NYC holds onto title of world’s No. 1 investment power hitter
The United States is home to half of the world’s top cities for commercial real estate investment, with demand driven by domestic investors and buoyed by continued low interest rates, concludes the Cushman & Wakefield report, Winning in Growth Cities 2019/20.
Top of the city ranking list is New York, followed by Los Angeles and then San Francisco, which has overtaken London and Paris to gain its ranking in the world’s top three.
Other US cities in the top 25 are (with those also in the top 25 for cross-border investment marked in bold): Dallas, Washington DC, Atlanta, Chicago, Boston, Seattle, Houston, Miami, Phoenix and Denver.
In terms of cross-border investment, meanwhile, the US is not so dominant. New York did regain its No. 2 spot behind London in this year’s ranking thanks to a handful of very large deals, but Los Angeles is the only other US city in the top ten, in 7th place, while San Francisco comes in at 13th.
Superstar cities vs. cities with high-population growth
The US did nonetheless show some of the biggest increases in investment totals compared with the previous year*.
New York showed its strongest investment performance for five years, with 13% more investment – reaching a total $60.62bn – pouring into the office, residential, hospitality, retail and industrial sectors in the 12 months to June 2019 year on year (y/y).
Among other larger cities, Boston saw the biggest rise in this year’s ranking in terms of investment volumes, up 66%, reflecting a market where office supply for big occupiers is limited and rents are continuing to rise. Investment in Seattle was up 38% and San Francisco 35%.
CBDs of NYC, Los Angeles, Boston, Chicago, Washington DC and San Francisco + core assets in faster-growing markets such as Denver, Atlanta and Phoenix – Cushman & Wakefield on the core investment targets for 2019/20
Looking ahead, Cushman & Wakefield pinpoints core investment targets for 2019/20 as the central business districts of gateway cities such as NYC, Los Angeles, Boston, Chicago, Washington DC and San Francisco, together with core assets in faster-growing markets like Denver, Atlanta and Phoenix.
At MIPIM, earlier in the year, Andra Ghent, Associate Professor, University of Wisconsin-Madison, pointed out that most of the population growth in the US is in the south, southwest and west, rather than in the country’s superstar cities, such as NYC, Washington DC or Seattle.
“There is a disconnect between the greater concentration of skilled workers in the superstar cities and the cities where most of the population growth is” – Andra Ghent, University of Wisconsin-Madison
“This has created a disconnect between the greater concentration of skilled workers in the superstar cities and the cities where most of the population growth is and which are less talked about, such as Houston, Atlanta and Phoenix,” she said.
*Figures excludes investment for development projects.
Millennials shaping the form of US real estate
By next year, the millennial generation will form half the workforce in the US. The panel at the MIPIM session Investing in the US: where, what & how? discussed the influence of the millennial generation on both gateway and secondary cities.
While millennials flooded to large urban cities a decade or so ago, sparking an urban revival, a steady trickle of them are now moving out of the superstar cities to locations where housing is cheaper, the weather warmer and the taxes lower, depending on the state.
“The millennial generation … want to be in a 24-7 live-work-play experience. This in turn is driving where corporates locate and the level of amenities within properties” – Bruce Mosler, Cushman & Wakefield
According to census figures analysed by the Wall Street Journal, US cities gaining the largest number of 25 to 39 year olds in 2018 were Los Angeles, Phoenix, San Antonio, San Diego, Austin, Seattle, Denver and Columbus. However, when they move location, they are taking their urban workplace expectations with them, the MIPIM panel pointed out.
Bruce Mosler, Chairman Global Brokerage, Cushman & Wakefield, speaking at MIPIM, said: “The millennial generation is impacting where, when and how people invest in real estate. They want to be in a 24-7 live-work-play experience, and this in turn is driving where corporates locate and the level of amenities within properties.”
NYC: bringing the office stock up to the digital age
These live-work-play expectations of the millennial generation are also driving construction in Manhattan, home to the US’s most important tech market outside Silicon Valley.
Tech companies in NYC are clustered in areas such as Silicon Ally in Manhattan’s Flatiron district in Manhattan, in Brooklyn or Queens, and in the outer boroughs. Kenneth Fisher, Partner, Fisher Brothers, a New York-based investor and developer, said at MIPIM: “Tech is almost 30% of the tenant base in New York, and a net grower. Tech is the future.”
