In the evolving world of commercial real estate, the most important foci of investing the big bucks is where the investor puts it. Larger cities including Boston, Chicago, Los Angeles, New York, San Francisco, and Washington D.C. are the top six cities that usually gain investors' attention for a higher guarantee of investment return. These top six cities now have some potential competition with a new trend that investors may want to consider opting for and an "18-Hour City" is what they're calling it.
Think of 18-Hour cities as a second-tier city characterized by a higher than average urban population, a booming economy and a desirable lower cost of living compared to other metro areas. These cities are a happy medium between the mundane 9-5 hours typically found in the suburbs and the 24/7 buzz life in the big cities.
Doing business in an 18-hour city is much more cost effective than conducting business in a larger market city. That's one reason why employers are allured by these areas and tend to target them as prime locations. As a result, Millennial job seekers flock to 18-hour cities for the opportunity to get the best of both worlds: urban living plus the perks of life from the suburbs. Retirees also benefit from 18-hour cities since they can access premium quality healthcare without the high cost offered in larger cities.
The cheaper costs offered from these new "it" cities is a big win for investors, as 18-hour cities generally have a smaller market, which means lower pricing for both residential and commercial properties. Investopedia cites a great example of what prices are from a 24-hour city versus an 18-hour city:
As of January 2016 the average price for office space in Seattle (a 24-hour city and among the top six mentioned earlier) was $227.18 per square foot. A few miles away in Portland (an 18-hour city) the selling price is significantly lower at $184.19.
Investors and developers are inevitably appealed by the latter.
According to Investopedia.com, 18-hour cities have a greater potential in yielding higher returns compared to returns in larger markets due to the tendency of lower cap rates. Since they are still emerging markets, cap rates remain stable and there is enough room for urban developments to continue to thrive. This helps keep the demand and supply in balance, giving the 18-hour city a chance to serve as an 'outlet' for the extra capital.
All good things are not without risk, though. According to Investopedia, these booming markets do have a much higher risk of volatility and are much more sensitive to fluctuations in larger commercial and residential markets. A speed bump for New York City is more of a mountain to climb for Denver or Austin since these cities have less "insulation" for dealing with larger national economic issues such as downturns of falling property values. However, according to a 2015 ULI/PwC survey, investors have been steadily increasing their risk tolerance in a healthy economy.
The predictions for the rise of 18-hour cities from last year are coming true, as the real estate industry is catching onto the great potential of these markets. Patrick L. Phillips, ULI Global Chief Executive Officer commented on the subject to Urban Land:
"More and more of these cities are gaining a competitive edge by positioning themselves as vibrant, more affordable places to live and work, with amenities that appeal to different generation."
According to a chart provided by Urban Land, Denver, Austin and Charlotte are listed among the top 10 cities of U.S. markets with the highest percentages of investment, development, and home-building prospects. Whether it's the hip aura that's attracting more and more people to 18-Hour Cities or their overall affordability (for now), investors both local and foreign are noticing. We can expect this trend to continue throughout 2016. However, beware of other potential factors that can negatively impact your return on investment such as over saturation of certain property types and other larger macroeconomics.