Are secondary markets stealing the lunch—tenants and investor capital—of gateway cities? Not so fast. One key takeaway from the panel discussion “Markets Shift: Are the Lines Blurring between Traditional Gateway Markets and Secondary Cities?” is that the death of the gateway market has been highly exaggerated.
“I really think that a lot of these gateway cities have been getting a bad rap, and I’m happy about that, because it’s allowing us to invest in those markets in a more productive way than we would have otherwise,” said Sara Queen, head of equity strategies for MetLife Investment Management’s Real Estate Group. However, the narrative on the “gateways versus secondaries” battle is somewhat false. In many cases, strategies can be both rather than choosing one over the other, she said.
Figuring out how migration and leasing trends have been changed or accelerated by the pandemic has been top-of-mind for both employers and commercial real estate investors. Investor capital has been flowing to high-growth secondary markets such as Austin, Raleigh, and Nashville for the past several years. However, there is still a solid case for gateway markets despite some of the disruption seen over the past 18 months.
“There is scale that large markets like a Chicago, New York, Boston, and San Francisco offer that you can’t get in growth markets,” said Keith Largay, senior managing director and co-head of the JLL Capital Markets office in Chicago. Gateways also tend to offer more infrastructure, deeper labor pools, and the appeal of 24/7 activity that many people crave.
Investors are looking for clues to potential changes in demand in migration and leasing trends. On the tenant side, the main driver is where do companies find their labor in the most cost-effective way possible, noted Steven Steinmeyer, a senior managing director at JLL. The answer to that varies depending on the industry and type of talent that companies need. “There are a lot of compelling reasons to be in a gateway, and there also are reasons to be in an Austin, if that works for you,” he said. At the end of the day, companies are going to locate in markets where it makes the most sense for their business, he added.
Over the long term, gateway cities are not going anywhere. “The amount of infrastructure and the billions of dollars of real estate that exist in these gateway markets—you can’t compete with that in these emerging markets on scale,” said Stephen Sotoloff, a senior principal of Walton Street Capital. However, investment strategies also vary depending on the investment platform, such as core-plus versus value-add or opportunistic, and there is no disputing the attractive opportunities in high-growth secondary markets.
Secondary markets are definitely coming into their own, Stoloff noted. In fact, all the investments that Walton Street Capital is making right now are concentrated in emerging markets since they are a better play for the firm’s five- to seven-year hold strategy. That does go back to the point that strategies can involve gateways and secondaries when considering the longer-term investment horizon, he added.