Should You Look Outside Your State for a Commercial Investment?

Traditionally, foreign investors sought commercial properties in the United States’ premier economic hubs (e.g. New York, Los Angeles, Chicago, etc).  However, market changes and the pursuit of yields have driven many of these same investors to begin looking for properties in secondary markets.

For domestic commercial real estate investors, are there lessons to be learned from this change in foreign investment preference?  In other words, should domestic investors look beyond their immediate environment to commercial properties outside of their state?

In this article, I’ll outline the reasons why investors should look beyond their states as they seek solid commercial investments.

Foreign Investment Trends

Historically, when foreign capital entered the US market, these funds flowed to Class A office space in premier economic centers (e.g. New York, Los Angeles, Chicago, etc).  This approach typically offered reliable risk-adjusted returns for foreign investors.

However, of late, two foreign investment trends in real estate have surfaced.  First, investors are seeking more deals at lower transaction sizes.  Second, many foreign investors have branched out of these major markets, diversifying their portfolios to include both different asset classes and assets in secondary markets.  

Bottom line, their traditional real estate investment strategy no longer meets required returns, so foreign investors are now seeking yields elsewhere.

What This Means to Domestic Commercial Real Estate Investors

So, what do foreign capital flow trends mean for domestic real estate investors?

While I’m certainly not advocating a complete overhaul of your investing strategy based on the preferences of foreign investors, I do see a key takeaway from the above trends.

As foreign investors analyze potential deals, many have concluded that diversifying into different, secondary markets offers far better yields than premier economic centers.  Domestic investors would be wise to observe these trends.  More precisely, if an out-of-state commercial opportunity in one of these secondary markets offers better returns than a local deal, why not pursue it? 

In the next two sections, I’ll discuss a couple of these secondary markets offering great opportunities for commercial investors. 

Need help connecting with reliable commercial real estate professionals in a new market? Drop us a note!

Chasing the Sun: Commercial Investments in Phoenix

While certainly a booming city (and the most populous capital city in the United States), Phoenix hasn’t traditionally qualified as a premier economic hub like New York or Los Angeles. 

However, the Phoenix market has proven extremely appealing for foreign investors recently.  It has over 300 days of sunshine a year, a highly-skilled labor pool graduating from Arizona State University, dozens of tech companies, and one of the highest population growth rates in the country. 

These positive attributes have driven massive commercial investment growth in Phoenix, primarily focused on multifamily properties.  Specifically, the non-recourse loan nature of these investments, the quality labor pool, and the growing population have made multifamily properties an outstanding investment choice for foreign investors.

For these reasons, domestics investors should absolutely consider commercial property opportunities in Phoenix.  With the right deal, Phoenix’s positive attributes would more than outweigh the logistical challenges of an out-of-state commercial investment.

Northern Diversification: Seeking Commercial Hedges in Minneapolis

Minneapolis has become another darling of foreign investors seeking yields in the second-tier commercial property market. 

Notably, Minneapolis includes a tremendous diversity of successful businesses.  Food, finance, higher education, health care, and retail - all of these industries thrive in Minneapolis.  Combine this diversity with a fairly affluent - and growing - population, and the city becomes a tremendous commercial investing opportunity. 

More precisely, Minneapolis’ tremendous business diversity provides an outstanding counter-cyclical hedge, as a slowdown in one industry will be partially offset by solid performance in the others. 

These characteristics have pulled foreign real estate investors into Minneapolis, a reality that domestic investors would be wise to notice. 

Feel free to drop us a note if you need help analyzing commercial real estate opportunities to build counter-cyclical hedges into your portfolio.  This analysis can seem challenging, and we’re happy to help!

Final Thoughts on Out-of-State Commercial Investing

While foreign investors will certainly still allocate capital to premier markets, risk diversification and the pursuit of yields mean that these foreign investors will also continue seeking commercial investments in secondary markets.

For domestic investors, the takeaway from this article shouldn’t be that you need to go buy commercial properties in Phoenix or Minneapolis.  Rather, as foreign capital continues to flow into secondary markets, these markets will likely see tremendous commercial real estate growth.  And, it’s just a matter of time before these foreign capital trends spread to secondary markets beyond Phoenix and Minneapolis.

Domestic investors should heed these trends and continue to actively seek opportunities in secondary markets with high growth potential, regardless of whether they’re in the local market or out-of-state.  As the saying goes, a rising tide lifts all boats.

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We recognize that, even after outlining the above information, commercial real estate investing outside of your immediate market can seem daunting.   

That’s why we’re here to help.  The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!