Just when you think prices can’t go any higher for properties in core markets, some experts say they haven’t yet reached their peak in cities like New York, Los Angeles, and Chicago.
“The opportunity over the next 12 years is even stronger,” says John Sikaitis, managing director for Jones Lang LaSalle. “I think core real estate is better positioned today than it has ever been positioned.”
The population in urban areas is growing quickly. And the larger a city or town is, the faster its population is growing, according to the latest Census data. If this trend continues, population growth will help the demand for properties in core markets and will raise the incomes such properties produce. That will in turn help support property prices that already seem sky high.
The 2013 population estimates from the U.S. Census show that densely populated places are growing quickly, and the largest cities are growing at the fastest rate of all. Nearly one in every seven Americans lives in either the New York, Los Angeles or Chicago areas. Between 2012 and 2013, the largest metro areas, with populations of more than 1 million, grew more than twice as fast overall as smaller metros, with populations fewer than 250,000 residents.
Smaller “micropolitan” areas, with between 10,000 and 50,000 in population, also grew but not as quickly. The number of people living in rural areas shrank.
“The closer to the middle, the more growth,” says Mitchell W. Kiffe, senior managing director with CBRE Capital Markets.
This marks a change from the 2010 Census, which showed flat or even declining population growth over the preceding 10 years in many large cities, including Chicago. Strong urban economies are helping these core markets. “I was not surprised by what the Census shows,” says Caitlin Walter, senior research analyst for the National Multifamily Housing Council (NMHC). “Employment is such a huge demand driver.”
Cap rates down, prices up
Properties in core markets have already performed well since the Great Recession. Investors favored core real estate as a safe investment in uncertain times, driving up prices. Cap rates in those markets are now at historic lows. In New York City, cap rates for class-A office buildings now average about 4 percent. Cap rates on class-A apartment properties are even lower.
Cap rates and investor yields must eventually return to a more historically normal range for these properties, probably when interest rates finally begin to rise, according to many experts. But that doesn’t have to drive down prices, if the income produced by the properties increases. Also, cap rates for core U.S. properties still have further to fall before they match cap rates in other world-class cities. Typical cap rates in London, Paris, and Singapore are as much as 100 basis points lower than those in leading U.S. cities. “We are catching up with these globalized cities,” says Sikaitis.
Investors seeking yield may find opportunities in once neglected submarkets in leading metro areas.
“Areas that no one would touch will become the most aggressive growth areas through 2020,” says Sikaitis.
This article was republished with permission from National Real Estate Investor.