How Texan Real Estate is One of the Biggest Beneficiaries of the Outpost Economy

Balance can be a challenging ordeal, especially when you are organizing and determining the correct allocation of real estate in a portfolio. Many pension funds will allocate around 15% for real estate investments; these are often core real estate investments that are income producing, high quality assets. By definition, these are often associated with primary markets.

But the Outpost Economy— the rise of a more dispersed economy and employment base away from major cities —is ushering in a growing curiosity and investments in real estate in secondary markets. In return, there may be a softening in some primary markets in the short term as the market corrects itself over the next few years.

Let’s briefly look at the rise of what we’re referring to as the outpost economy and how it may impact real estate investments within pension funds.

Does the geography of these assets matter? It depends, but the differentiating factor is high-performing real estate located in primary markets versus secondary markets. Because of some downturns in commercial real estate activity during the pandemic, there is a temporary softening of investment in primary markets. This has correlated to an increased interest in secondary markets as the real estate economy corrects itself.

Be prepared for core investments to go through a reshuffling

The value of downtown high-rises and office space in primary markets tumbled by 10 to 15% after one full year of the pandemic. In a Graceada Partners report in late 2020 titled “The Rise of the Outpost Economy,” we made this prediction and calculated that certain secondary markets—for a variety of reasons including a higher quality of life and better opportunities for residents—would be the market share segment that would perform the best. Not all secondary markets will experience such prosperity.

The demand for real estate in well-performing secondary markets has steadily risen in the past few years. This is due to increasing property demands in these areas as the price point in large cities remains too high for homeowners and investors to turn as good of a profit as in some years prior. The outpost economy is centered around where people want to live and where they subsequently want to work. Targeting markets that are experiencing high levels of interstate and intrastate migration is one piece of the real estate pie. An example of this would be the secondary market of Sacramento, just a two-hour drive from San Francisco and the Bay Area.

Then there are the booming areas in the vicinity of the state’s capital: Modesto and Stockton. Housing demand and prices have climbed roughly 20% in Modesto over the past year. On top of that, prices have almost tripled in the last decade for the city. To put this into perspective on that national scale, that’s two and a half times greater than the average American home price in the last 12 months. The same can be said about growing secondary markets such as Austin, Texas and Nashville, Tennessee.

Consider growing in secondary markets

According to a CBRE study, markets like Austin and Dallas “were among the top-performing metros where the least number of jobs were lost in 2020.” In addition to fewer jobs leaving, more came in. Most notably, Elon Musk announced this fall that Tesla will relocate its headquarters to Austin. In these two Texan cities, the self-fulfilling nature leads to success piling on and leading to more collateral success. Given the current market trends, this is the general expectation for outpost economies. With less people leaving and more people coming into the market that can be sustained by the success of their city’s microeconomy, demand goes up and so does the cost of properties within city limits.

Another secondary market to keep an eye on is Nashville. According to roofstock the value of homes in Nashville have increased by nearly 54% since 2016. The Music City has attracted many musicians, but lately has been a crossroads in the Midwest and South for tech workers. Startups have seen the potential of this city, which has led to young professionals moving there.

With a more decentralized economy, jobs and businesses will appear scattered across the United States. However, certain cities will experience a financial renaissance as young professionals flock to buy up or rent housing and wealthier corporations follow a few lengths behind, hoping to hire and establish outposts for a new target market.

As you look ahead to 2022 and beyond and consider where to invest the real estate portion of your pension funds, you may want to consider some of the high-growth secondary markets where the outpost economy is taking shape.

About the Author:
Ryan Swehla is Principal and Co-Founder at Graceada Partners, which specializes in value-add real estate private equity investment in California's fastest growing region, the Central Valley.  Swehla provides strategic direction and oversees capital sourcing for Graceada Partners’ portfolio.  He serves on Graceada Partners’ investment committee and focuses on strategic equity and debt relationships, leading Graceada Partners’ sponsorship of three real estate funds and prior syndications. Swehla’s insights on the real estate investing climate have been cited in Institutional Real Estate Americas, The New York Times, Forbes, Commercial Property Executive, REIT Magazine, Epoch Times and other publications. He holds CCIM and CPM designations and graduated from Columbia University with a bachelor's degree in Engineering and Management with minors in Finance and Economics.
Graceada Partners is a Vendor member of TEXPERSThe views and opinions contained herein are those of the author, and do not necessarily represent the views of Graceada nor TEXPERS. These views are subject to change.
Follow TEXPERS on FacebookTwitter and LinkedIn as well as visit our website for the latest news about Texas' public pension industry.
Share this post:

Comments on "How Texan Real Estate is One of the Biggest Beneficiaries of the Outpost Economy"

Comments 0-2 of 0

Please login to comment