Austin, Raleigh, Pittsburgh, Nashville Making Strong Argument for More Investment
By: Jeff Myers
The four office markets of Austin, Raleigh, Pittsburgh, and Nashville are making a strong argument for more investment. And unlike Keyser Söze, their stories are for real. Thanks to gains in the tech, energy, and healthcare industries (to name a few), these markets are among the few markets in which the office job base has surpassed prerecession levels, as compared to an average net shortage of 3.2% among the top 54 markets tracked by PPR.
With more bodies to fill office space
, these four metros have office fundamentals that are on relatively firm footing, including Class A occupancies at or near 10-year highs.
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Despite these high Class A occupancies, speculative construction remains relatively light, and as a bonus, pricing on assets in these metros generally remains at or below the benchmark for to top 54 markets. In fact, except for in Austin, the average quarterly cap rate for 4 and 5 Star assets in these markets has seldom dipped below the benchmark in recent periods, much less the lower levels typical of core markets. Therefore, if acquisition or (dare it be said) development is on the list, these unusual suspects are certainly worth considering.
Conversely, many major metros are not in as favorable a position from an investment perspective. Though their office-job levels are in decent standing, San Jose, Boston, Houston and Washington, DC, have the most construction underway as a percentage of inventory, which will likely weigh on near-term fundamentals.
Other markets also come up short in comparison. Dallas-Fort Worth has very low structural occupancies that have not surpassed 85% in more than a decade. And though New York City has a high structural occupancy rate, on a relative basis occupancies there have not improved nearly as much as they have in the four focus metros.
So now may be the time to think outside of the traditional market opportunities and truly compare alternative investments.
Jeff Myers is a senior real estate economist with CoStar's Property and Portfolio Research (PPR) group in Boston.
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