Some Secondary Markets Risk Overbuilding

IRVINE, CA-Demographics make the outlook still strong for multifamily, and there are silver linings for retailers, but some secondary markets are at risk of overbuilding. So says Kevin Maggiacomo, president and CEO of Sperry Van Ness, who recently spoke with GlobeSt.com about these and other commercial real estate issues.

GlobeSt.com: As the retail sector recovers, where do you see the greatest improvements occurring?

Kevin Maggiacomo: The greatest improvement will quite simply lie in the stabilization of cash flow. Of all the property types, retail (multi-tenant retail in particular) was one of the hardest hit. Properties purchased at the height of the economic upswing were often purchased with heavy debt. When the economy began to struggle, retailers would look to owners for rent reductions. Unable to because of lender restrictions and/or their inability to make debt-service payments (loss of income), many were taken back by lenders. With new owners in place and with as much as 50% less cost basis, ownership are reducing or have reduced rents for struggling retailers and can offer new rental incentives, e.g., lower leasing rates and tenant-improvement dollars for build-outs.

GlobeSt.com: People are beginning to talk about a condo resurgence.  How do you feel this will I mpact the apartment sector, which many experts say can't keep pace with demand?

Maggiacomo: I don't believe that the building “boom” has materialized to the extent that it will make up for demand for apartments. Many people who have lost their homes are not anxious to get back into homeownership. And for every 1% drop in homeownership, one million people are added to the rent rolls … and the homeownership rate has dropped some 3% from the peak in 2007.

Also, apartment demand is coming from both sides of the age spectrum. Boomers who are retiring (traditional homeowners) are opting to rent instead of own when they relocate to avoid the responsibilities that come with ownership. On the opposite end, we have graduating students reluctant to buy homes or condos amidst the economic and employment uncertainty.

GlobeSt.com: Which secondary markets do you see as the strongest for yield moving forward?

Maggiacomo: The momentum is with markets dominated by energy, high tech and related knowledge industries. But the standouts are also well diversified. Austin is a case in point, where high tech, education and government are all contributing to growth. In fact, the growth outlook is strong across Texas markets, led by Houston. If there's a risk here, it's in overbuilding. Construction in Austin is more than 5% of inventory, which will be difficult to absorb if there are any bumps in the road. Dallas isn't far behind in the development cycle.

Other standout markets include Portland, Salt Lake and Denver; on the East Coast, the Florida High-Tech Corridor (anchored by Tampa and Orlando), Nashville and Charlotte. These are markets that have struggled to recover investor interest. Common features often include moderate to fast-growing core industries, a young and well-educated workforce and a critical mass of entrepreneurship across industries. They aren't markets where you'll invest today and cash out your returns tomorrow. Nor are they markets where the upside has already been priced in. Instead, these are markets with healthy longer-term prospects for income growth, where we see businesses and real estate players making meaningful investments for the longer haul.