Investing in traditional Gateway Real Estate Markets vs. Up-and-Coming Markets

Key factors foreign investors would want to consider when it comes to deciding where to invest in North America.

By Christopher J. Wein


For foreigners interested in pursuing real estate investments within the North American market, identifying markets within such a vast and diverse geography can be a significant challenge.

Typically, we see foreign investors focus on the traditional gateway cities such as New York, Los Angeles, Vancouver and San Francisco.  While these markets offer numerous opportunities to invest, they may also display characteristics that discourage foreign investment decisions.  Such challenges include high costs and additional taxation and in some cases demand that exceeds supply.  The combined effect of these factors is lower yields and potential limitations to medium term capital appreciation. 

While foreign investor shouldn’t ignore gateway cities, the knowledgeable investor might benefit from investigating up-and-coming or alternative market.  Although gateway cities will generally offer the real estate investor long term stability with respect to values, alternative markets, despite some volatility, often provide above-average returns in terms of both equity appreciation and income growth.


"FOR THE PAST DECADE, WE HAVE BEEN WITNESSING A GLOBAL MIGRATION OF THE EARTH'S POPULATION INTO CITIES."


Within North America, alternative markets include large metropolitan areas with dense populations, a diversified economy, large municipal governments and have a significant educational, cultural, recreational and transit infrastructure.  Such cities include Miami, Washington D.C., Dallas, Atlanta, Toronto, Houston, Phoenix and Philadelphia.

To identify opportunities within these markets, investors can consider the dynamic nature of modern demographics and cultural diversity.  For the past decade, we have been witnessing a global migration of the earth’s population into cities.  This migratory pattern appears to trend toward an even more significant concentration of urban populations over the next several decades.  One example of this global phenomenon can be easily recognized within the greater Dallas metropolitan area. 

Over the past decade, Dallas has seen a significant increase in net migration, both domestically and internationally.  As net migration and population growth outpace national averages, real estate investment opportunities flourish within all asset classes.  Investors looking to capitalize on equity appreciation, growing rental incomes and cap rate compression, need to consider the factors that have and continue to contribute to the rapid urbanization occurring within the Dallas metroplex.  By analyzing and understanding these factors, investors can identify other cities across North America that share similar attributes and may represent great investment opportunities.


FACTORS OF LARGER ALTERNATIVE AREAS

Local & Regional Government – Population and economic growth is often affected by the stability of government policies.  When analyzing a market like Dallas, there is a healthy balance between regulation and capitalism.  Local and regional governments generally support real estate development and provide modern infrastructure in terms of hospitals, essential services, roads, transit and parks.  Development costs, levies and taxes offer a balance between government services and affordability.

Amenities – Dallas offers significant cultural, educational and recreational amenities to its citizens.  Dallas offers an impressive cultural arts district in the heart of the city, including a symphony hall, opera house, numerous live theatres and many impressive museums.  Aside from an impressive public school system, there are numerous polytechnic institutions, colleges and universities.  For recreation, aside from numerous parks and sports facilities, Dallas residents enjoys professional baseball, football, basketball and hockey teams.

Employment – Net job creation is a perennial indicator of increasing real estate values and Dallas has led the US in this regard several times over the past number of years.  Sustainable job creation within municipal regions relies on several factors, including low regional and municipal business and income taxation; access to an open, diversified and educated workforce; municipal infrastructure including transit and healthcare; affordable office and warehouse facilities and access to broader markets and a mild climate.

Cost of Living/Affordability/Quality of Life – One of the largest challenges facing gateway cities is affordability.  Many gateway cities are losing large employers due to the overwhelming costs facing employees.  This not only includes the upward stress on local real estate markets and rents, due to significant global interest, but also in many cases higher taxation, food costs, commute times and user fees associated with essential services.  Over the past several years, many large-scale US employers have relocate to the Dallas area to provide their workforce with a lower cost of living and higher quality of life.

Accessibility – With a more traditional perspective, gateway cities have always typically included a large seaport as a major factor for accessibility.  Given several recent trends such as continued globalization, the advancement of technology, the shift of North American employment from manufacturing based to knowledge based and the growing affordability of air travel, investors should consider accessibility will be measured far more by size and access of international and regional air travel.  Dallas includes not only a large, modern international airport with direct flights throughout the globe, but also a significant regional airport close to the downtown core.

Cultural Demographics – Long term, diverse cultural demographics will be one of the most important factors in determining sustainable growth in cities around the world.  The continued migration to cities and the power of globalization will drive communities to welcome and embrace cultural diversity.  In recent years, it is easy to observe a measured shift within the Dallas region to a more diverse cultural fabric of citizens.

By applying these factors to several alternative markets across North America, investors can recognize many similarities in places such as Toronto, Washington D.C., Atlanta and Miami. 


"OFTEN THESE YOUNG MARKETS CAN INCLUDE MANY OF THE FACTORS MENTIONED IN RELATION TO CITIES..."


HIGHLIGHT OF SMALLER ALTERNATIVE MARKETS
Other alternative markets include smaller cities that may just be on the cusp of rapid expansion and urbanization.  Some examples of these cities include Nashville, Charlotte, Calgary, Birmingham, Portland, Austin and Denver.  While these cities may represent more risk due to overall market size, economic volatility and less significant infrastructure, the opportunity for rapid real estate escalation can be tempting. Often these young markets can include many of the factors mentioned in relation to cities like Dallas and should be measured utilizing similar metrics.

Low Barrier to Entry – Often these burgeoning markets provide opportunities to invest at an appreciably lower cost.  In many cases competition is light and opportunities abound. 

Government Support – Municipal and regional governments may offer investment or development incentives in the form of tax credits, levy relaxations or infrastructure support.

Youthful Demographics – The global economy is being dominated by new technologies, young, dynamic entrepreneurs and disruption.  In many cases, this dynamic, youthful workforce is attracted to these burgeoning cities that welcome innovation and provide the necessary ingredients for startups to thrive.  Extreme growth within these startup companies can help to ignite a local or regional real estate market.

Depending on the investor’s acceptance level of risk and overall real estate investment goals, these burgeoning young cities may offer great potential returns and rewards for foreign investors.


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About the Author
Christopher Wein
Christopher Wein
Asset Manager

Christopher Wein is the president of Great Gulf Residential of Great Gulf Group Ltd. He leads the senior management teams for all land, housing and high-rise residential development initiatives. Wein has more than 20 years of senior leadership in the design and development industries. He serves on numerous boards and is a frequent speaker at industry conferences and universities.

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