of the migration to Atlanta is thought to be from the growing positive perception of the city due to its comparatively low cost of living, warm weather, start-up business friendliness, and growing presence in a host of different industries. Over this same period, the number of jobs in Atlanta grew about 20%, outpacing the national average growth which was closer to 10%. Atlanta mints about 40,000 new college graduates each year from schools like Georgia Tech, Emory, and University of Georgia. Some of the industries that are driving the economy in Atlanta include technology, IT, film, transportation, consumer goods, and financial services.

The Atlanta apartment market, in aggregate, had an average vacancy rate of 9.0% in 2017 and 12-month rent growth rate of 3.6%. This compares with the national average vacancy rate of 6.5% and rent growth of about 2.7%. The vacancy rate of 9% was due to 11,700 new apartment units added in 2017, of which only about 9,500 were absorbed by renters. I expect these new apartment deliveries to be absorbed in 2018, driving vacancy rates down as the market continues to see an influx of millennial migration to work at some of the nation’s best technology companies while taking advantage of the low cost of living.

The Atlanta office market had an average vacancy rate of 11.7% in 2017 and 12-month rent growth of 4.1%. This compares with the national average office vacancy rate of about 10.5% and rent growth of about 3.0%. The office vacancy rate continues to outperform Atlanta’s historical average vacancy rate of 13.6%. The lower than historical average vacancy rate in 2017 has been a result the strong job growth and an absorption rate of about 75% on the roughly 2,800,000 square feet of new office deliveries. The volume of new office space deliveries falls short of the national delivery average and I expect this trend to continue into 2018. This trend of low supply but high demand has created a lucrative environment for office deals in Atlanta. The West Midtown and Central Perimeter submarkets are personal favorites of mine and they pose opportunities to re-purpose industrial buildings into “creative office space” that are in high demand by many companies today.

            

Austin

Over the past 10 years, Texas’ capital city of Austin has expanded its employment base and number of jobs by about 3% per year, or more than twice the national employment growth rate. Labor demand continues to be strong in Austin, which boasted an unemployment rate of about 2.6% in 2017. The University of Texas at Austin, largely considered a Public Ivy, has a student population of over 50,000. Many of these students are picked off immediately upon graduation to work in Austin’s booming technology industry. High-tech Labor demand has been so strong in Austin that there has been a high-tech labor shortage, causing many Austin technology companies to have to begin poaching talent from other Texas markets and Silicon Valley’s technology focused labor pool. This out of state talent poaching can be seen as a plus for the Austin market, as it fills labor demand while also increasing population for the city. Austin’s population of 20-34-year-old millennials totals about 500,000, or about a quarter of their total population. It is unlikely that these highly educated millennials will be leaving anytime soon and are expected to make up more than 75% of the US workforce by 2020. The greater Austin metropolitan area was also rated as the best places to live according to U.S. News and World Report, based on exceptional job growth, migration and desirability. Some of the industries that are driving the economy in Austin include technology, household goods, leisure and hospitality, natural resources, government, and health services. Well-known companies that make up a portion of these industries in Austin include, Charles Schwab, IBM, Apple, Google, Samsung, Whole Foods, Facebook, and University of Texas at Austin.

Vacancy rates in Austin reached historical lows in 2012 after beginning to experience huge job and population growth. The current apartment vacancy rate in Austin is 8.9%, which is above the national average due to more than 36,000 apartment units being delivered by developers since 2012. Developers have begun to back-off of building luxury apartments in the Downtown and University submarkets and are now focused on more condominium developments. With lofty expectations for continued job and population growth in Austin over the next few years, along with slowing apartment deliveries, I expect the apartment vacancy rate to trend down going forward as apartment absorption by the millennial continues. Apartment rent levels in Austin are now about 20% above pre-recession levels, compared with the national average apartment rents that are about 15% above pre-recession levels.

The Austin office market had an average vacancy rate of 8.3% in 2017 and 12-month rent growth of 2.1%. This compares with the national average office vacancy rate of about 10.5% and rent growth of about 3.0%. The lower than national average vacancy rates have been the result the strong job growth and investor/employer interest in new office deliveries. Because of this strong interest for office real estate in the greater Austin area, as leases roll on these properties over the next few years, rental rates and NOIs are should continue to rise. Austin has had one of the strongest economies in the US over the last decade and is expected to grow another 15% or so over the next 5 years. Much of the growth and demand in Austin has been concentrated in the central business district, however because of this, the city is starting to see expansion into more suburban areas, including the Southeast submarket where cap rates are currently more attractive than the downtown and central business district submarkets. It is important to note that while the technology industry is not the whole economy in Austin, it does make up a large portion of the economy currently. If the US were to experience a technology driven recession in the future, Austin could be at risk of feeling that burn.

