In the face of turbulence and capital outflows in emerging markets, the attraction of US commercial real estate as an investment safe haven continues to grow. The challenge for the yield-conscious investor looking for quality assets, however, is that everyone else is after the same thing and the number of assets that tick all the boxes in traditional locations is rapidly shrinking.
With investors priced out of key gateway markets such as Manhattan, Washington DC and San Francisco, the race is on between them to snap up assets in secondary markets and/or alternative asset classes that still offer substantial returns.
But this can be easier said than done: the deeper you have to head into secondary or tertiary markets, the greater the risk of digesting too many exotic assets. Successfully predicting the long-term success of such projects requires great skill, good advice and a detailed understanding of local markets.
For those unable to bring such knowledge to the table there is an alternative: looking in more familiar locations for assets that bring long-term added value. The modernisation of some of the nation’s most iconic buildings show how this can be achieved. Major capital improvement programmes boost capital value via heightened energy efficiency, improved occupier experience, and increased ancillary income from retail stores and other outlets. The Empire State Building’s $550 million multi-year capital improvement program, for instance, has been critical to its recent success in signing several larger multi-floor tenants. The new owners of the Willis Tower (formerly the Sears Tower) in Chicago, are also embarking on major renovations to the building’s ground-level retail, observatory deck and office layout.
Of course, such property icons rarely come up for sale, but the rationale is applicable more widely and worth remembering: older buildings on the edge of prime markets in supply-starved locations can offer an opportunity to add value.