Whichever city Amazon selects as its HQ2 will be the next hottest market with the greatest upside for the next 5-10 years. You can invest in all assets in that market and expect a healthy return vs. the currently overpriced gateway cities.
What value can one still find in gateway markets?
We have invested in various assets in San Francisco and New York over the past several years. Obviously, these markets are extremely pricey and it seems to be getting harder to get a decent return in this market. Should we be looking at other markets or are there still deals to be had in these markets? What types of deals seem to be producing the best yield in tier 1 markets?
We believe there are still good opportunities in the areas you outlined below; however, very limited and most importantly, one would have to secure the opportunity quickly before other potential investors come in and scoop it up. We have seen other Tier 1 cities within the US with healthy returns and less expensive. We are seeing healthy returns in the student housing, senior care sectors in Tier 1. We are always cautious in giving strong recommendations and suggest the investor to assess all sectors and cities carefully in order for it to match their appetite and return expectations...
I agree with your concern that gateway markets appear to be overpriced, with no current expectation of a price correction. That has caused investors to seek returns elsewhere. There is no one answer to the question where is the best place to invest. I have seen multi-family investors looking at secondary or even tertiary markets. People are looking at asset types in which there has been dislocation, such as retail. In the case of retail, a buyer must be paired with an expert, as there is no one solution to repurposing opportunities. A lot of money has moved into industrial and logistics. My responses would depend on your return requirements, asset preference and risk tolerance.
The answer, based on investor behavior and market intelligence, seems to be that returns are likely to stay on the low side on fully leased A assets in gateway markets. This does not mean there are not opportunities in gateway markets, but those would not be in fully leased, stabilized, quality office or multifamily properties, where the returns are likely to stay low (4%+/-) for a while. The reason that it is likely that returns will stay low is that there is not a lot of that kind of product available and institutional investor demand for the product remains very strong. Areas where more opportunity might be found is in development or major value add projects, or certain more niche asset classes, such as senior living, dormitory, co-living and the like. Many investors seeking higher returns are seeing these project types or value add, but for the latter or ground up development, a lot of local expertise is required. Others have turned to secondary and tertiary markets, and that takes a lot of research and work getting comfortable with the varying dynamics of each individual market.