          

Denver

Out of about 50 markets in the US with a population of at least 500,000, Denver's 2017 unemployment rate was the lowest, at a barely visible 2.7%. In 2016, Denver ranked first on the US News and World Report of Best Places to Live based on its availability of jobs, overall desirability, and quality of life. Examples of industries that drive Denver’s economy include natural resources, aerospace, oil, technology, transportation, and telecommunications. In addition, the healthcare and marijuana industries in Denver have experienced significant growth over the past few years and are expected see major investment over the coming years.

The Denver apartment market had an average vacancy rate of 7.7% in 2017 and 12-month rent growth of 2.6%. Denver delivered about 7,500 new apartment units in 2017, with 6,300 of those units being quickly snapped up. Denver suburbs have been largely ignored by apartment real estate developers over the past several years while they largely favored the more urban submarkets. Because of this, vacancy rates have been very tight in Denver’s suburbs such as Aurora and the Southeast submarket. I expect to see growing population numbers in Denver’s submarkets in 2018 and subsequent years due to relative affordability over Denver’s urban submarkets.

The Denver office market had an average vacancy rate of 11.1% in 2017 and 12-month rent growth of 2.1%. This compares with the national average office vacancy rate of about 10.5% and rent growth of about 3.0%. The office vacancy rate in Denver is due to an influx of speculative development, which gave prospective tenants more options than they had a few years back. Given this, office real estate delivery is showing signs of slowing in certain submarkets, which could contribute to a manageable level of office space inventory going forward when compared to historical averages. I expect the suburban Denver markets to continue to be attractive for investment over the next few years due to their lower supply relative to Denver’s central business district.

                

Durham

The Tri-City Region in North Carolina makes up about 20% of the state’s population and includes the cities of Raleigh, Chapel Hill, and Durham. This region is home to Research Triangle Park, a national leader in medical and healthcare research, and currently attracts about 80 new residents a day for its strong job growth and high quality of life. More specifically, Durham’s population growth has outpaced the national average population growth in each of the last 5 years, with more than 30% of the total population being made up of 20-34-year-old individuals. Employment growth in Durham has also outpaced the nation in the last several years, with over 3.5% growth in some of the years in the current economic cycle. Education and medical related industries have been a couple of Durham’s major economic drivers and Durham is home to prestigious higher learning universities such as University of North Carolina – Chapel Hill, Duke, and Duke Medical. These universities are some of the largest employers in Durham and make employment levels in the city rather resilient in economic downturns due to their relatively “recession proof” nature. In addition to employing a large number of people, these universities also provide about 200 companies in Durham’s Research Triangle Park with direct access to their highly educated graduates. Other large industries that contribute to Durham’s economy are professional and business services, leisure and hospitality, manufacturing, and financial services. The growth in the overall number of jobs in Durham is also expected to outpace the number of jobs in the US through 2022.

The 2017 apartment vacancy rate in Durham was 7.7% and developers grew Durham’s inventory of apartment units by more than 5% in 2016 and 2017 with more than 2,200 new units delivered in this time period. Rental rates in Durham grew more than 4% in 2016, well above the US average. Rent growth has since slowed to about 2.3% over 2017, and I expect further stabilization of Durham’s economy over the coming years to lead to continued propulsion and rent growth in the city’s apartment market.

The Durham office market had an average vacancy rate of 9.7% in 2017 and 12-month rent growth of 1.6%. More than 700,000 square feet of office space was delivered in Durham in 2017, or about 50% more annual office construction than usually occurs in Durham. Despite the large jump in office space deliveries and even more expected in 2018, Durham has continued to boast an office vacancy rate below the national average, which is reflective of Durham’s strong employment market. Durham’s Downtown submarket has seen the highest level of office deliveries in recent years, with about 10% of the submarket's inventory being built in the past five years. However, even with the elevated office deliveries, vacancy in this submarket was still less than 5% to close out 2017. The current low vacancy rates in Durham’s central business district may be signaling a high demand for the new office space for years to come.

I do business nationally but born and raised in GA for 43 years.

Really Texas is about the only state outgrowing us right now. In about the next 12 to 15 years GA is slated by some estimates to grow by about 5 million people. That is like taking just about all of the SC state and dropping it on our state for population growth.

The traffic here is crushing on the interstates. I-575 which is an off shoot of I-75 in some areas is pushing 100,000 cars a day.

