Markets to Watch
One clear theme in Emerging Trends this year is that commercial real estate investors are becoming increasingly cautious in their outlook and more selective in their asset selection. That mind-set reflects the expectation that in an era of “higher and slower for longer,” it will be harder to earn an acceptable return in the coming years. Investors are reconsidering not just which property types they should buy but also the qualities of specific assets within each property sector.
This heightened degree of asset selectivity is extending to locational attributes as well. Just as investors are becoming more discerning within the property types they prefer, industry participants we interviewed for this report say they are less willing to give blanket endorsements to their preferred geographic markets. Rather, they focus on specific submarkets by property type: apartments in a particular neighborhood in one city and warehouses on the south side of another city.
Outlook Still Sunnier in the Sun Belt
To be sure, the market preferences of respondents to the Emerging Trends survey have not changed radically in the past two years since undergoing some fundamental shifts in the immediate aftermath of the pandemic. Clear general preferences are still evident. For example, respondents still see the best opportunities in the so-called “smile” markets situated along an arc in the southern third of the country. The number of these Sun Belt markets among the top 20 markets for “overall prospects” has inched up to 15 this year from 14 in the last two years and an average of 12 in the decade preceding the pandemic. At the same time, the number of markets in cold-weather climates in the Northeast and Midwest has remained stuck at just two, down from an average of three before the pandemic. So, little recent change there.
One industry consultant we interviewed said, “There has been a 50-year pattern of migration from the Northeast and the Midwest to the Sun Belt. There’s no evidence in the last year that that trend is abating.” The consultant continued that when you consider the relative cost of living, the quality of life, and the extent these are business-friendly states, “there’s a reason why some of that’s happening, and I think that that will continue.”
With these geographic preferences somewhat fixed, the market rankings, as determined by the relative ratings of each market, did not change significantly from last year. There was only one change in the composition of the top 20 metro areas from last year, with Las Vegas displacing Salt Lake City. Three of the top 10 markets from the 2023 report dropped out of the top 10 this year—Tampa/St. Petersburg, Miami, and Charlotte—but all stayed in the top 20.
Looking at the full range of 80 markets, the relative ratings were more stable than in most years. Only five markets moved up or down at least 10 positions from last year, compared to the 20 markets in 2023 that moved at least 10 places from the prior year. The ranking of the typical market moved up or down by only half as much (by 3.5 positions, on average) as from 2022 to 2023 (7.1 positions).
“There has been a 50-year pattern of migration from the Northeast and the Midwest to the Sun Belt. There’s no evidence in the last year that that trend is abating.”
U.S. Markets to Watch
Getting Tighter
Yet, turn the prism and a different impression emerges. Most notably, expectations are more downbeat nearly everywhere. Survey respondents gave lower ratings to 74 of the 80 markets in the Emerging Trends coverage universe this year, while only five improved. Scores fell for the second year in a row to their lowest level since before the pandemic. On a scale of 1 to 5, the average score for all markets fell from 3.19 in 2022 to 2.87 last year and to 2.74 this year. These score declines are relatively modest, amounting to just 5 percent this year, but their direction is unmistakable. The nearly uniform downgrade helps explain the historically low profitability prospects expressed by survey respondents, as discussed in chapter 1.
In addition to the lower overall ratings, the ratings are within a tighter range than they have been in a while. The score difference between the first- and tenth-ranked markets is only 29 basis points (bps), compared to 45 bps last year, a 35 percent decline. Similarly, the score difference between number one and number 20 is only 46 bps, compared to 68 bps last year, a 33 percent decline. In other words, survey respondents see less difference in prospects among markets than they used to.
Moreover, the drop in scores has been more significant among the leading markets. The top 10 market scores dropped an average of 22 basis points, compared to 13 bps for all other markets, further demonstrating that the ratings are getting tighter among markets. The greater tightness of the market scores and the greater decline in scores among the top markets show that industry participants are less enamored with high-flying markets than in previous years.
