Among Emerging Real Estate Markets, Bold Entrepreneurs Bank on ‘Boutique’

Welcome to 2021: “Meme stocks” are bullying hedge funds, millennials are buying into the ’burbs while downtown office towers remain boarded up, and there’s debate over whether New York City is dead. If there’s ever been a time to rethink investment norms, this is it. For real estate entrepreneurs, this means resisting the magnetism of coastal megacities and instead exploring smaller, tertiary markets far and wide.

But where to start?

Conveniently, the Urban Land Institute’s 2021 Emerging Trends in Real Estate report illuminated the following eight unique investment muses that comprise its newest category, “boutique markets.”

• Boise, Idaho
• Chattanooga, Tennessee
• Des Moines, Iowa
• Greenville, South Carolina
• Knoxville, Tennessee
• Omaha, Nebraska
• Portland, Maine
• Richmond, Virginia

These emerging commercial real estate markets are demure cities anchored by lively downtowns that charm visitors, and idiosyncratic developments that enhance their economic base. Each has a low cost of living and doing business to support slow and steady growth anticipated for the foreseeable future.

They’re loosely bound by a few common factors, such as demographics (on the younger side); population (between 600,000 and 1.3 million); and growth rates (all positive through 2020). All eight have at least a few large, established employers, an educated workforce and a pool of talent streaming from nearby universities.

“They are stable, there are jobs, and those are reasons why people want to move there — they all have positive in-migration,” explained Anita Kramer, ULI senior vice president and co-author of the report. “On paper, they hit the criteria.”

But what’s more noteworthy are the attributes that set them apart. “When you say boutique, what you really mean is unique,” Kramer continued. “Each has something really unique about them.”

In other words, their appeal transcends data. What’s outstanding about these places, she noted, is that, “We’re not just talking about a small market with potential. They have a creative bent to them. There’s spark and there’s energy. I guess that’s really what it comes down to — the intangible things you can’t really describe in a report.”

Take an immense climbing wall affixed to the outside of a parking structure, and the Southeast’s first co-living space development, for instance, which are both claimed by Chattanooga. Or entire zoning ordinances whereby obsolete industrial buildings are being adaptively redeveloped into high-density residential neighborhoods, which is the case in Knoxville.

From tech innovation parks, to museums and cultural centers, to walkable retail and restaurant plazas to outdoor recreation attractions, these places “have at least one of everything,” Kramer said, making them “really feel like a place where you could live.”

With ULI’s insight, along with local brokers and CoStar analysts, LoopNet’s been learning why these niche locales burn so bright by taking a closer look at an exemplary few.

While intangibles are key to these boutique markets, their data speaks volumes as well. Boise’s population statistics over the past 10 years, for example, show that the small, secluded city outperforms the national average in all key metrics.

From the end of 2010 to the end of 2020, Boise’s population grew 23% and its households expanded by 25%, according to data from CoStar, the parent company of LoopNet. Compare that to 6.5% and 7.6%, respectively, for the nation at large. Boise’s boon is thanks, at least in part, to an office employment growth rate that’s more than double the country’s average, and a median household income that outshines the U.S. as a whole.

Supply is following closely behind, and so is the bounty that comes from this sort of boom in demand: 10,000 more multifamily units were delivered in the past 10 years, an expansion that amounts to 35% more than the growth rate averaged across the country in the twenty-tens. Asking rents rose about $385 per unit over those years, representing an increase of nearly 50%.

“You’re going to see a lot of momentum pretty much across the board in Boise, and all of it stems from population and employment growth,” explained CoStar Managing Analyst Steve Basham. “People want to go where the jobs are and where it’s affordable to live. And that in turn is going to spur companies to want to be there.”

So why Boise?

Going back to intangibles, Basham cited the lesser-known city’s laid-back, less-dense, less-expensive, slower-paced and outdoor-oriented lifestyle. It appeals to those swept up in the “flight to affordability” spurred by the challenges found in overpopulated, expensive and tech-oriented West Coast cities like San Francisco, Los Angeles and Seattle, which have only been exacerbated by the pandemic.

The “Scenic City’s” qualitative charms strike a similar chord.

Chattanooga is nuzzled in a corner of the Appalachian Mountains and promenaded by the Tennessee River — beckoning visitors with nearby hiking jaunts, the Riverwalk, Ruby Falls and the Creative Discovery Museum. “It has a small-town feel, but also an emerging nightlife scene,” said Alexander Tkac, CoStar’s market analyst for Nashville. “There are things to do downtown with Warehouse Row and the University of Tennessee, which have helped cultivate a more urban feel, and you’re also an equidistant 90-minute drive from Nashville and from Atlanta for a weekend getaway — so I think all of that has attracted, on the margin, a younger demographic.”

