I recently came across this excellent commentary which was published this past spring in Pensions and Investments. It is succinct overview of some of the factors driving demand and returns in "non-gateway" cities such as those here in the Carolinas - and at Prudent Growth we share these viewpoints as we see them playing out in real-time in our portfolio of properties.
From the article:
"...However, there is a demographic shift underway that is driving interest in office investment opportunities in non-gateway cities — a trend that cannot be solely attributed to the high prices and significant competition in most major markets.
Data show the population growth of millennials in non-gateway (secondary) markets has exceeded gateway markets with the trend expected to continue through 2022. This young adult population, age 20 to 34, is in search of well-paying jobs, affordable housing and high quality of life that can be found in prime business centers of non-gateway markets at a more reasonable price. Since jobs follow workers, many of these markets are experiencing employment growth, creating demand for well-positioned, modernized office assets with full amenities that appeal to millennials.
Non-gateway office-using employment growth is 66% greater than in gateway markets. Many employers are finding it difficult to recruit skilled labor in the ever-tightening gateway markets, which are increasingly ruled by large companies that put pressure on small to midsize businesses attempting to attract and retain talent in the same geographical area.
Investors may view secondary market asset pricing, which is often significantly below replacement cost, as a comparative bargain to gateway markets and as an opportunity to secure yield. Assets that meet return thresholds are now simply less available in gateway markets. In response, investors are casting a wider net for stable yet growth-oriented acquisitions — a trend that should continue in coming years.
While there is appeal to the energy of city living, millennial priorities are changing. They are increasingly seeing value in different things such as a lower cost of living, shorter commutes and better work-life balance, as well as easy access to groceries, the outdoors and startup communities. Millennials are realizing non-gateway cities better align with their priorities, as they offer an abundance of high-quality amenities in both urban and suburban locations and are often more affordable for the average working family. While gateway markets do offer a high quality of life, it is mostly at the income extreme. The development of mixed-use urban and suburban areas in many non-gateway markets is bringing this concept to more millennials at a much more achievable cost.
Investors with a deep understanding of local markets are uniquely positioned to align with the shifting priorities among the millennial demographic and increasingly are focusing on areas in growing markets that offer cultural attractions, walkable cores, premium retail and restaurant offerings and good public transportation options. ...
Full article here: https://www.pionline.com/article/20180410/ONLINE/180419999/commentary-the-demographics-driving-real-estate-investments-in-non-gateway-cities