Markets with Lower Ratings in 2024
Emerging Trends in Real Estate 2024 Market Categories
Source: Emerging Trends in Real Estate surveys; compiled by Nelson Economics. Note: Bold type indicates the 20 highest-rated markets in Emerging Trends in Real Estate 2024 survey for overall real estate prospects.
Enduring Trends
The French proverb “The more things change, the more they stay the same” is meant to convey that the daily current of turbulence does not alter deeper realities. And so it is with the market predilections of industry participants. If their preferences are narrowing or adjusting slightly, they are not disappearing entirely. The average score fell this year for every broad Emerging Trends market category. However, their relative standings were unchanged: the Magnet markets are still the most favored category, followed closely by the large Establishment markets. Finding relatively less interest among survey respondents are the generally smaller and/or older Niche and Backbone markets, as they have in prior years.
Full descriptions of these market groupings can be found in the section following.
Average Market Scores by Market Category: 2024 versus 2023
(Higher scores are better, scale of 1 to 5)
Sources: Emerging Trends in Real Estate surveys (overall real estate prospects); compiled by Nelson Economics.
Drilling down into the subgroups, the Supernova markets (−23 bps) and Super Sun Belt (−21 bps) fell the most of any market grouping. This seems to reflect primarily the come-down of the highest-rated markets rather than a fundamental reappraisal of these specific metro areas: both retain their standing at the top of the heap, although the gap with the Establishment markets has narrowed.
What accounts for the enduring—if slightly diminished—appeal of these two Magnet markets, along with the group’s third member, the 18-Hour Cities? Based on our interviews with industry leaders, investors are attracted to the growth story in these metro areas, as exemplified in the industry quotation that opens this chapter. Population growth for these markets averages three times the national average and twice as much as any other market group. Economic growth is also well above average.
Households are attracted by the warmer weather, more affordable housing, and strong job growth in these mostly Sun Belt markets. Firms are attracted by the lower regulations and taxes in these markets, along with the growing labor force, in a virtuous cycle between population in-migration and corporate relocations, which feed off each other. In turn, these key drivers attract the attention of commercial and residential real estate investors and homebuilders. There is a strong and sustained market correlation between the overall real estate prospect ratings and homebuilder ratings in the Emerging Trends survey.
Not all of the recent rating declines in these markets can be attributed to just general investor malaise, however. As we highlighted in Emerging Trends last year, some of the fastest-growing markets have experienced some growing pains, with greater traffic congestion and more expensive housing, among other issues, and those trends seem to have intensified in the past year. The appeal for investors and developers has also slipped, as many of these markets quickly became supplied in some product types, especially multifamily. But that does not seem to be changing the long-term industry demand.
The head of research for an asset management firm acknowledged the recent overbuilding but said, “I still default long-term strategically to the long-term growth in the Sun Belt markets.”
Drilling down into the subgroups, the Supernova markets (−23 bps) and Super Sun Belt (−21 bps) fell the most of any market grouping.
And Some Emerging Trends
If there’s one factor that could dent the Sun Belt hegemony, it’s the escalating risks from climate change. As we documented in the “Eco-Anxiety Comes Home” trend, the number of major climate-related natural disasters keeps rising, and insurers are taking notice, raising premiums and reducing availability in states where there are caps on premium increases, such as California and Florida.
Indeed, insurance woes seem to be at least one factor turning industry participants away from Florida markets. Six of the 10 Florida markets in the Emerging Trends coverage fell in the rankings, including all three of the top 20 markets, led by Tampa/St. Petersburg, which fell 13 places. Miami, Orlando, and Deltona/Daytona Beach also each fell by at least five places in the rankings.
The immediate impacts of climate risks should not be overstated, however. As we noted in “Eco-Anxiety Comes Home,” households consider a range of factors when deciding where to live, and climate risks do not yet rank highly for many people. Consider that Phoenix jumped seven places this year to the second overall position, and Las Vegas cracked the top 20 for the first time in at least a decade. Both cities were in the news this year for their record-breaking heat waves, but that did not seem to deter new residents—or the interest of CRE developers and investors.
