A Tale Of 2 Cities: Growth In Smaller Metros Can Look Very Different On The Ground

Small and midsized cities have seen a burst of investment and growth during the pandemic as people who could now work from home seized the opportunity to leave big cities for areas with lower costs of living.

Developers and investors took notice of the exodus, and they turned their focus to these smaller metropolitan areas — the so-called secondary and tertiary cities.

“Big city real estate was once considered the obvious staple of any portfolio, [but] it’s now properties in the smaller, scrappier metros that are attracting attention,” reported NAI Global, the largest independent broker organization in commercial real estate. “In a climate of uncertainty, these smaller metros often offer an attractive combination of safer investment opportunities and strong returns.”

But at ground level, “scrappy” may look very different from one city to another. One metro area might have seen its central business district blossom in recent years, while another witnessed most new investment flow out from its downtown and into the suburbs.

“We're finding both pros and cons with this trend, particularly in our brokerage work,” said Jordan Elliott, principal and president of NAI Elliott, which is based in Portland, Oregon. “The pro is that suburban retail here is just booming.”

Elliott noted that some suburban retail spaces that had sat vacant for a decade or more saw their fortunes turn around during the pandemic. 

“All those spaces now are gone because the demand is very high for suburban retail spaces, whether it's used for retail, medtail or other uses, and suburban restaurant spaces have been very hot, too,” he said.

Downtown Portland, however, has suffered a fate similar to larger cities such as San Francisco. Several major Portland employers have announced plans to leave downtown and move to suburban hot spots such as the Kruse Way corridor in Lake Oswego. 

Concerns about crime and the cost of doing business in Portland were cited as possible motivating factors when Hoffman Construction, Oregon’s largest construction company, announced plans last month to vacate the downtown office tower it had built in 2001 and used as its headquarters.

Those are visible signs of a balance of power that has shifted from the city of Portland, which has a population of 640,000, to other areas of the 2.5 million-person Portland metro region. A local newspaper recently declared that Kruse Way is “Portland’s new main street.”

“The downtown office market is dreadful, with a huge amount of ghost occupancy and the same kinds of problems you hear in every market, whether it's primary, secondary or tertiary,” Elliott said. “And as people have left downtown, areas like the Kruse Way corridor have boomed.”

The situation is different across the country in Worcester. Massachusetts’ second-largest city is enjoying growth more often associated with cities in the Sun Belt than in New England. During the pandemic, the city’s population exceeded 200,000 for the first time, said Michael Jacobs, a partner and principal with NAI Glickman Kovago & Jacobs. 

Jacobs credited this positive trend to a variety of factors, including an in-migration of people from Boston who were attracted to the city’s more affordable housing and competitive job market. Another factor buttressing downtown Worcester was that employees there returned to their offices earlier and at levels not seen in many larger cities, he said.

Thanks to its growing population, multifamily is the most active commercial real estate sector in the city “by far,” Jacobs said. Approximately 4,000 apartment units are in the construction pipeline, and several new large projects will be going before the city planning board in coming months, he said.

“Worcester has undergone a renaissance during the past five to seven years, which has certainly helped our population grow,” he said. “It has been anchored mostly by a new Triple-A ballpark built by the Boston Red Sox, and there are now six or seven major housing developments in the immediate neighborhood. This sort of progress and opportunity definitely contributes to this secondary city’s growth.”

Worcester, like Portland, is not immune to the effects of rising construction costs and interest rates, or to the flight to quality that has left many Class-B and C office properties struggling to attract tenants. Jacobs said this has necessitated a change in thinking among commercial property owners.

“One thing we all learned during the pandemic is that you need to take care of your tenants, probably more than you ever have,” Jacobs said. “We advise people to work with their tenants, because until leasing activity increases, it's worth a few concessions to keep your strong, reliable tenants.”

In Portland, Elliott said he expects development to continue to mirror trends in other West Coast cities, with suburban retail growing and downtowns struggling for the foreseeable future.

“The macro trend here is that there is constant demand for suburban retail space and I don't see that going away,” Elliott said. “I also don't think that the office market is going to improve any time in the next five years, unfortunately. But at some point, hopefully, that sector will begin to equalize and our downtown core will revitalize in terms of the number of people who live and work here.”

This article was produced in collaboration between NAI Global and Studio B. Bisnow news staff was not involved in the production of this content.

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