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As people fled gateway markets last year, some wondered if 2020 would mark the end of city life. The way we see it, urban cores aren’t dying; they’re multiplying. Real estate developers are bringing soaring architectural icons to secondary metros, creating new cityscapes across the country, but they still believe in the longevity of gateway markets, too. The combination could trigger the beginning of a boom in high-rise development.
New Towers Rise in Secondary Markets
Life in the small city is taking off. People are moving to secondary markets for housing affordability, a better quality of life and, during the early days of the pandemic, lower rates of COVID-19 transmission. Now, big city amenities are following. Developers are building a pipeline of sophisticated high-rise towers that are typically reserved for major global markets.
Austin is the standout for urban revitalization in secondary metros. Downtown Austin has 43 ongoing high-rise construction projects that promise to transform the market’s downtown area, and the pipeline is only growing. But Austin isn’t alone. High-rise projects are climbing in almost every emerging metro, including Salt Lake City, Downtown Miami, Phoenix and Atlanta, all of which have new high-rise projects that were announced this year.
Investment in secondary markets and particularly in the Sunbelt region wasn’t born during the pandemic. Population growth has spurred investment from both institutional and private players for the last several years. CBRE research shows increased population growth in the Sunbelt and other secondary metros as early as 2016 when Texas, Florida and California led the nation in population growth. collectively gaining a combined 1 million residents, and Utah, Nevada, Idaho, and Florida led in population growth rates. In the same year, New York was among the states with the highest net decrease in population.
The pandemic has only accelerated the trend. New data from the US Census Bureau estimates the population of Texas and Florida grew by a combined 600,000 residents in 2020, but Arizona, North Carolina and Georgia also saw substantial inward migration. On the other hand, California and New York lost a total of nearly 200,000 residents during the pandemic.
Accelerated population growth has catalyzed a new brand of development focused on high-rise projects and urban-style amenities to meet the expectations of new residents. The outsized demand has mitigated the risk profile of these markets, creating space for both institutional and boutique developers to launch high-caliber ground-up construction projects.
Existing developers active in these markets have ramped up activity, and many large capital firms are partnering with small local shops with deep market expertise to oversee construction projects. More frequently, however, new developers are entering these markets chasing opportunity and strong yields. In CBRE’s 2021 development opportunity index, which ranks the top cities for new construction, eight of the top 10 development markets in the US are secondary metros in the Sunbelt region, including Atlanta, Phoenix, Orlando, Raleigh, Austin and Charlotte. Already this year, many developers have announced entry into these markets with new high-rise projects and land acquisitions.
Don’t Count Out Major Metros
While developers have expanded into secondary markets, they haven’t abandoned development in major cities. Although migration trends are favoring smaller metros, the numbers aren’t significant enough to hamper growth in major cities, and some of the exodus is also only temporary. In May of 2020, 40% of urbanites said they wanted to move to a smaller market. By August, as more cities began to reopen, only 26% of residents in major metros made the same claim.
As residents have stayed, developers have renewed optimism on new construction starts. In New York City, YIMBY reports pulled that new construction permits last year declined only slightly from 2019 but were still substantially above new construction permits in 2018. On the West Coast, the Bay Area’s construction pipeline continues to grow with nearly 70,000 new construction residential permits in 2020 alone, and Downtown Los Angeles has $3 billion in development projects underway, including five major groundbreakings in 2020. This combination of urban development in cities large and small is a good indicator that demand for city-style living is here to stay.
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