Moreover, California did not seem to suffer from their insurance problems, demonstrating that other factors are at play in the ratings. All eight of the California markets improved their rankings this year over last, though the individual changes were not meaningful, with none more than five places.
Other top trends we identified in the first chapter could have more significant impacts on market perceptions over time, notably the expected further fallout in the office sector, especially downtown offices. Eight of the top 10 and 12 of the top 20 markets have office vacancies at least two percentage points above the national average, and three have vacancy rates over 10 percentage points above. Some of these markets are used to functioning at elevated vacancy rates, including Dallas and Phoenix. Still, the record levels now—with more than 30 percent of downtown class A space vacant in some markets—could portend a reckoning, particularly as owners face significant tenant lease terminations or expiring debt.
Some of these same markets, especially tech hubs such as Seattle and Austin, also have the highest shares of remote workers, contributing to the office sector downturn. The impacts from the markets with many people working from home will bear watching for further impacts not only on the office buildings but also their downtowns. Yet other top-rated markets with high office vacancies have much lower rates of remote working, such as Los Angeles, Dallas, and Houston. These trends show that remote working is likely to have different impacts in different markets and that not all office troubles can be blamed on working from home. Construction continued unabated in some markets, even as firms had been reducing their per-head space demand for years before the pandemic.
Population Size and Economic Output
Sources: Bureau of Economic Analysis, HIS Markit, and U.S. Census Bureau; compiled by Nelson Economics.
Note: GMP=Gross metropolitan product
Population and Economic Five-Year Growth
Sources: Bureau of Economic Analysis, IHS Markit, and U.S. Census Bureau; compiled by Nelson Economics.
Note: GMP=Gross metropolitan product
Grouping the Markets
The Emerging Trends survey covers 80 geographic markets, which are sorted into major categories and subgroups to facilitate the analysis of these markets.
Population Size and Economic Output
(Detail by market subgroups)
Sources: Bureau of Economic Analysis, HIS Markit, and U.S. Census Bureau; compiled by Nelson Economics.
Note: GMP=Gross metropolitan product
Magnets
Magnet markets are migration destinations for both people and companies, and most are growing more quickly than the U.S. average in terms of both population and jobs. These metro areas are also the preferred markets for investors and builders, with the highest average “Overall Real Estate Prospects” ratings of any group in the Emerging Trends survey, as well as a disproportionate share of the leading markets. Collectively, these markets account for almost one-third of the population and economic output in the Emerging Trends coverage universe, the second largest group in “Markets to Watch.” However, they account for almost two-thirds (65 percent) of the 20 highest-rated markets.
Super Sun Belt. These markets are large and diverse but still affordable, forming powerhouse economies that attract a wide range of businesses. Despite their large population bases, most are among the fastest-growing markets in the country. Moreover, their economic performance has been solid through thick and thin.
This dynamic helps explain the popularity of these markets in the Emerging Trends survey. These metro areas collectively have maintained the highest average rating of any subgroup in terms of overall prospects for the last three years. The average ranking of Super Sun Belt markets slipped the second most this year of any of the 12 subgroups after the Supernovas. The high rating is led by longtime survey favorites Dallas/Fort Worth and Atlanta, which ranked third and fourth this year. This category also includes Phoenix, which jumped to number two this year. Interviewees most commonly cite the solid growth prospects, business-friendly environment, affordable housing, and good quality of life as reasons for the popularity of these metro areas.
Population growth in these markets is fueling considerable development and employment growth—and vice versa. Every market is growing faster than the national average, adding over a million new residents since 2019—all requiring new housing, services, and workplaces. Said one Atlanta interviewee in the 2022 report, in what applies to all these markets: “Low cost of land, climate, and available jobs make the market attractive. Hence, the influx of people moving here.”