Chattanooga’s median household income comes up just shy of the national average, Tkac noted, but it also offers a much lower cost of living compared to Nashville or Atlanta; and much lower rents for employers as well – at around $20 per square foot for office space. “That’s a very attractive thing for employers to see.”

Blue Cross Blue Shield, the Tennessee Valley Authority, Volkswagen and now Amazon are some of the metro area’s top employers, but what’s maybe more unexpected, he said, is the array of smaller tech firms setting up shop in the city.

The tech influx is thanks in no small part to Chattanooga’s comparatively cheaper and remarkably fast and reliable fiber-optic communication network — which broke records for speed when implemented in 2015.

Scenic surroundings put a geographical limit on sprawl, he added, which has resulted in some creative adaptations downtown that are attractive to investors and tenants alike. Though the city’s population has grown around 7.4% in the past decade (about a percentage point more than the national average), developers don’t have room to push the city outward. Instead, “old industrial space is renovated into apartments and older warehouse space is redeveloped into innovation districts with a lot of cool, adaptive office workspaces.”

Capital coming into the Chattanooga area has flowed into these adaptive reuses or asset-repurposing projects, Tkac said, and it certainly helps that much of the city’s downtown sits in an opportunity zone.

Atlanta, he said, “is comparatively dragged down by the rule of averages because you have so much old-stock, small buildings and it’s easier to build there,” he noted. “Generally, we don’t see strong rent growth in a market like that because the second rents start to rise, someone constructs a building down the road and that brings rents back down.”

Chattanooga’s constraints favor landlords. “The limited land means rent growth will likely remain strong,” he concluded. “You can purchase industrial, office and multifamily properties at a relative discount compared to those in the heavy-hitter metros. But because of the strong demographics and growth, you will see a run-up in pricing from acquisition for all three of these property types.”

That trifecta of creative spaces, fast Internet infrastructure and cheaper rent and wages than its big siblings Nashville or Atlanta means Chattanooga will likely continue to lure startups, entrepreneurship ventures and tech-heavy firms, as well as the talent to support them.

Virginia’s capital city also exemplifies the trend driving residents, employers and investment from top tier megacities to attractive and affordable tertiary markets.

“Pricing has gone through the roof in D.C., Boston, Chicago and so on, while cap rates have gotten so tight in those markets that it’s been increasingly difficult to find assets with high rates of return,” explained CoStar Senior Market Analyst Mike Cobb. “Richmond has done particularly well because it’s geographically positioned along I-95 — it’s two hours from D.C., yet much more affordable … and it’s one of the leaders in terms of back- and middle-office operations. It’s a great example of a place you can add hundreds of call centers and research hub-type jobs with great starting salaries that go a long way for your younger workers entering the workforce.”

On top of that, he continued, “companies can get top-quality office space for around $30 per square foot, whereas in D.C. it’s going to be double, sometimes potentially triple that.” And the cap rates follow: “You’re looking at below 6% for top-quality office space in gateway markets,” Cobb noted. “In Richmond, it’s around 8.5%. Those two things are really indicative of how Richmond’s office market has been doing.”

With a generation entering the workforce from the city’s Virginia Commonwealth University and the University of Virginia an hour away, employers are spotting the opportunity to relocate. IT firm ASGN Inc., for example, pledged more than $12 million to move its 700-person headquarters from the L.A. metro area to the Richmond region in June 2020.

Multifamily development in Richmond has cranes scattered across the skyline in effort to catch up with demand, he continued, but the favorable employment conditions have gone so far as to constrain the supply required to bring in many more large, 3,000-plus office firms under one roof. “There have been other companies in the past couple of years that have been willing to relocate to Richmond, and there just isn’t space of high-enough quality that can suit them. So, the city has actually lost out on companies.”

That means there’s likely room — albeit with a degree of risk — for speculative office development in Richmond.

Restaurants are sizzling as well, noted Tom Rosman, director of commercial brokerage for Richmond-based One South Realty Group. “Richmond has culturally kind of exploded in the last 10 years with the craft beer scene and the food movement. On some Saturdays there are lines around the block with people coming from all over the East Coast to get the beers.” And though it’s been tough, he said, most retail and restaurants are hanging on even through the pandemic – at least more so than you’d think.

Richmond’s resiliency echoes what’s seen across these markets, ULI noted, in that they all “withstood the COVID-19 downturn better than many markets.”

“I see a lot of investors from D.C. and a ton of residents just move down here,” Rosman continued. “They just pick up and come and live here and figure out what to do. They’re the creative class: I.T. professionals, artists, architects. It’s a great place to live, it’s reasonably affordable, and there’s good business here.”

The commercial real estate veteran noted that he’s currently closing on three mostly- or fully leased mixed-use buildings that include restaurant spaces. “People are putting their money on the line for these properties,” he said. “They’re not afraid.”