An estimated 60% of New York City’s office stock is over 70 years old which poses a challenge for occupiers looking for office space that appeals to millennials, with the right amenities, design appeal, communal feel and tech infrastructure.
Of the 14.6m sq ft of new office space currently under construction in Manhattan, Hudson Yards is the largest private sector development since Rockefeller Center. This new West Side neighbourhood includes a total 10.6m sq ft of offices, as well as around 100 retail and culinary experience units, public squares, gardens, the first Equinox Hotel and cultural spaces including The Shed and the Vessel interactive artwork.
Fisher Brothers is reinvesting in their NYC portfolio to “be on the shortlist and stay on the shortlist” for occupiers
Fisher said that his company was reinvesting in their NYC portfolio in order to “be on the shortlist and stay on that shortlist” for occupiers. This included redoing lobbies, elevator systems and bringing in amenities across the building. For example, said Fisher, “we’re offering conference centres, so tenants don’t have to tie up as much as 25% to 30% of their space with conference rooms.”
Growth of tech expands secondary markets
Secondary markets highlighted by the Cushman & Wakefield report as investment targets for 2019/20 include core assets in Atlanta, Denver and Phoenix, followed by the growth markets of Austin and Seattle. Houston was categorised as an ‘opportunistic’ target market.
David Bouton, Managing Director and Co-Head of Citigroup’s North America Commercial Real Estate Finance Group, said at MIPIM: “If you look at a city like Austin, it’s unbelievable how tech has shaped so much of that city compared with 20 years ago when it was just a state capital, a university town.”
“When we invest in secondary markets, we always ask ourselves: are we chasing yield?” – David Bouton, Citigroup
Regarding these secondary markets, Bouton added: “When we invest in secondary markets, we always ask ourselves: are we chasing yield? We want to make smart investment decisions that stand above a cycle and that don’t just chase yield.”
Bouton sounded a note of caution about the secondary markets: “People are coming into these markets very quickly and sometimes at the wrong time. The question to ask is: what are these cities doing in terms of infrastructure? You don’t want to have development starting to outpace infrastructure.”
Looking ahead in the US
In a separate MIPIM session on real estate trends in North America, the moderator, Andra Ghent of the University of Wisconsin-Madison, asked the panel what the next asset class would be to take the US by storm.
For Roelof Opperman Principal, Fifth Wall, the Los Angeles-based venture capitalist specialising in proptech, it would be ‘dark’ kitchens, shared kitchens for meal deliveries, as they take over light industrial and sub-grade office space; and last-mile logistics, with the repurposing of retail assets as logistics hubs.
On residential, Rony Tamayo, Vice-President International, Lennar, a leading US homebuilder, saw single-family rentals as the asset class causing the most excitement. “There are a number of companies focussing on this and buying thousands of homes each year.”
For other panel members it was healthcare as well as innovations in the built environment to help with the effects of climate change.
A new challenge for investors – ‘extreme climate events’
In a new section, Cushman & Wakefield’s Winning in Growth Cities report looks at the impact of ‘extreme climate events’, whether wildfires encroaching on Los Angeles or rising sea levels affecting Miami, while in New York, predictions are that 37% of Lower Manhattan will be at risk from storm surges by 2050.
“Investors should consider the climate resilience of their portfolios, in terms of the physical risk, government policy, level of preparedness and resources, as well as migration and the socio-economic impact” – David Hutchings, Cushman & Wakefield
“When looking at location, investors should consider the climate resilience of their portfolios, in terms of the physical risk, government policy, level of preparedness and resources, as well as migration and the socio-economic impact”, says David Hutchings of Cushman & Wakefield, author of the report.
Just this month, news headlines told of hundreds of thousands without power in California as utilities companies implemented a safety plan to prevent the spread of wildfires, while typhoon Hagibis headed towards Japan, leading to the postponement of matches for the Tokyo Rugby World Cup and the Japanese Grand Prix.
As Richard Wiles, Executive Director, Center for Climate Integrity, an environmental advocacy group, told The New York Times earlier this year: “The next wave of climate denial – denying the costs that we’re all facing.” Investors take note!
Picture credits Hudson Yards:
55 Hudson Yards: Related Companies, Oxford Properties Group and Mitsui Fudosan
50 Hudson Yards: Related Companies and Oxford Properties Group
Public square, gardens & Vessel: Timothy Schenck