18-Hour Cities. Metro areas in this now-classic Emerging Trends category faired relatively well during the pandemic recession, a testament to their enduring appeal. Though growing less affordable over time—partly due to price pressures from transplants from more expensive Establishment markets—these medium-sized cities nonetheless continue to attract in-migration due to lifestyle, workforce quality, and development opportunities, according to ULI interviews. Measured by per capita gross metropolitan product (GMP), workers here are the most productive of any subgroup in the fast-growing Magnets category.
The 18-Hour Cities are scattered throughout the country, comprising a more geographically diverse set of markets than the other subgroups. The 18-Hour Cities markets include Charlotte, Denver, Minneapolis, Portland (Oregon), Salt Lake City, San Diego, and Fort Lauderdale. Features common to all are active downtowns and urban-like suburban nodes.
The dynamic economies of these markets continue to make them popular with developers and investors alike. Four of the seven markets in this grouping rate among the top 20 markets nationally for overall prospects, led by San Diego (number six), followed by Denver and Charlotte. As a group, the 18-Hour Cities rate fourth highest among the 12 subgroups, falling just behind the Multitalented Producers of the Establishment markets category this year.
Supernovas. The Supernovas are the fastest-growing markets in our coverage universe, though the pace is slowing slightly. Like the astronomic source for its name, the five metro areas in the Supernovas category have exploded into prominence over the past decade or so. All are smaller markets with between 1 million and 2 million residents. But their defining attribute is their tremendous and sustained population and job growth, which are well above national averages. These are true magnet markets, particularly for educated millennials. Over the next five years, the number of residents in these metro areas is projected to grow by 7.6 percent, four times the forecasted U.S. population growth of 1.9 percent over the same period.
Despite their relatively modest sizes, all the Supernovas have above-average levels of economic diversity and white-collar employment, which explain their strong investor appeal and should help them sustain high growth in the years ahead. Nashville repeats as the top market in the nation for the third year in a row, while Austin fell one spot to number five and Raleigh/Durham dropped to number nine. These three markets took three of the four top-rated spots in our 2022 survey after sweeping the top three places in 2021.
The glow for this category has faded somewhat this year as their unfettered growth has invited some big-city problems such as congestion and rising costs of living. Most notably, Boise, the 2022 shooting star, fell further to number 41 after two years in the top 20. But the Supernovas appear to be suffering some growing pains more broadly, as discussed elsewhere in this report. Even in leading markets such as Nashville and Austin, feedback from local market experts via ULI District Councils revealed frustration with infrastructure quality and living costs, prompting concern about the future growth prospects.
Still, these are problems that city leaders and real estate professionals in most other markets would love to have: these are still some of the fastest-growing and strongest economies in the nation, and little on the horizon seems likely to change that.
The Establishment
The Establishment markets have long been the nation’s economic engines. The 20 markets in this category produce 42 percent of the GMP in the 80 Emerging Trends markets while accounting for only 35 percent of its population base, primarily reflecting the outsized contributions of the nation’s gateway markets, which we refer to as the Knowledge and Innovation Centers. These markets include the central cities and nearby markets for Boston; Chicago; Los Angeles; New York City; Washington, D.C.; Seattle; Silicon Valley; and the San Francisco Bay area.
Though growing more slowly than the Magnet markets, the Establishment markets still offer tremendous opportunities. This group’s average rating is second among our four major groupings. However, the appeal of these markets to investors and developers has waned in recent years as growth has slowed across many of these markets while challenges have increased.
Multitalented Producers. Though all the Establishment markets are large and economically varied, some are more diverse than others, specifically the multitalented metro areas of Chicago, Los Angeles, San Jose, and Seattle. These markets distinctively produce a wide range of both goods and services, ranging from airplanes and software in Seattle to films and apparel in Los Angeles.