It is cheaper to live here although has gotten more expensive over the decades compared to what it used to be. The brand new house I grew up in the 70's was about 38,000 brand new. Today brand new construction about 200,000 a house minimum is needed to make any profit for a developer with land, legal, construction material, and labor costs.

National median income average is about 54,000 annually. Some parts of GA we have over 100k in incomes. A lunch here fast food maybe 10 bucks a person but used to be 5 over 10 years ago. Sit down restaurant about 15 bucks a person lunch with tip.

I traveled for a conference for commercial real estate investing  I was speaking at in Oakland, CA a few years back. There a lunch for 2 chicken and waffles with tip about 60 bucks. Steak dinner at night 250. Got home and Chinese dinner for 2 in GA was about 25 bucks and had leftover for the next day. In CA lot's of people make 100k or more a year but so expensive so does not go far there.

Here in GA if you make 100k a year you can live pretty well.

There are lots of CA people move here. They have a run up in property in CA and then sell. They are worth about 3 to 5 million then move here and for 500k have a loaded house with move theater and basement with 5 beds and 4 baths on a large lot and they are shocked at the prices. In CA they would be spending many millions for the same property.

I do commercial real estate and not residential. I do not have to travel on the interstate very often and take back roads to my office building. It's only about 10 minutes from where I live : )

I have systematically designed my life to be as stress free as possibly and avoid the herds.

I feel sorry for them sometimes the majority of the population stuck on interstates for many hours and day working that j-o-b. If they only knew what it felt like to be free. Some of them spend 1 to 2 hours to work and back every day. Now instead of widening the interstate lanes the state partnered with private for a toll lane in the middle. The state funded projects are sometimes 20 years behind for roads that need to be redone or changed,etc. 

Feds have little money and state with counties cannot fit the whole bill so private partnership funds most of it but then they get revenue sharing on the toll roads. The workers have one more thing like the NES video game Metroid sucking the financial life out of them so that they rarely ever get ahead. It's how 90% of the population lives. I guess if they are happy that way more power to them but it never suited me. I knew I was destined to make my own path as an entrepreneur.

I know the other states mentioned as well. Everyone practically long term wants the warm belt states for investment. The cold belt states tend to have higher caps and cash flow but long term rent growth and equity value is more in the warm belt states. 

Durham is booming. My step sons live there and they have multiple opportunities. The traffic is bad and the state is more conservative than Florida where I live.  I just don't like the very dry air and the hills close in on me. I prefer flatland and living near the beach. Going up and down hills gives me a headache.

Originally posted by @Taylor Hazard :

Great topic. Are these your the best for investment in your opinion or are you only highlighting for attractive markets?

Thanks Taylor. I am highlighting some of the larger US markets that I view as attractive based on the characteristics and indicators that I mentioned. I saw you have experience in Denver, how do your thoughts compare to mine on that market?

-Vince

Originally posted by @Joel Owens :

I do business nationally but born and raised in GA for 43 years.

Really Texas is about the only state outgrowing us right now. In about the next 12 to 15 years GA is slated by some estimates to grow by about 5 million people. That is like taking just about all of the SC state and dropping it on our state for population growth.

The traffic here is crushing on the interstates. I-575 which is an off shoot of I-75 in some areas is pushing 100,000 cars a day.

It is cheaper to live here although has gotten more expensive over the decades compared to what it used to be. The brand new house I grew up in the 70's was about 38,000 brand new. Today brand new construction about 200,000 a house minimum is needed to make any profit for a developer with land, legal, construction material, and labor costs.

National median income average is about 54,000 annually. Some parts of GA we have over 100k in incomes. A lunch here fast food maybe 10 bucks a person but used to be 5 over 10 years ago. Sit down restaurant about 15 bucks a person lunch with tip.

I traveled for a conference for commercial real estate investing  I was speaking at in Oakland, CA a few years back. There a lunch for 2 chicken and waffles with tip about 60 bucks. Steak dinner at night 250. Got home and Chinese dinner for 2 in GA was about 25 bucks and had leftover for the next day. In CA lot's of people make 100k or more a year but so expensive so does not go far there.

Here in GA if you make 100k a year you can live pretty well.

There are lots of CA people move here. They have a run up in property in CA and then sell. They are worth about 3 to 5 million then move here and for 500k have a loaded house with move theater and basement with 5 beds and 4 baths on a large lot and they are shocked at the prices. In CA they would be spending many millions for the same property.

I do commercial real estate and not residential. I do not have to travel on the interstate very often and take back roads to my office building. It's only about 10 minutes from where I live : )

I have systematically designed my life to be as stress free as possibly and avoid the herds.

