CREFW-Summer2015

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CRE Finance World Summer 2015
10
U
Stewart Rubin
Director
New York Life Real
Estate Investors
S office building sale prices are 3.5% above the November
2007 peak of the last cycle (107.6% Percentage Peak-
to-Trough Loss Recovered)1. Much of the value increase
is associated with major market Central Business District
(CBD) office space in Boston, Chicago, Los Angeles,
New York, San Francisco, and Washington. The Office-CBD Major
Market Index is 27.5% above its previous peak (155.9% Percentage
Peak-to-Trough Loss Recovered). The six major markets have
experienced significant foreign and domestic investment. These
markets mostly benefit from long term growth factors including high
education attainment levels, high share of residents with Science,
Technology, Engineering, and Math (STEM) degrees, significant
high-tech location quotients (LQ), lack of exposure to the more
volatile energy sector, and high current office employment.
Boston, Chicago, Los Angeles, New York, San Francisco, and
Washington are global cities with strong economic engines.
However, since these major markets are priced well beyond
previous peak levels, alternatives will be identified. The alternative
investment markets either have or are acquiring some of the
underlying characteristics of the big six markets. Although they
may never achieve the depth and status of the big six markets,
they have long term value growth potential. Many of these metros
are being transformed and will likely be larger and stronger office
markets in 15 to 20 years time.
The metros that seem poised for long-term growth based on the
criteria detailed in this report are Austin, Raleigh, Denver, Salt Lake
City, Nashville, and Charlotte. These markets excel in several long
term growth factors that spawn and sustain office demand. These
demand factors include the aforementioned education and high-
tech emphasis, but also include characteristics that are attractive
to corporations and young college graduates such as affordable
housing. Other markets such as Seattle, San Diego, Atlanta, Dallas-Ft. Worth, Portland, Minneapolis, and Indianapolis exhibit long term
growth attributes in certain categories that suggest consideration
after factoring qualitative factors and overall market position. The
markets are selected from a long term investment perspective
independent of short term supply considerations. Focus is placed
on secular change underlying cyclical rhythms.
Major Markets
The major markets of Boston, Chicago, Los Angeles, New York,
San Francisco, and Washington, DC are driving high office building
values. Aside from the availability of low cost capital, major market
CBD office benefitted from foreign investment. US Gateway cities
have attracted investors pursuing stable investments and, in addition
in the case of foreign capital, the quest for safety. Additionally,
Houston had recently been a magnet for investment; however, high
energy prices fueled demand, which might quickly evaporate if the
recent decline in energy prices persists. Table 1 details the top
metro areas for foreign and domestic investment in office buildings.
Table 1
Top 10 Metros Office Total Volume
Past 24 Months YE November 2014
© Real Capital Analytics, Inc. 2014
Market values in major markets have soared despite lagging market
fundamentals. With the exception of San Francisco, real office
rents in major markets are between 11.1% and 22.0% below their
previous peak. Overall, record office building values notwithstanding,
underlying real estate fundamentals have not recovered back to
peak levels experienced before the last recession. In order to invest
prudently it is important to identify long-term secular trends that
underlay the broader real estate cycle being experienced.
Factors for Evaluating Long-Term Trends in Metro Areas
College educated people tend to self-sort into metro areas in
which there are opportunities. In turn companies locate in places
where they can hire educated employees. This circle of opportunity
becomes self-perpetuating as jobs are created in these metros.
Accordingly, metros with high education attainment rates are favored.
We also examined and prioritized markets in which young college
educated persons2 (YCE) live and are relocating to. Similarly markets
with a high degree of STEM graduates attract employment growth.
Technology jobs have a disproportionate impact on local economies.
Markets with tech job growth and high location quotients in tech
using office jobs are identified.
The primary manifestation of office demand is office-using jobs
(OUJ). Markets in which office-using jobs have grown over the
past five years and are projected to grow over the next five years
will be highlighted later in this report. Young workers are attracted
to metro areas with job opportunities and affordable housing.
Metro areas with affordable housing include some of the highest
population growth markets in the nation. Markets with high growth
in the number of children between the ages of 5 and 14 are noted
later in this report. In addition to these children representing future
demographic growth, the parents of this age group have usually
set down roots at this point3, establishing a demographic base.