Though these metro areas all have a significant tech presence and a substantial science, technology, engineering, and mathematics (STEM) employment base, office-based jobs generally make up a smaller share of employment than in the Magnets or other Establishment markets. But make no mistake: workers here tend to be productive, with per capita GMP ranking the second highest of any of the subgroups. Though their elevated cost of doing business and getting deals done limits their appeal for some real estate professionals, the Multitalented Producers nonetheless continue to attract a disproportionate share of investment dollars.
Ratings for these markets have been volatile in recent years, mostly due to the changing fortunes of the tech sector, which figures heavily in these economies. San Jose and especially Seattle both improved this year after tumbling in last year’s ranking. Together, the ratings of these markets fell the least of any category after declining more than almost any subgroup in the 2022 survey. This subgroup now rates the third highest, up one rung from last year.
Knowledge and Innovation Centers. This grouping serves as the focus of intellectual capital in the economy, whether in social media (San Francisco), finance (Manhattan), biosciences (Boston), or think tanks (Washington, D.C.). With the most educated workforces in the country, these innovation centers are by far the most productive, with per capita GMP more than twice that of any other subgroup.
This group also has some of the most expensive housing in the country, along with the highest costs of doing business. Lofty asset prices have cut investor appeal for most of these markets, especially as growth has slowed in recent years. These markets also bore the brunt of out-migration from dense, expensive CBDs during the pandemic, though most are staging rapid recoveries. The average rating for this group dropped on par with the modest national decline this year. None of the markets moved significantly up or down this year.
Overall, this group remains somewhat out of favor with investors relative to its former glory not long ago. Only Boston remains among the 20 top-rated markets. Boston has leveraged its region’s world-class concentration of higher education to become a world leader in life sciences. Much of the development is in its new Seaport market, augmenting a central cluster across the Charles River in Cambridge.
Major Market–Adjacent. This group includes the markets surrounding high-cost CBDs in Los Angeles, Miami, New York City, San Francisco, and Washington, D.C. Though most are suburban in character, some are more urban. Moreover, several are or contain MSAs or divisions in their own right: Northern New Jersey (Newark, NJ/PA metropolitan division), Inland Empire (Riverside/San Bernardino/Ontario, California, MSA), and suburban Maryland (Frederick/Gaithersburg/Rockville metropolitan division), among others.
Many of these markets benefited from the out-migration from their neighboring CBDs during the pandemic, and their prospects have improved somewhat in the eyes of survey respondents. But here, too, there is a diversity in trends as seven of the 12 markets either improved or stayed even this year, and five declined, led by Jersey City, which fell 14 places.
Niche Markets
Befitting their moniker, Niche markets are generally smaller or less economically diverse than the Magnets and Establishment markets but typically have a dominant economic driver that supports stable economic growth. This group ranks third among the four major market groups in terms of investor outlooks but far behind the Magnet and Establishment groups.
Boutique markets are smaller cities with innovative or unique developments that coordinate well with their economic and demographic profiles. However, the demographics in these markets—with fewer millennials and more seniors—tend to be less favorable for economic growth. “Eds and meds” is an oft-used term to describe areas with sizable education and/or health care facilities. Finally, Convention and Visitor Centers markets focus on tourism, conventions, and, in some cases, the retirement and second-home market.
Boutique Markets. These are smaller markets with lively downtowns; diversity in leisure, cultural, and natural/outdoor amenities; and stable economic bases that withstood the COVID-19 downturn better than many markets. These markets offer a lower cost of living and cost of doing business in a diverse range of settings, primarily noncoastal. Chattanooga, Des Moines, Greenville, Knoxville, Omaha, and Portland (Maine) all have populations of less than 1 million, and all maintained their previous positive in-migration during the pandemic, indicating the appeal of these towns.
Richmond remains the top-rated market in this subgroup and continues to attract substantial residential and commercial development, but every market in this grouping experienced lower overall scores this year.
