Investors were fleeing primary metros even before COVID-19

by Clay Jarvis26 Jun 2020

While real estate talking heads discuss whether or not investment opportunities will be popping up more frequently in less densely populated areas now that COVID-19 has made living and working shoulder-to-shoulder with thousands of people less attractive, new data from LightBox says that trend is already well under way.

In its most recent Market Snapshot, LightBox reveals that over the past eight quarters, investors have been migrating from primary metropolitan areas to secondary and tertiary markets that provide greater upside and less competitive buying environments. By measuring phase one environmental site activity, an early indicator of commercial real estate investment activity, LightBox found higher sustained growth in phase one ESA in cities such as Portland (which saw a 45 percent increase in ESA over the last eight quarters), Lexington (47.4 percent increase), Syracuse (46.9 percent), and Columbia, South Carolina (36.8 percent) than in Sacramento (18.5 percent), Orange County (20 percent) and Long Island (19.7 percent).

According to LightBox’s principal analyst, Dianne Crocker, ESA has proven to be a reliable predictor of future commercial activity since the market tanked following the 2007 financial crisis. Her findings track closely with the overriding trend that’s been unfolding in commercial real estate over the past 12 years: The bottom-of-the-cycle opportunities found in major centers like Manhattan and Los Angeles after the Great Recession were gobbled up, leaving little room for investors lacking the appetite to get involved in heated bidding wars.

“Everybody wanted deals in New York and L.A. and the really big metros in the U.S., but over time, all of that interest in properties in the bigger metros drove prices up,” Crocker says. That’s why cities like Baltimore, Providence and Portland are seeing faster growth in ESA than their more expensive neighbors: Washington D.C., Boston, and Seattle.

Cities with port access, like San Diego and Baltimore, have seen higher rates of growth, likely due to interest in warehouse/distribution space. Those with large tech footprints, like Austin and Nashville, should continue to fare well.

“Any places where the big tech companies like Google are investing in real estate will be a huge draw for investors,” Crocker says, adding that cities like Denver, Salt Lake City, Atlanta, and Raleigh, North Carolina should all remain attractive for both tech companies and the employees they hope to hire.

Overall, ESA in the first quarter of 2020 posted an 8% increase over Q1 2019, a remarkable feat considering the instant halt COVID-19 put to transactions in March. Crocker says that healthy level of pre-pandemic activity bodes well for the commercial sector’s recovery. She believes the demand is still there.

“There is a record-high volume of dry powder looking for places to invest in the U.S. commercial real estate market,” she says. “And that dry powder doesn’t go away because of the pandemic. Having that much capital available, even capital that doesn’t rely on borrowing from a bank, is going to shorten this distress cycle, I think.”

But that distress is coming. Crocker is already tracking data for her Q2 report, and it’s not looking nearly as sunny.

“The numbers over the next quarter are going to be the ones that really tell the story of who emerges from this pandemic the fastest and where investors are focusing over the near-term,” she says.