I feel sorry for them sometimes the majority of the population stuck on interstates for many hours and day working that j-o-b. If they only knew what it felt like to be free. Some of them spend 1 to 2 hours to work and back every day. Now instead of widening the interstate lanes the state partnered with private for a toll lane in the middle. The state funded projects are sometimes 20 years behind for roads that need to be redone or changed,etc. 

Feds have little money and state with counties cannot fit the whole bill so private partnership funds most of it but then they get revenue sharing on the toll roads. The workers have one more thing like the NES video game Metroid sucking the financial life out of them so that they rarely ever get ahead. It's how 90% of the population lives. I guess if they are happy that way more power to them but it never suited me. I knew I was destined to make my own path as an entrepreneur.

I know the other states mentioned as well. Everyone practically long term wants the warm belt states for investment. The cold belt states tend to have higher caps and cash flow but long term rent growth and equity value is more in the warm belt states. 

Hey Joel - I appreciate your feedback and some great points you made. The traffic in Atlanta is definitely something to consider when thinking about the population growth since the highways are already crowded. I am personally an advocate for privately funded toll roads if the state can't keep up and private funding is what it will take to ease traffic getting in and out of the city. 

-Vince

Originally posted by @Denny Faircloth :

Thanks for the insights and perspective. As a not so data driven investor, it's nice to get a little data confirmation occasionally.

Denny - I'm glad the post was helpful. Do you generally avoid looking at this type of data all together or is it just not as pertinent to your investment strategy?

-Vince

@Vince DeCrow - The information and insights are surely valuable and I don't necessarily "avoid looking". It would surely make me a better investor. When I stumble upon it, like I did with your post, I read it and take it into consideration. I just don't take the time or make an effort to do the research myself. There are about a million other things I would rather do. More of a personality trait than anything. I should probably hire someone to analyze data and deliver it to me. Something I need to work on for sure. Thanks again, I appreciate it.

BTW, I lived in the Gold Coast near the intersection of Dearborn and Schiller for years.

There should be an honorable mention for a fifth...whatever city gets HQ2.   Actually it will be awesome if you already own in that city but a terrible investment if you don’t as I imagine the amount of money that will be thrown at property will be RIDICULOUS.   Whoever it is will be ruined for smart investment for a long time.   

@Vince DeCrow I am invested in Origin III so I hope your top 4 are correct.   Given Origin’s track record I am confident they are.   

@John Nachtigall

Hey John - Great addition to the post. I agree that there could be a host of net positive's for investors that already own real estate in the market that Amazon decides to drop their HQ2 in. If it ends up being a market that doesn't already possess the 50,000 workers that the HQ2 would employ, this could be a huge plus for the city's demographics and population growth, with all else equal. Many of the cities that made bids for the HQ2 would also need to develop a large number of homes/condo's/high-end apartment's for the relatively high salaried workers to live in, which could create aggregate property appreciation in the market. The overall economic stimulus impact of HQ2 could also be huge for the chosen market - unless it happens to go to a city like NYC, where the stimulus created from it may be relatively smaller or unnoticeable in the grand scheme of things. 

I'm glad you have confidence in these markets too and that you are participating in Fund III! As I'm sure you know, in addition to investing in the right markets, value-add expertise and boots on the ground approach are also big factors that help to contribute to strong returns. In the next month or so I am going to follow up with a post on 4 or 5 more markets that posses the same strong fundamentals and indicators.

Happy New Year.

-Vince

Originally posted by @Brian Schmelzlen :

Great topic! Thank you for posting.

I am curious what your thoughts are about the San Diego market? I am very interesting in office buildings, and want to start local.

 All those cities sound great. The last time I checked for San Diego it was at 20 year lows for vacancies across the board, residential, office, commercial, industrial, warehouse etc with continued strong rent growth, appreciation, demand etc...My guess it will continue to be in top 3 nationally for total profits ( since 2000) moving forward. 

There is so much regional demand even Mexico is building massive new high rise residential (self contained mini city) and medical tourist complexes walking distance to border (100 feet). 

I think they even have a shot for Amazon hq2, maybe at the Qualcom stadium site. The city has a renowned international reputation for consistantly reeling in the top shelf corporations. 

Good luck!

Pictured from US border. 

Originally posted by @Matt Lefebvre :

Great post @Vince DeCrow.  Coming from a state with an aging population where there are more millennials leaving than staying, I can now see where they're all headed to!  

Thanks Matt. As you may know, the millennials are currently the largest living generation, the most educated group that the US has seen to date, and are expected to make up the vast majority of the workforce within the next few years. Because of these factors, I find staying on top of this generation's most desirable city's to work and live in are an important factor when thinking about office and high-quality multi-family investing. In my opinion, migration trends of millennials are especially important to think about when making multi-family investments since many of them are just getting started in their careers and have a higher probability of renting vs buying a home at this time due to capital constraints. 

