Investors ready to hit secondary markets

San Francisco is considered the top commercial real estate market in the country.

Next year is shaping up to be a good one for the commercial real estate sector.

According to Emerging Trends in Real Estate 2014, which is co-published by PwC and the Urban Land Institute, investors will start looking beyond the long-established major markets and into some of the secondary cities in 2014.

Investors are searching for higher yields, as opportunities are hard to come by in the in the major markets. Thus, the report projects that 2014 will be the year investors leave places such as New York, Los Angeles, Chicago, Boston and Washington to find better deals in smaller markets.

"Real optimism has emerged as a key theme in the real estate market for 2014 as trends are progressing significantly through the economic and real estate recovery cycles," said Mitch Roschelle, a partner and U.S. real estate advisory practice leader at PwC.

"The steady economic recovery and job creation has created 'tailwinds' that have propelled the commercial real estate market forward, and momentum of this recovery seems powerful enough to weather spikes in interest rates that may be inevitable," he added.

The anticipation that many will move to secondary markets is also fueled by debt and equity capital during 2014.

The survey found respondents to be especially positive regarding an even playing field for foreign investors, private equity funds and institutional investors.

"The anticipated interest in secondary markets is indicative of how the U.S. real estate recovery is expanding beyond the traditional investment hubs," said Patrick Phillips, the Urban Land Institute's CEO. "Access to greater amounts of both debt and equity financing, combined with a sustained improvement in the underlying economic fundamentals, means that the opportunities and returns offered in smaller markets are potentially very appealing."

Top markets, according to report
The top markets to watch, according to the Emerging Trends report, include San Francisco, Houston, San Jose, Calif., New York and Dallas.

The report claims San Francisco is the top-ranked market for the second straight year. The city's commercial real estate market is being fueled by an anticipated rush of employment, which would bring more consumers to the area.

Houston, which came in fifth last year, took second due to its investment and homebuilding potential. Non-residential construction and exploration industries are also showing big gains in the market.

The other Texas market to make the top five, Dallas, has shown strong homebuilding prospects and is being recognized for its investment and development possibilities.

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