Rapid Startup Growth in These 4 Cities Has Led to Big Changes in Commercial Real Estate
According to PwC's "2018 Emerging Trends in Real Estate -- U.S. and Canada," Seattle is set to become the strongest real estate market in the country this year. Driven by a massive influx of young, highly educated new residents -- the city's population growth rate is twice the national average, and the metro area is expected to gain nearly 30,000 new residents annually through at least 2022 -- Seattle appears ready to stake its claim alongside cities like San Francisco and New York City as a true blue-chip real estate market.
This years-long upward trend started to take shape in the wake of the Emerald City's startup revolution -- for years, Seattle was rivaled only by Silicon Valley when it came to tech-oriented startup activity -- underlining the strong correlation between startup activity and commercial real estate (CRE) growth.
Unfortunately -- for entrepreneurs and CRE investors alike -- the Great Recession took a heavy toll on the startup world. According to the 2017 Kauffman Index of Startup Activity, 2013 had the lowest volume of startup activity in more than two decades, bottoming out a precipitous post-2008 drop that saw nationwide entrepreneurship not only slow down, but actually start to contract.
Encouragingly, startup activity has rebounded strongly in the half-decade since its 2013 low, and Kauffman's Startup Activity Index is now the highest it has been since the mid-1990s. In addition to the New Yorks and Seattles, cities like Austin, Las Vegas, Los Angeles, Miami and San Diego have enjoyed robust growth in their startup sectors, leading to parallel -- and, arguably, consequent -- expansions of their CRE markets.
While it might be too late to "buy low" in these now top-tier markets, there are a number of smaller markets around the country with immense potential. Using Kauffman's index as a framework, we've referenced Reonomy's proprietary data sets to investigate the correlation between a city's startup activity and the CRE properties within that market. The result? A list of four cities whose rapidly growing startup ecosystems are increasing the value of local CRE -- meaning smart investors would be wise to keep their eyes on them in the coming months.
According to our data, Charlotte has seen the median sales price for commercial properties within city limits grow steadily from $198,000 in 2015 to $343,750 in the first quarter of this year.
It's not surprising, then, that the city ranked 17th in Kauffman's 2017 Startup Activity Index -- up three spots from its place in the 2016 Index. Though this latter figure is still affordable in contrast to other, "trendier" markets, the relatively rapid increase in median sales price over the last three years suggests that it might be now or never for CRE insiders looking to make a low-cost investment in the Charlotte market.
With powerhouse financial institutions like Bank of America and Wachovia headquartered alongside unicorns like Red Ventures and AvidExchange and emerging tech companies like Passport, it's no surprise that 100 new residents flock to the city every day. In fact, five-year job growth is up 115.7 percent.
Notably, while sales of general use commercial properties have remained fairly stable in recent years, sales of vacant lots zoned for commercial uses have more than tripled from 1,202 in 2013 to 3,692 in 2017. As such, Charlotte may be a particularly attractive market for CRE developers looking to build customized assets from the ground up.
Cleveland jumped nine places on Kauffman's Startup Activity Index between 2016 and 2017, the second-best improvement among all the cities assessed. Like in Charlotte, the median sales price in Cleveland's CRE market leaped an impressive 60 percent from 2015 to 2017, and figures from the first quarter of 2018 suggest continued growth for the foreseeable future.
According to our data, multifamily residential properties have become particularly popular in Cleveland, with total sales rising steadily from 5,697 in 2013 to 8,366 in 2017. This strong growth has seen multifamily properties' share of the CRE market expand from 51 percent to 67 percent between 2015 and 2017, cementing the multifamily asset class as the one to watch in the 216.
Interestingly, according to the city's former "Tech Czar" Michael Dealoia, Cleveland's industrial history has pushed its technology sector toward B2B and data-driven startups geared toward transforming aging industries. Thanks to startups like ViewRay -- an MRI-guided radiation device with over $310 million in funding -- and MacroPoint -- a supply chain visibility software company with over $44 million in venture funds -- the city's tech sector saw job growth of 84.3 percent in 2017.
Kansas City, Kan./Mo.
Arguably the highest-placing "under-the-radar" CRE market on the list, Kansas City climbed four places to 15th on Kauffman's 2017 Startup Activity Index. Interestingly, much of the attendant CRE growth has occurred on the Kansas side of the city -- traditionally the less commercially oriented side.
While the total number of commercial sales in Kansas City, Mo., grew by a respectable six percent from 2015 to 2017, the total number of commercial sales in Kansas City, Kan., increased by more than 21 percent. Our data shows that, as in Charlotte, the expansion of Kansas City's CRE markets (on both sides of the state line) has been driven largely by a boom in vacant lot sales.
Much of this growth has been driven by investment from major telecom players like Sprint, which in 2013 partnered with Techstars to launch the Kansas City-based Sprint Mobile Health Accelerator to offer funding and expertise to local entrepreneurs. According to Crunchbase, Kansas City saw nearly 100 seed, angel, VC and equity crowdfunding rounds between January 2015 and July 2017, totaling $192 million.
Reno, Nev.If its CRE market continues to expand at the current rate, The Biggest Little City in the World might need to shed its nickname sooner than anyone would have ever imagined. Our data shows that total commercial sales in Reno have increased by nearly 50 percent since 2015, driven in part by sales of vacant lots, but even more so by the CRE asset classes one would expect: hospitality and "special purpose" (e.g. casinos).
Total sales of hospitality properties jumped by an astounding 125 percent between 2013 and 2017, and 2017 saw the sale of 75 special purpose properties, a sizeable increase over the 37 sold in 2016 and the 17 per annum average from 2013 through 2015. That said, Reno isn't only a haven for hospitality- and gambling-oriented CRE investments. Both Tesla and Panasonic have opened impressive facilities in the area in recent years, and the resulting influx of workers has led to solid, albeit modest, growth in the city's multifamily residential market.While no CRE investment is ever a sure thing, Charlotte, Cleveland, Kansas City and Reno represent four of the most promising emerging markets in the U.S.