-Vince

Originally posted by @Matt R. :
Originally posted by @Brian Schmelzlen:

Great topic! Thank you for posting.

I am curious what your thoughts are about the San Diego market? I am very interesting in office buildings, and want to start local.

 All those cities sound great. The last time I checked for San Diego it was at 20 year lows for vacancies across the board, residential, office, commercial, industrial, warehouse etc with continued strong rent growth, appreciation, demand etc...My guess it will continue to be in top 3 nationally for total profits ( since 2000) moving forward. 

There is so much regional demand even Mexico is building massive new high rise residential (self contained mini city) and medical tourist complexes walking distance to border (100 feet). 

I think they even have a shot for Amazon hq2, maybe at the Qualcom stadium site. The city has a renowned international reputation for consistantly reeling in the top shelf corporations. 

Good luck!

Pictured from US border. 

 Well said, Matt. Thanks for contributing your insights on San Diego.

Originally posted by @Vince DeCrow :
Originally posted by @Matt R.:
Originally posted by @Brian Schmelzlen:

Great topic! Thank you for posting.

I am curious what your thoughts are about the San Diego market? I am very interesting in office buildings, and want to start local.

 All those cities sound great. The last time I checked for San Diego it was at 20 year lows for vacancies across the board, residential, office, commercial, industrial, warehouse etc with continued strong rent growth, appreciation, demand etc...My guess it will continue to be in top 3 nationally for total profits ( since 2000) moving forward. 

There is so much regional demand even Mexico is building massive new high rise residential (self contained mini city) and medical tourist complexes walking distance to border (100 feet). 

I think they even have a shot for Amazon hq2, maybe at the Qualcom stadium site. The city has a renowned international reputation for consistantly reeling in the top shelf corporations. 

Good luck!

Pictured from US border. 

 Well said, Matt. Thanks for contributing your insights on San Diego.

 Right on. Chitown is also a major top global investors city...big time and as rated by Schroders/Oxford U) since 1600s? with hundeds of billions in play. 

@Matt R. That's an interesting chart. Chicago saw about $3 billion in investment in 2016 just from corporate expansions that created about 15,000 jobs in the downtown area. 

I am going to follow up with a Part II of this post highlighting a few more attractive cities for commercial real estate investment in 2018 and Chicago is one of them.

It’s definitely important to look at trends but if the trend is already expected then returns tend to be lower and opportunities for smaller investors are less. What are the emerging cities that may be not be on large investor’s radar? Maybe some sort of an analysis of growth rates, vacancies, rent growth versus cap rate??

@Vince DeCrow with regards to Durham/Raleigh don’t forget to mention NC state and Cary as areas and university near by too!

I live in Cary and having moved her recently
Can confirm it’s booming. Lots of new apartments going up. Job growth is also quite good.

Hey @Vince DeCrow thanks for putting this together. 

Interesting to see Denver on the list, as I would thought the market is still very hot. GA and TX has been doing pretty well these past few years and are poised to continue.

Learnt a lot! Thanks! - Ola 

Originally posted by @Greg V. :

It’s definitely important to look at trends but if the trend is already expected then returns tend to be lower and opportunities for smaller investors are less. What are the emerging cities that may be not be on large investor’s radar? Maybe some sort of an analysis of growth rates, vacancies, rent growth versus cap rate??

Hi Greg - Thanks for the input, I agree with your point and if an investor consistently stays ahead of trends, then this will lead to higher overall returns for them compared with investing on the backside of trends. However, since the vast majority of us aren't first movers on every trend out there, I kept my post focused on relatively larger and accessible cities/markets that posses the major indicators that have historically been correlated with compressing cap rates and higher returns for any size investor over the associated real estate cycle.

Since the type of analysis that you brought up requires expertise in forecasting and assumption making and does not usually come to investors for free or without putting in a significant amount of time, I will leave this analysis task to each investor them-self :). Thankfully, for those that want to invest but don't have the resources or expertise to conduct this type of analysis themselves, there are a host of passive investment partnership opportunities out there. Feel free to direct message me for more info.

-Vince  

Originally posted by @Caleb Heimsoth :

Vince DeCrow with regards to Durham/Raleigh don’t forget to mention NC state and Cary as areas and university near by too!

I live in Cary and having moved her recently
Can confirm it’s booming. Lots of new apartments going up. Job growth is also quite good.

Absolutely! I have been through Cary several times in the past few years and noticed the growth myself. Are you getting yourself some skin in the game on the boom?

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