Convention and Visitor Centers. These Sun Belt (or just sunny, in the case of Honolulu and Las Vegas) markets draw substantial numbers of visitors, whether for conventions or leisure. At the same time, several markets in this category also have substantial bases of retirement/second-home markets. Markets in this category include Cape Coral/Fort Myers/Naples, Charleston, Deltona/Daytona Beach, Honolulu, Las Vegas, New Orleans, Orlando, and Virginia Beach/Norfolk. All have significantly more tourism employment (relative to market size) than the U.S. average, with Las Vegas the most travel-dependent market in the country.
These markets all endured significant challenges resulting from COVID-related restrictions, particularly those that rely on air travel, business demand, or both. As with most markets nationally, none of this group moved materially this year, but Las Vegas was notable for cracking the top 20 for the first time in years, while Orlando fell.
Eds and Meds. Before the pandemic, Eds and Meds markets were envied for their desirable combination of stability (large universities) and growth (health care). COVID-19 initially dented their reputations as both education and medicine suffered disproportionately during the pandemic. However, demand for education and health care—and the facilities that house them—have resumed their growth. Ratings for these markets fell in concert with the other Niche subgroups this year.
This category includes markets with a strong base of major universities, highly ranked health care systems, or both—Baltimore, Columbus, Gainesville, Madison, Memphis, Pittsburgh, and Tallahassee. Each metro area has one or more universities in the U.S. News & World Report top 100, while Memphis has St. Jude Children’s Research Hospital, the top-ranked children’s specialty hospital in the United States. Cities in the Eds and Meds category typically are more affordable markets. Philadelphia—the largest market in this category—also has significant employment in telecommunications and financial services, among other sectors. And both Philadelphia and Pittsburgh, at the other end of Pennsylvania, have numerous corporate headquarters in various sectors.
Backbone Markets
The final group comprises a wide variety of interesting and enjoyable places to live and work. Though generally rated relatively lower in our surveys, many of these metro areas offer select investment development/redevelopment opportunities. These 18 Backbone markets have more than 30 million residents among them. Although markets in the Affordable West subgroup are growing sharply, most of the Backbone markets are slower growing but benefit from moderate housing and business costs. This category as a whole fell less than any group this year.
The Affordable West. Beyond the pricey coastal markets in Seattle, Los Angeles, the San Francisco Bay area, and San Diego, several small- to medium-sized cities offer attractive places to live at a more affordable price. Notably, they are among the fastest-growing metro areas outside the Magnets. These include Albuquerque; Sacramento; Spokane, Washington/Coeur d’Alene, Idaho; Tacoma; and Tucson, all of which are forecasted to experience faster population growth than the nation as a whole over the next five years. Nonetheless, affordability here is fading as this rapid population growth has pushed home prices relative to income higher than the national average.
Though the ratings of these markets fell this year, as they did just about everywhere, they actually dropped a bit less here, so their rankings rose slightly, though none moved significantly.
Determined Competitors. These diverse markets tend to be strong ancillary locations in their regions, with several successfully revitalizing their downtowns and neighborhoods. This group includes Indianapolis; Kansas City, Missouri; Louisville; Birmingham, Alabama; and Oklahoma City—all very affordable with a favorable quality of life. Significantly, all maintained positive population growth through the pandemic, and all saw faster job recovery than the national average—a positive sign for future economic growth. The ratings for this group fell less than most in this year’s survey, and every metro area either improved their ranking or stayed the same, with Indianapolis rising 7 places to almost crack the top 20 at number 22.
Reinventing. Reinventing markets are eastern and midwestern cities seeking to modernize their economic base. Many were manufacturing centers and are now moving to a more sustainable mix of education, health care, and technology. These markets include Buffalo, Cincinnati, Cleveland, Detroit, Hartford, Milwaukee, Providence, and St. Louis. Though the economic rebound in most of these markets lags the national recovery, the federal government’s stimulus programs have helped cushion the downturn. However, anemic population growth remains a problem, as several of these markets experience negative net out-migration as residents search for opportunities elsewhere. Overall, there were few material changes in the outlook for these markets, in the view of Emerging Trends respondents, but Milwaukee moved up 13 places, the most of any market this year, though only up to number 62.
