Austin is best 'non-gateway' commercial real estate market in U.S., survey says

Austin is the best non-gateway city in the U.S. for commercial real estate investment. That’s the consensus of DLA Piper’s annual State of the Market Survey.

The findings were released at the law firm’s Global Real Estate Summit held Sept. 26 in Chicago.

DLA Piper surveyed about 220 real estate executives from top real estate firms and some 45 percent of them said Austin — tied with Seattle — will perform the best in the year ahead as a commercial real estate investment. They didn't factor in so-called gateway cities such as New York and Los Angeles.

Denver and Nashville tied for the next top cities, garnering 33 percent of the votes.

It’s somewhat of a surprise that Austin notched the top ranking, given that only 4 percent of the respondents to the survey are based in the Southwest, which includes Texas, Oklahoma, New Mexico and Arizona.

The largest percentage of respondents, some 37 percent, are based in the Midwest, and 28 percent are based in the Northeast.

DLA Piper’s report indicates some hesitation about commercial real estate as compared to previous years.

This year 60 percent of respondents said they are bullish about commercial real estate during the next two years, thats down from 62 percent last year and way below the 89 percent who were optimistic in 2014.

A large majority of those surveyed, 92 percent, expect interest rates to increase, and global uncertainties, such as escalating tensions with North Korea and the ongoing fallout from Brexit, could impact commercial real estate across the U.S.

Historically, these issues would have little impact on Austin, which has been a small market dominated by local money and politics, but those days are over.

Increasingly, institutional money and private equity is flowing to Austin from around the globe.

Here are a few other highlights of the report:

• Investors from China are considered the most likely to invest in U.S. commercial real estate, and there is evidence of Chinese capital already at work in Austin. I previously wrote about Sackman Enterprises, which is building the 70 Rainey high-rise southeast of downtown, bringing on Starryland USA, a division of China-based Fuxing Huiyu Real Estate Co., as a partner.

Though German investors aren’t mentioned in the DLA Piper report, capital from that European country is in ample supply across Austin — mostly investment in suburban offices.

• The DLA Piper survey-takers rate healthcare and industrial real estate as the best investment categories, with positive marks from 56 percent thumbs up on healthcare assets and 53 percent thumbs up on industrial. Data centers and multi-family follow in third place but only with 31 percent approval.

• Many of the respondents watching the performance of retail assets.

“Respondents are clearly keeping a close eye on the effects of online retailing, rating it the most disruptive force in the CRE market over the next 12 months,” the report states.

The pop-up store concept that has been touted as “cool” in the media is viewed with different eyes among landlords, it appears.

“One trend this year has been the increase in pop-up retail stores — placements now offered by landlords for whom ‘a short-term tenant is better than no tenant at all,’” the report states.