Future of Investing Goes to Second-Tier Cities and College Towns

“The lack of affordability in some urban areas is changing behavior, sometimes radically,” the report states.

Investors and fund managers are seeing that buyers and renters are moving to second or third-tier cities, according to SEI/Prequin’s 2020 Survey of Real Estate Managers and Investors on the future of real estate investment.

Just over 60% of investors and just over 40% of fund managers indicated that there has been an emphasis on secondary and tertiary cities.

“These are not all created equal from the standpoint of residents or investors. The most attractive growth prospects are often found in markets anchored by prominent universities, large medical facilities or major research and development centers,” the report states.

This switch to second-tier cities is because of the rising prices in first-tier metropolitan areas.

“Real estate prices in the most expensive markets are enough to produce vertigo: A 60-square-meter apartment in London costs the equivalent of 14 years’ salary. The lack of affordability in some urban areas is changing behavior, sometimes radically,” the report states.

The rising price of owning a house is also leading to younger people flocking towards apartment rentals.

“The move away from homeownership to renters, and a focus on experience over ownership, is permeating all age groups, not just millennials,” Maurice Malfatti, managing partner at Blue Heron Asset Management, said in the report.

According to U.S. Census data, the number of renters age 60 and over has increased by 32% over the past decade.

Regulation

Regulation is widely seen as a threat to the industry, according to the report.

“I think generally the regulatory environment tends to have rules of unintended consequences. The fewer government regulations there are the better,” Joe Lubeck, CEO of American Landmark, said in the report.

The report states that rent controls are regulations that have good intentions but unintended consequences including properties not being maintained in cities in California such as Berkeley or Santa Monica.

One hundred and seventy-seven organizations participated in the survey. One hundred and seventeen are fund managers and 60 are institutional investors. The survey and the interviews were conducted during the fourth quarter of 2019 and the first quarter of 2020.