By Chris Rising
There are many trends shaping the real estate market. Most of these trends are being driven by the advancement of technology – specifically by the millennial generation's use and interpretation of cloud-based and mobile-focused technology. Everything from communication to transportation is evolving and we're keeping our finger on the pulse and looking where the “puck” will be headed.
As an owner and operator of more than 4M SF of office and data center space in Downtown LA, we are bullish on the DTLA market. However, we also believe there are a number of real estate markets outside of LA that are ripe for further growth. Here are the ones we're focusing on and why:
There continues to be positive economic data and statistics as they relate to real estate metrics in Denver, CO. With a current greater metro population of just over 3 million people, Denver's growth rate has consistently outpaced the national rate every decade since the 1930s. Denver's low unemployment rate (2.2%), coupled with their affordable housing market makes it prime for additional in-migration. In November 2017, Denver approved a $937 billion bond package, setting in motion the city’s largest collection of capital projects, which should serve to further tighten the employment market. Additionally, Denver has invested approximately $5.3B in the FasTracks, a system of commuter rail, light rail, and express bus services, allowing greater public transit connectivity for the greater metro workforce, and additional transportation bandwidth as Denver continues to grow. We believe that companies with a national and global presence will continue to look to Denver as a headquarter city and we believe that technology-focused businesses will look to the well-educated millinial population as an attractive place to start companies.
South Orange County, California
The market dynamics in South Orange County make it an ideal investment opportunity, if one is able to capitalize on the infrequent investment opportunities in the market. The Irvine Company's new office and residential construction in the highly amenitized Spectrum submarket has experienced strong demand and has shifted market focus towards the southern end of Orange County. Given the relatively small scale of the market (4.5M SF), compared to the Airport submarket (22.5M SF), if only 5% of the Airport submarket decided to move to South OC near the Spectrum Center, it would result in a 25% increase in demand/absorption for the Spectrum submarket. While many companies with a significant Los Angeles presence, such as Nestle and Toyota, are leaving their respective markets, we continue to see a strong commitment to the market from OC-based companies, such as Blizzard, Mazda, and Western Digital.
Downtown San Jose, California
Major tech companies like Google and Adobe Systems have already discovered the appeal of downtown San Jose and are bringing their deep employee bases with them. A growing presence of both retail and restaurant entities only further boosts the economy of this once-forgotten and sleepy downtown area, leading an urban revitalization and a boom of multi-family development (2,200 units developed in the last 2 years, with 2,067 units under construction). Add plans for a new BART station to be in operation by 2025, and relatively discounted office rent rates compared to nearby cities like Sunnyvale and Palo Alto ($5.82/sf and $8.35/sf, respectively), and this area has gained some lasting economic activity.
Salt Lake City, Utah
We are especially focused on Salt Lake City because its appeal is rooted in many important metrics for real estate investment. SLC and Utah's economic incentives, its notoriety for competitive corporate and income tax rates, and its relatively low costs of doing business (including real estate costs), make it a veritable jack of all trades. Forbes ranked Utah as #1 “Best State for Business” in 2015, further drawing in corporations that want to save on costs. We see Salt Lake City in many ways as an earlier stage Seattle, with a variety of nearby outdoor activities and high measures of livability. This, coupled with its excellent transportation options — including over 1,700 miles of railroad track across the state and four major freeways that go through Salt Lake City itself — and a strong local talent pool (thanks to nearby universities) causes SLC to stand out to both employers and employees seeking a great place to live, work, and play.
Overall, we believe that the best areas to invest in commercial real estate share certain basic traits:
- The market must be located in or near areas with ideal demographics, which include a diverse and strong workforce with lots of employees seeking upward mobility and entrepreneurial mindset.
- The market must also have above-average higher education opportunities nearby, including universities, colleges, and community colleges, which serve to feed nearby businesses with bright, eager graduates.
- Density is also a key factor we use in deciding which areas to invest in, as more dense areas tend to have more consistent lease and investment demand throughout the ebbs and flows of the real estate cycle.
- Access to public transportation is also typically a key ingredient to a successful submarket, which not only reduces traffic, but also expands the employee base of a certain area.
- Last but not least, we also like to see diverse industries in the markets we invest in. Many submarkets in Southern California have still yet to recover from when the home mortgage industry blew up in 2007 and 2008.
As our company expands and we seek other target markets in the Western US, we find that a mixture of each of these key ingredients is a strong starting point in a successful investment.