Push For Yield Will Lead to Secondary Cities in 2014

CHICAGO-The push for yields will mean deeper inroads into markets outside the usual suspects in 2014, DTZ says in its Capital Markets Update issued Wednesday. “Many investors will take a harder look at the Texas, Oregon and Washington markets as the year progresses,” according to DTZ's report, which cites Dallas, Houston—both of which are leading the recovery—as well as Seattle, Sacramento and Portland, OR.

Cross border investors in particular will have their eyes on these markets “in an effort to spread risk and improve returns as they continue their investments in the Americas,” DTZ says. Another driver, the report says, is a need to diversify portfolios and asset classes.

For example, many Asian funds seek office product in key gateway cities like San Francisco, New York, Washington DC and Chicago, where competition is “fierce” thanks to the public and private REITs that have already established a physical presence in these markets. For them, DTZ says, multifamily or retail offer good alternatives.

Further, the report notes that many US-based firms would welcome investment from international funds and therefore are willing to joint venture and provide the necessary “market understanding, transparency and representation” to manage the investments. “This will also increase transactions and add value to the asset,” according to DTZ.

Improving economic data and job growth indicators hint that investor demand next year will both “increase and broaden to embrace these secondary markets,” while a higher share of investments within these markets will come from cross-border investors as they increase their risk tolerance.

Assuming the US recovery continues, the overall '14 environment will be encouraging for much of the real estate marketplace “as continued stimulus measures and positive recovery sentiment spark an appreciation in capital values for effective, occupied space,” the report states. Among the drivers of continued growth in the coming year: a functioning debt market, CMBS in particular, as well as liquidity across the capital stack.

“Opportunities remain for investors who are willing to dig in on fundamentals and avoid markets overheated by investors bidding up core real estate,” according to DTZ. “With such competition in the prime/core marketplace, investors will be forced to deploy capital in secondary markets to achieve yields.”