Property

American Second-tier cities Reap Investment Benefits

American Second-tier cities Reap Investment BenefitsFor most investors outside of North America, the only places to park your money in the US are the major gateways at New York, San Francisco and Los Angeles. Boston, Houston and Miami are on the rise due to their education and energy industries and connections to South America, but they’re not quite at the first tier yet. Farther down the line are locations re-emerging from extreme low ebbs (Las Vegas, Detroit) but in between are hotspots Seattle and Memphis, proving there’s more to each than coffee and Graceland.

Pacific Northwest Boom
Nestled between Puget Sound and Lake Washington, the Seattle metropolitan area is home to 3.6 million people and has been a major trading gateway between Asia and North America for years, but only recently started registering on the hip chart. The former Queen City is the birthplace of Jimi Hendrix, the grunge movement and Heart’s trailblazing Ann and Nancy Wilson, and it can be credited with the mainstreaming of coffee culture. But it’s also a tech hub that’s starting to pay dividends.

According to an April report in the Seattle Times, home prices in March 2015 were 18.9 percent higher than they were a year earlier, and there’s not much to buy. Research by Marcus & Millichap states over 115,000 high-paying tech jobs have moved into Seattle since 2008, apartment vacancies are currently sitting at a 15-year low and rents are expected to rise in excess of 8 percent this year. “Locally the market has been performing very well if you look at the last two years. It’s very similar to San Francisco, prices have been on an upward trend and accelerating in the last 12 months, largely because of a lack of inventory,” explains Sam Van Horebeek, director of East-West Property Advisors in Hong Kong. Just 12,000 apartments are scheduled for completion in 2015. If the tech sector continues to expand and adds the projected 65,000 jobs this year, supply is going to remain short.

Prices in Seattle are currently flirting with levels seen farther south in San Francisco, and that’s not all the two cities have in common. Home prices are averaging approximately $400,000 (HK$3.1 million) right now, but there is more construction on the way. However, investors looking for appreciation are advised to find something now, if possible. The next two years are crucial. “I don’t believe it will continue like this just because of the construction,” says Van Horebeek. “But it’s becoming an interesting place. Besides Microsoft, Boeing and Starbucks, who are expanding their campuses, new technology companies are moving into the Seattle area.” Along with those staples, Amazon, retailer Nordstrom, Costco, Nintendo of America, T-Mobile and a burgeoning biotech industry are nearby, and online travel retailer Expedia is moving its 3,000 employees into the city by 2018, which will likely put more pressure on rental prices.

Naturally the question on everyone’s mind is whether there’s a bubble waiting to burst. “That’s the same discussion you could have about San Francisco. The market is high and will get higher in the next few years due to the lack of choices for local buyers,” theorises Van Horebeek. “Prices are rising because families are moving there because of job creation — and that’s a good reason for prices to go up.”

Southern Charm
While Seattle is shaping up to be a short-term appreciation play, Memphis — nestled on the shores of the Mississippi River in Tennessee — is one of the smartest pure investments options in the US right now. With a metropolitan population of just over one million, Memphis has seen its fortunes rise right alongside the e-retailing boom.

The city’s location on the river, at the junction of five major freight railways and two interstate freeways seems to have made it a natural for its shipping and distribution hub status. Memphis handles the second largest cargo volume at its airport in the world (behind Hong Kong) and the continued growth of e-commerce is underpinning Memphis’ property market, which was slumping as recently as 2014. “As people continue to shop online … providers such as Amazon are shipping via couriers and they go through Memphis,” explains Van Horebeek. “The city is growing as e-commerce grows, and as long as it maintains its position as a hub — which is seems to be doing — it’s going to be great for job creation.” FedEx is headquartered in Memphis, UPS has a major presence that has expanded in the past few years and DHL operates out of Memphis too. True, the firmly middle-class labour market won’t provide investors with luxury rentals, but it will provide an opportunity for more of them. What fancy bankers don’t provide in lofty rents, middle managers will provide in numbers.

The Memphis story is one that Van Horebeek is discovering investors are keenly interested in. “It’s a city that even American investors are looking at because the returns are so attractive. There are many components to consider in investing, but there are two keys from a return perspective: the value appreciation over time and the annual short term cash flow a property generates.” Capital appreciation averages roughly 3 percent, but Memphis is seeing 10 to 12 percent yields in strong, middle-class neighbourhoods that are in heavy demand; four- and five-bedroom houses can be purchased for under $200,000; median sales price in September was $120,750 (HK$940,000).

But it’s not all distribution all the time. CBRE’s second quarter 2015 data notes that office leasing is strong despite negative absorption (largely stemming from a major occupier’s lease expiration and relocation), and that local small and medium-sized businesses are actively contributing to the market activity, a strong economic indicator. “You’re not investing in a city like Memphis, or Kansas City or Minneapolis for long-term appreciation. You’re investing because oft the yields you can make — after property taxes and management fees,” finishes Van Horebeek. “Where in the world can you achieve a comfortable 10 percent?”