Is Triangle real estate now a ‘core’ market?

Is Triangle real estate now a ‘core’ market?
By Lee Roberts – Managing Partner of SharpVue Capital
Aug 5, 2022

Everyone knows that Triangle real estate is booming, and transaction activity remains strong even as the economy cools. I suspect that this economic cycle may also help to redefine how institutional investors think about real estate markets.

The prevailing wisdom among institutional real estate investors has been that the U.S. is segmented into “core” and “secondary” markets. A “core” market is one in which a large institution can be comfortable owning assets across cycles, while a “secondary” market is seen as one to which an investor might commit capital but not the bulk of its real estate allocation, and perhaps not for the longer term.

In this taxonomy, global “gateway” markets like New York, Chicago, Washington, San Francisco and Los Angeles are “core.” This might include Atlanta and Miami in the Southeast, although investors differ in their views. Markets like Raleigh, Charlotte and Tampa are “secondary” to many who see them as more volatile and less liquid.

Yet these investors must now reconcile two factors. First, they have seen how the fast-growing markets of the Southeast perform during both a global financial crisis and a worldwide pandemic: They continue to grow. Indeed, the data show conclusively that the growth of Southeastern markets actually accelerated during both events.

Second, the traditional core markets have suffered more than expected. Office landlords in Chicago, San Francisco and Los Angeles are beginning to worry that their investments may not be as safe as originally assumed, as these markets suffer from a drop in office demand and outward migration.

Over time, this may result in even more capital flowing into our region. While we have seen unprecedented inward capital flows in recent years, the Triangle and most other Southeastern markets still do not attract major capital allocations from significant international sovereign wealth funds, foreign pension funds or global insurance companies.

A related shift relates to a “core” location within a given geographic market. Duke Energy’s decision to sign a long-term lease in Charlotte’s Optimist Hall project is a good example.

The project is a renovated textile mill in a trendy, emerging area adjacent to light rail, outside of the central business district and not what would have been considered an obvious location for an $80 billion utility.

This trend is occurring around the country. In New York, HSBC is moving its U.S. headquarters to a new tower on the far west side of Manhattan, a location that previously would have never been seen as a headquarters location for an international bank.

In addition to a hip location, the bank reportedly was attracted to the green amenities of the new building, such as advanced air filtration. The lower carbon emissions of new buildings also help tenants comply with their environmental goals, with HSBC noting that its new headquarters will enable a 60 percent reduction in energy consumption.

Meanwhile, the building that HSBC is vacating is in midtown Manhattan on Fifth Avenue, traditionally thought of as one of the best locations in the city. It sold in December 2021 for a $45 million loss compared to the seller’s original purchase price of $855 million. That seller, when buying the asset, probably thought it was acquiring a “core” asset with a blue chip tenant in a fortress location.

It will be exciting to watch the Triangle benefit from both trends.

Lee Roberts is the managing partner of SharpVue Capital in Raleigh.