Go To The Secondary Cities

I have been a proponent of the major secondary cities for quite awhile.  I have just returned from looking at several potential acquisitions in these cities and studied what is occurring in these places. My trip was to due diligence several prospective transactions on behalf of our Asian investor partners to expand their areas of investing outside of the traditional gateway cities. Several things are apparent from this trip.

There are wonderful things happening in certain secondary cities around the country where the state and local administration has been business friendly and where strong efforts have been made to encourage gentrification and lifestyle that appeals to millenials. In these cities developers have been very active in taking old industrial or service buildings, .like car repair shops, small factories and warehouses and converting them into restaurants, offices and other clean uses. Whole neighborhoods are in transition to becoming hip areas instead of dark, dangerous places. The homeless are being moved out and police presence stepped up as it was in New York under Giuliani twenty years ago. The adaptive reuses are often very clever and retention of these older buildings has added character to these areas. These deals are still economically viable for developers as they are not the traditional low cap deals yet, although they are getting there fast.

The millennial wave is making vast changes to the opportunities in real estate that you need to pay attention to. Lifestyle is a major issue to these kids. They want to be able to do outdoor recreation, to have safe places to congregate at night and on weekends, and places to live that are not outrageously expensive. Open space offices in loft like settings that do not have high rents is a trend they need to launch their new business ventures, and they do not seek nor need fancy office buildings. They are perfectly happy to have their coffee at a converted auto repair shop that is now redone as a cool venue. They want to be able to bike to work and to be able to find a shared car on the weekend. Their life is not about grinding away in an office tower.

There are a number of these states like Texas, Wisconsin, and Colorado where the administrations have encouraged the growth of the cities, have made starting a business easier and have pushed to bring business to their states. Nobody has done this better than Texas where they have severely limited torts, cut taxes, cut red tape, and gone all out to bring in business. That is why there is such an exodus from California to Texas. That is why Austin is the fastest growing city in America. Where there are moderately conservative governors who cut taxes, reduced regulations, made the state right to work and reduced union influence, and do not focus on increasing entitlements, then you see economic growth. Compare this to places like Baltimore, Detroit, or now Connecticut. Connecticut was where all the banks and funds fled from New York when New York was raising taxes and costs to do business. The governor and legislature just raised taxes again. Now GE and Aetna are strongly considering leaving and most of the banks have already left. When taxes go up, the unions, and especially the teachers union, have undue influence, and where the government pensions are essentially bankrupt, then you have nil economic growth. Where the police are constrained from doing their job and crime is still high, you have middle class flight and businesses leave. Just look at Baltimore or Detroit or Newark.

Unfortunately all of the huge gains made in New York under Giuliani and Bloomberg are rapidly being negated by DeBlasio. He and the city council are undoing the tough policing and the shootings are rapidly rising again. Murder is up over 20% already.  This same trend is happening in other major cities where the police are now being told to back off and an anti police attitude has taken hold. DeBlasio is trying to raise taxes and to institute an old style left wing approach with the focus on the unproductive instead of the job creators. The result of a recent survey of white people in New York showed that whites now think DeBlasio is anti white and implementing policies that are unfavorable to those who are the middle class base of the city.  This is how cities begin to go in the wrong direction.

If you want opportunities to find interesting real estate deals and long term value enhancement, look at the vibrant secondary cities where the governments of the state and cities learned the lessons of New York and the reasons for tough crime enforcement, lower taxes, and business friendly laws.