Dubai: Super-luxury condos — with price tags north of $10 million (Dh36 million) — in New York may not be flying off the shelf, but that need not mean the whole of the US real estate is burdened by lacklustre buyer demand.
To do that, investors — many of them institutional funds from the Gulf — have to direct their investments into non-Tier A locations.
“Focus is gradually shifting to secondary markets that provide more growth opportunities, comparable interest rates and more balance between pricing and fundamentals,” said Andres Szita, Co-founder and Chairman of Ethika Investments, a specialist real estate fund house. “These lesser known areas throughout the southeast, Midwest and American west have an unbelievable amount of depth and potential, housing the headquarters of many Fortune 500 companies and strong regional firms.
“Minneapolis — known as a prominent centre for medical technology and research and as home to 17 Fortune 500 companies — is undergoing very strong leasing momentum given the breadth and diversity of its economy.”
If the US real estate market does manage to get overseas investors to fly over, it could also be at the expense of London realty, still mired in uncertainties over what Brexit in its full version has for it.
“With the US continuing to exhibit growth fundamentals, which are outpacing the UK, Eurozone, Japan and other major industrialised nations, interest from Middle East investors is expected to remain strong. The diversity of the US major markets allows investors to gain exposure to growth where certain sectors such as financial services, technology, health care and education lead the way.” Any spike in fund flows and deal-making will also make the US real estate story more broad-based. The top five gateway markets — New York, Boston, Washington DC, Los Angeles, and San Francisco — have already gone through the cycle of attracting higher capital flow.
According to Szita, “In these markets, the pricing is still ahead of the fundamentals. Ethika’s focus is on markets that are rebounding in job growth and where fundamentals continue to pace on a growth basis.
“These markets are within the Top-30 metropolitan areas, but still have opportunities, whether it’s rental rate or RevPAR [revenue per room] growth.”
“Value-add opportunities, which generate cash flow growth through lease-up of significant vacancies and physical repositioning of underperforming assets, continue to generate outstanding risk-adjusted returns. And [are] favoured given the attractive going-in basis and lesser interest rate sensitivity.” The office sector is rated a strong positive, with projections for the next three years anticipating absorption of existing space to total 175 million square feet. This, according to Ethika, is more than the past eight years combined.
“With commercial real estate, construction financing has remained conservative, which has kept the delivery of new supply in check. This phenomenon has helped to keep fundamentals in balance, although there have been limited opportunities to acquire new Class A office buildings, hotels or retail centers.” Retail space is another to watch out for “as the continued growth of online retail revolutionises the brick-and-mortar store front and the spending habits of millennials lead to changing configurations of shopping centres,” Szita added. “Retail destinations that in many cases have had low single digit vacancies for a generation are experiencing volatility and a needed capital infusion to stay relevant. For investors with the capability to execute on value-add strategies, these temporary displacements create unique buying opportunities in the sector.” But residential assets — especially of the premium variety — is passing through some turmoil. “While newbuild luxury residential in gateway markets has been a favoured asset class for foreign investors for the past few years, pricing and absorption have decelerated, especially with exchange rates impacting many buyers,” said Szita.