Second-Tier Markets Target for Commercial Property Investors in 2014

Commercial real estate investors will look to purchase properties in second-tier markets in 2014 seeking yield and capital protection, a report from PwC US and the Urban Land Institute says.

Top-notch properties in major markets like Boston, Chicago, Los Angeles, New York, San Francisco and Washington are becoming higher priced and harder to find.

At the same time, the fundamentals supporting real estate in the second-tier markets are continuing to improve. Thus more properties in those cities are capable of meeting investors’ risk/return profile.

“Access to greater amounts of both debt and equity financing, combined with a sustained improvement in the underlying economic fundamentals, means that the opportunities and returns offered in smaller markets are potentially very appealing,” says ULI CEO Patrick Phillips.

The biggest threat is the timing and pace of interest rate increases next year. The report expects a modest increase in the short term which will not cause a major disruption to the real estate recovery.

The increased borrowing cost because of higher rates will be offset by greater demand for space and higher rents.

But if rates increase faster than the economy grows, that could hurt real estate, the report says.