David Maki, senior managing director of real-estate investment management firm Heitman, argues it is time for institutional investors in the US property market to look beyond traditional gateway cities, such as New York, San Francisco and Chicago.

He sees good opportunities in an emerging crop of “new gateway markets” –10 cities located mostly in the southern US that are outperforming their better-known rivals in jobs growth and net migration, opening up strong debt investment opportunities in non-regulated commercial mortgages.

The standout markets are Dallas, Atlanta, Houston and Nashville, which are as liquid as better-known cities but have lower entry costs and can provide defensive investments in times of asset price and economic uncertainty, Maki argued.

“You don’t have to write gigantic cheques to get access to Dallas or Atlanta,” Maki told the 2018 Conexus Financial Real Estate and Private Markets Conference, held in Melbourne at the end of February.

“By going into smaller markets that we view as equally liquid, and view as attractive for all the right reasons, like performance and fundamentals and growth, you can create a more diversified portfolio.”

Jobs growth is probably the single most important variable that determines high-performing commercial real-estate markets, Maki explained, as the movement of people into an area is crucial to the “inputs and outputs of real estate”.

“If you think of real estate as something people occupy, you should go to places where people move,” he explained.

For this reason, many investors choose the gateway markets of the US, which also include Miami, Honolulu, Los Angeles, Boston and Washington D.C.

However, the net migration numbers into these cities – which have a combined population of about 62 million – are “not that impressive”, Maki said, with many seeing a net outflow of people in recent years.

More impressive are the net migration figures into Portland, Denver, Phoenix, Dallas, Austin, Houston, Nashville, Atlanta, Tampa and Charlotte. Collectively, these cities are home to about 38 million people.

“If you always choose to invest in high-performing markets, these are the ones we think you should invest in,” Maki said.

Non-bank lenders have a strong role to play in these markets, due to post-financial crisis legislation driving banks to pursue safer strategies, Maki said.

“Unregulated” non-bank lenders have grown from 15 per cent to 50 per cent of the US$3.9 trillion US commercial real estate mortgage market over the last five years, he said.

Debt investments can be considered defensive because the equity holder bears the first risk of deviation in cash flows and asset prices, Maki said.

Heitman’s research of historical changes in real-estate market values found new gateway markets tended to appreciate less than the traditional gateways in periods of growth but didn’t perform any worse during recessions.

This makes them ideal for a diversified portfolio of debt investments, as debt doesn’t benefit from capital growth to the extent that equity investments do, Maki said. However, this difference in appreciation during growth periods also appeared to be narrowing in recent years, he noted.

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