When it comes to examining and planning commercial real estate (CRE) portfolios, considering markets that aren’t necessarily top of mind may be worth considering. Those cities off the beaten path of high-cost, urban hubs may have the potential to offer significant value, especially for early adopters. With potential as the next great opportunity, an unexpected market is worth a look.
According to a recent Realtor.com report, the “Top Markets for Real Estate Investment,” ranks the ten cities emerging as top CRE investment destinations. While they’re not what one would call the usual business epicenters, they offer affordability, strong rental demand, and steady economic growth.
The Top 10 in rank order are:
- Dayton, Ohio
- Rochester, New York
- Cleveland, Ohio
- Pittsburgh, Pennsylvania
- Knoxville, Tennessee
- Albany, New York
- New Haven, Connecticut
- Buffalo, New York
- Grand Rapids, Michigan
- Columbus, Ohio
High property prices in major cities have made it difficult to achieve desirable returns, prompting a search for more affordable alternatives. This has pushed many to explore new opportunities, and based on this list, it’s fair to say that those opportunities are overwhelmingly located in the Midwest and Northeast. These emerging markets may offer lower entry costs with potential for higher yields.
Affordable average home prices and robust demand helped propel Dayton, Ohio, to the top of the list. In the first two quarters of 2024, it had a rental vacancy rate of only 4.7%.
“As the rental market eases in many areas, the Midwest and Northeast stand out for their combination of affordability and stability,” said Hannah Jones, Realtor.com senior economic research analyst. “These regions offer investors a prime chance to secure steady rental income and tap into growing demand, making them attractive for both seasoned and first-time investors alike.”
The factors that may make these markets attractive include:
- Economic growth: Cities like Albany and Grand Rapids have robust local economies that support sustained growth.
- Lower cost of living: Life in these cities is significantly more affordable than in traditional markets, making them attractive to residents and investors.
- Steady demand: There’s a consistent demand for rental properties in these areas, driven by population growth and economic opportunities.
- Population growth: Many of these cities are experiencing a population boom, driving demand for housing and office space.
- Affordability: Lower property prices mean lower initial investment costs and potentially higher returns.
- Less competition: Compared to traditional markets, there’s less competition among investors, allowing for better deals.
- Lower volatility: These markets tend to be less volatile, providing a more stable investment environment.
- Diversified economy: A diverse base reduces the risk of reliance on a single industry.
These cities, however, aren’t without their challenges:
- Competition with established markets: Emerging markets must compete with established ones with more developed infrastructure and amenities.
- Market vulnerability: Because booms always carry a risk of bust, these cities may be more vulnerable to economic downturns and shifts in market dynamics, but this largely depends on the speed and trajectory of growth.
- Regulatory challenges: Navigating local regulations can be complex and may be problematic for investors unfamiliar with a particular area.
Many of these markets are furthering their potential to become major investment hubs by properly leveraging their economic strengths and modernize their offerings. For example, Columbus, Ohio, is strengthening its position as a tech hub with over 240 thriving tech startups calling the city home. Similarly, Knoxville, Tennessee, is focused on revitalizing its downtown area to enhance its appeal to investors.
The concept of “flight to quality” — when investors begin to shift their asset allocations from riskier to safer bets — is becoming increasingly relevant in these emerging markets. This is true in both residential and commercial real estate, according to ConnectCRE, in its article “Investor Interest Turns the Midwest into a Multifamily Hot Spot,” which states that “value-add assets” are a big driver in the Midwest. These are Class A or B+ properties in good locations that can benefit from a slight or modest value-add or management efficiency play.
Cleveland, Dayton, Pittsburgh, and Buffalo also made Rental Income Advisors’, “12 Best Markets for Cash Flow Rental Properties” list, which was just updated for 2024.
Cash flow in CRE refers to the net amount of cash generated by your property minus all operating expenses, mortgage payments and taxes. A top cash flow market is where properties consistently generate positive cash flow, meaning their rental income exceeds all operating expenses and debt payments monthly, which leads to greater financial stability, risk mitigation, and investor growth.
Affordability, strong rental demand, and economic stability, could make unexpected cities worth consideration compared to traditional hubs. However, navigating market vulnerability and regulatory complexities still need to be addressed. By monitoring tenant migration trends and identifying new hotspots, investors may be able to capitalize on the growth potential of these emerging markets.
As a prominent player in CRE for more than 30 years, KBS understands the importance of staying well-informed about tenant migration trends and the ever-evolving market dynamics.
Focusing on data and actionable insights, may lead to the discovery of high-potential areas that offer significant returns.
Learn more by visiting KBS.com/Insights.
