A Viable Infrastructure Alternative:
Secondary Markets


Marc DeLuca

Since the 1960s, when most infrastructure such as roads, bridges, airports and electrical grids were put into place, the U.S. population more than doubled. Because of intense usage and just plain old growing older, much of this infrastructure is “dangerously overstretched.”

Because these systems were built decades ago, economist say that delaying maintenance is holding back the economy. Civil engineers are also raising safety concerns.

The American Society of Civil Engineers (ASCE) has given the U.S. a report card on its infrastructure effort. The grade: D. The report says that conditions are “mostly below standard,” exhibiting “significant deterioration,” with a “strong risk of failure.” The organization estimates that there is an “infrastructure gap” of nearly $1.5 trillion. This amount will be needed by 2025.

Forbes, for instance, figures that “investment in infrastructure is both economically attractive as well as socially useful. A modest 1% reallocation of existing U.S. pension investments to infrastructure would deliver over $250 billion. Given a measure of collaborativeprivate-public partnerships and the use of innovative financial mechanisms, the vision of long-term city and county infrastructure improvements can be realized.”

Infrastructure concerns in first-tier cities like New York and San Francisco are top of mind, but another solution that may be less burdensome financially could be implemented in second-tier cities.

Secondary markets like Raleigh-Durham, Nashville, and Austin are already exploding with new tech-talent and employers are following this demand…

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Secondary markets like Raleigh-Durham, Nashville, and Austin are already exploding with new tech-talent and employers are following this demand. What works most for them is the affordability.

As we recently reported, “secondary markets are increasingly being recognized as a ‘calculated risk.’ As tech, healthcare, education and other industries move in — and mixed-use properties go up — the [second-tier city] investment is attracting both private and institutional investors.

If city and local government can collaborate with the federal government and investment institutions, second-tier cities can get the infrastructure solutions they need, at a fraction of the costs it would be for first-tier cities.

Forbes is one step ahead of this solution and clarifies it this way:

“With the steady drumbeat of major companies moving corporate headquarters and top talent into already thriving top-tier cities comes enormous pressure on housing and commercial real estate in these cities. There’s an antidote to this—namely, investment in the infrastructure of smaller cities, to reinvigorate and once again make them a magnet for young people starting careers and families. With the right sort of collaboration between city and local government and business, these smaller cities can become home to the entrepreneurial startups that need commercial space in which to expand.  Governments can get the ball rolling by inviting our largest financial institutions to be the engine for this smaller-city renaissance, by investing in rebuilding their infrastructure.”

Infrastructure solutions in secondary markets would be a move that encourages sustainable growth and more satisfied citizens. And most importantly, increased safety.  As Forbes puts it, business-government infrastructure partnerships, where all parties are in it for the long-term, are a win-win.

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The bottom line: collaboration. Local governments must forge alliances with financial institutions who can invest in the area’s infrastructure, long term. Forbes recommends not just throwing money at the problem, but local governments and investment institutions becoming true partners in infrastructure improvement. The beauty of it, especially these days, is a genuine feeling of bipartisanship  and a common goal to be achieved.

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KBS is actively investing in second-tier cities like Raleigh-Durham, Nashville and Austin. These are very much like urban markets, but smaller in size than gateway cities, and more affordable. It’s more than just affordability, though; it’s also the richness of amenities: light rail, walkable communities, vibrant nightlife, and in many cases, no need for a car.

Real estate investors looking for opportunities need look no further than secondary markets where new infrastructure is already in place or is being built to meet the burgeoning demand from an influx of companies.   These markets may never become gateway cities, but they are attracting growth-oriented companies seeking vibrant urban locations without the high cost of locating in overpriced gateway markets.

 

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Marc DeLuca is the Eastern Regional President for KBS, overseeing four asset managers and a portfolio of assets totaling over 11.0 million square feet.