Real estate managers are moving out of the city center, investing in new areas to escape the crowd of capital looking to invest in the urbanization trend.
Managers are investing in once-blighted neighborhoods of cities as well as older, inner-ring suburbs — especially those with access to mass transit — as city centers have become crowded with capital. Managers are trying to capture demand formed by 1 million people worldwide moving into cities each week, according to a March report by real estate services and investment firm Jones Lange LaSalle Inc.
The six major metropolitan U.S. cities — Boston, New York, Washington, Chicago, San Francisco and Los Angeles — accounted for $52.7 billion in transactions, compared to $74.3 billion for the remainder of the U.S. metropolitan areas combined as of Dec. 31, according to real estate research firm Real Capital Analytics Inc. But even in the major cities, transaction volume dropped 16% in the year ended Dec. 31, the data show.
Investment on the fringe started in coastal primary-market cities such as San Francisco, New York and Boston. It now is slowly spreading next to central business districts of smaller cities, said Julia Georgules, director of local market research in JLL's Boston office. Renewed investment activity is causing once-blighted areas to make a comeback, she said.
The demand for 24-hour city-type amenities will lead to more suburban investment.
“You will see suburbs serviced by public transit become more urbanized,” Ms. Georgules said.
This twist on the urbanization trend, in part, is leading to a different type of investment analysis by real estate managers. “As always, real estate location has been key. Now the focus on location is down to the neighborhood level,” she said.
Some of those neighborhoods include uptown Oakland, Calif.; the Central Eastside of Portland, Ore.; Los Angeles' Downtown Arts District; Shockoe Bottom in Richmond, Va.; and Minneapolis' North Loop.
In Durham, N.C., abandoned tobacco and textile manufacturing plants have been transformed. There now are about 200 startups in a tech hub in the redeveloped American Tobacco campus. The Chesterfield, an old cigarette factory, is now is a lab environment for life sciences companies.
Tenants are not attracted to these revived areas for lower cost. “A lot of these neighborhoods have become very trendy and can charge a premium,” Ms. Georgules said. “It's not a cost-saving but it's investment around demand for a unique experience. A workspace that is creative ... with unique retailers and restaurants.”
The trend is driving real estate investment managers to try to figure out “the path of growth,” of the live-work-play environment favored by technology and creative tenants, said Jason Kern, Chicago-based CEO for the Americas at real estate investment manager LaSalle Investment Management. LaSalle is the investment management arm of JLL's global business.
“We have certainly been focused on technology centers ... where we see the right urbanization trends,” Mr. Kern said.
LaSalle — which has $58 billion in global assets under management — is not the only firm investing in fringe submarkets. On March 14, real estate money management firm Stockdale Capital Partners LLC. and money manager Jasper Ridge Partners LP formed a joint venture to recapitalize ownership of the Galleria Corporate Center — an office complex that used to be a defunct mall — in what is now the downtown entertainment district of Scottsdale, Ariz. Jasper Ridge replaced Oaktree Capital Management LP as partner.
The area around the Galleria center had been home to strip malls and is now a live-work-play center with residential and retail properties, hotels and restaurants.
“There's been the creation of an urban core where there was nothing there,” said Daniel Michaels, Stockdale managing director in Los Angeles.
The area was developed to take advantage of the corporate migration to Arizona because it is a right-to-work state and its younger, educated workforce, he said. Yelp Inc., SAP SE and McKesson Corp. are among the tenants in the Galleria Corporate Center.
Urban centers also are starting to be planted in the suburbs.
“The suburbs aren't dead; they are just becoming more urban,” said Gunnar Branson, president and CEO of the National Association of Real Estate Investment Managers, a Chicago-based trade association.
It is one trend that is transforming the real estate money management business, he said.
Personal space — for apartments and offices — is getting smaller. There's been a 30% reduction in the amount of square feet per person in new apartment buildings, Mr. Branson said. Public space is becoming more important than private space. “The No. 1 reason people rent or stay in the building is because they have friends in the building,” Mr. Branson said.
Executives at real asset money management firm Brookfield Asset Management expect some suburbs to be urbanized. “When we think about the powerful trends underlying urbanization, we don't limit that impact to the major cities, because we include the likelihood of urbanization occurring within pockets of the traditional suburbs,” said Barry Blattman, a vice chairman and a senior managing partner at Brookfield Asset Management in New York.
One example is The Domain, a facility outside the central business district of Austin, Texas, once owned by IBM Corp. that is being transformed into a mixed-use development including offices, multifamily and retail, JLL's Ms. Georgules said.