‘Yield is king’: real estate investors ditch New York, LA for second-tier US cities
- In Chicago, one can buy a two-bedroom flat for as low as US$382,167, while in New York, an investor needs US$1.27 million
- Investors from Hong Kong and mainland China are looking to US cities such as Seattle, Austin and Nashville
Finding New York and Los Angeles far too expensive as investment options? Then it’s probably time to head for the less glamorous cities of Salt Lake City, Nashville, and Austin.
Real estate experts believe that secondary cities in the United States are becoming more popular with investors looking for better returns, even though they could face higher risks and find it more difficult to re-sell in an economic downturn due to lower liquidity.
“The cap rate difference in Charlotte, North Carolina and New York was something like 120 to 150 basis points. That's significant, and that's where the bargain aspect of that comes in,” said Dan Flanigan, managing partner of the New York office of US law firm Polsinelli. “You have a much better shot at getting between 9 and 12 per cent in these secondary cities.”
Flanigan, who said his mid-sized law firm handled real estate deals involving investors from mainland China and Hong Kong in recent years, was in Hong Kong to meet with clients and attend a conference.
Data from New York-based Real Capital Analytics showed that investments from Hongkongers and mainland Chinese in cities such as Salt Lake, Austin, Nashville, Dallas, and Seattle increased annually from between nearly a third and as much as tenfold in 2018.
These investments included income-producing assets, defined as office, retail, industrial, hotel apartment and senior housing.
In the case of Austin, the capital of the lone star state Texas, it received investments worth about US$100 million in 2018 from merely US$7.7 million in 2017. Nashville, known for country music, had zero investments from Hongkongers and mainland Chinese in 2017, but received US$101.3 million last year.
Meanwhile, entertainment capital Los Angeles saw real estate investment from Hongkongers and mainlanders of US$576 million in 2018, easing from US$2.2 billion in 2016. In New York, these investments flows declined 89 per cent in 2018 on year to US$380 million, according to Real Capital Analytics.
Flanigan said these secondary cities are attracting a steady stream of young professionals.
“Those gateway cities [of LA and New York] are still doing great, and they’re attracting all kinds of money and transactions, but the rest of the country is growing at a better pace,” Flanigan said.
Spencer Levy, chairman and senior economic adviser, Americas research at CBRE, agreed that investors should look to secondary cities because of higher yields.
“At this stage of the cycle, these cities have higher growth and higher yields than the major metros. Yield is king and some foreign investors have an ‘emerging market strategy’ in the US,” Levy said.
According to CBRE's 2019 Americas Investor Intentions Survey, released early this month, investor appetite for risk is lessening, and that the top reason for purchasing real estate this year is to have a steady source of income.
Mark Elliott, head of international residential at Savills, said the property agency has recently branched out from selling real estate in New York and Los Angeles to Chicago, Seattle and Austin.
But risks remain.
“Liquidity is lower in the smaller markets so when there is an economic downturn it will be more difficult to sell,” Levy said.
Emerging markets are also considered a riskier bet than major cities.
“I would say somewhere like Austin, Salt Lake, and Nashville, these are emerging markets and these come with risks. The question is can the market resell and absorb the prices that developers are charging?” Elliott said.
But Elliott believes that risks that secondary cities face are the same as New York and LA's.
“I think they are the same risks that there are in New York – they are the macro fundamentals of the US economy.”
