Global Real Estate Investors Have A New Favorite City, And It's Not A Gateway Market

Foreign investors in commercial real estate have long preferred to place their money in a small handful of top-tier cities like New York, Chicago and San Francisco. 

But a new survey shows that even the investors that have traditionally chosen stable cash flow over maximizing returns are now more eager to buy in the Sun Belt hotbeds of Atlanta and Austin than the gateway cities.

Atlanta is the city most foreign investors plan to invest in this year, according to the annual Association For International Real Estate Investors survey, ahead of No. 2 Austin and No. 3 Boston. 

While both Austin and Boston were among the top three destinations in the 2021 survey, Atlanta supplanted Dallas and is the top investment target for foreign buyers this year. According to AFIRE, Boston is considered a primary/Gateway city, while Atlanta is a secondary and Austin is classified as tertiary.

“There is an exciting level of growth and change in markets like Atlanta that is likely to have a positive impact for some time to come,” AFIRE CEO Gunnar Branson told Bisnow in an email. “Just like domestic investors, international investors are following the larger demographic trends whereby more people and companies are choosing to live and work in less expensive metropolitan areas.”

AFIRE surveyed 175 institutional investors, pension funds, asset managers and other global investment groups with $3T in holdings, 60% of which plan to increase their investments in secondary and tertiary cities in the U.S. over the year, including in places like Charlotte, Raleigh, Dallas and Denver.

Chicago and New York experienced the greatest decline in global investor interest this year, although New York and London are still top 10 cities for planned global investment in 2022, alongside Dallas, Seattle, Los Angeles, Berlin and Denver.

The flood of capital into secondary and tertiary markets like Atlanta, Charlotte and Nashville could upend their classifications in the long run, George Smith Partners principal and Managing Director Shahin Yazdi told Bisnow.

“I feel we're going to expand the list of gateways. Some secondary markets are going to be considered primary markets moving forward. Of course, that could always change, but based on demographic reports and where people are migrating to … these are going to start to be gateway cities, for sure” Yazdi said. “I don't know enough about Boston, but definitely Atlanta.”

Branson said Austin, Atlanta and Boston are luring investors because of a preponderance of tech companies moving there, coupled with university systems churning out the talent needed to fill jobs in the sector.

“Georgia Tech has become the center of a tremendous growth of tech companies in the Midtown area, but it is not the only world-class university delivering another class of skilled graduates every year,” Branson wrote. “Atlanta has also become very active in the movie and television business, bringing even more activity into the area. Meanwhile, Boston and Cambridge have their own share of world-beating universities and graduates. Both are significant tech leaders, and that’s where the people, jobs, and real estate demand are.”

CBRE Vice Chairman Will Yowell told Bisnow that it's not just that businesses are moving to Atlanta, but Fortune 500 companies are setting up large offices in the city, helping the region's reputation with international investors.

“People know Coca-Cola. People know Microsoft. They know Google,” Yowell said. “That's critical to continue to validate Atlanta as a market that's going to achieve very strong risk-adjusted returns.”

Foreign investors have grown more comfortable with secondary cities as they gradually expand their geographic reach, Branson said.

“It's also worth noting that most international investors have been in the U.S. for some time with significant presence on the ground. They have been learning the secondaries for some time,” he said. “Just like domestic investors, international investors are following the larger demographic trends whereby more people and companies are choosing to live and work in less expensive metropolitan areas. As investors search for yield in a very competitive landscape, they are spending more time in secondary markets.”

Global investors have a growing appetite for U.S. real estate, and 76% expect to increase their investment in the U.S. this year, expanding to 82% over the next decade.

“The current dominance of U.S. secondary and tertiary cities in this survey is supported by a shifting preference beyond traditional Gateway markets, as six in ten respondents plan to increase their investments in tertiary cities over the next few years and seven in ten planning an increase in secondary cities,” the AFIRE research committee wrote in the report.

The committee includes Branson, USAA Real Estate Global Head of Research and AFIRE Chairman Will McIntosh, Metzler Chief Investment Officer Zeb Bradford, Wealthcap Management Vice President Peter Grey-Wolf and AFIRE Senior Communications Director Benjamin van Loon.

Yazdi said that he has already seen evidence of this shift from his perspective in Chicago, which along with New York, has seen commercial real estate performance lag behind the smaller, less mature cities to the point where some owners are simply handing the keys to older office assets over to their lenders.

“Outside of just foreign capital, we're seeing domestic buyers flock to places like Atlanta. It's just becoming a hub of employment,” Yazdi said. “I still think there are strong foreign buyers in some of the major markets like New York and LA, but they get the market reports. They see what's going on.”

Multifamily continues to be the preferred asset class investors this year, with 90% of those surveyed putting apartments at the top of their buying wish list, according to the report. Investor emphasis on multifamily, which was followed in preference by industrial and life sciences, is helping boost Sun Belt interest, where developers have been churning out new projects in an effort to keep up with demand, Yowell said.

“With office investments, I don't think Atlanta would rank as high there, as much as it pains me to say,” he said.

Branson said he does not see a shift back to office and retail being more popular acquisition targets any time soon.

“Office is not favored now because it is uncertain what office is about to become, what new capital will have to be put into them, and what value office users will place on them,” he said. "As long as it’s uncertain, it will be difficult for anyone to increase their allocations beyond where they already are."