Today there is a lot of talk about “comeback cities.” For commercial real estate investors seeking long-term value-add investments, these areas are prime markets to acquire new assets. Why? Because properties in these markets can be acquired at low initial costs when the market is in a downturn before being sold off for higher returns when the market goes back up.
Born and raised in Cleveland, Ohio, the original comeback city, this is something close to my heart. When Cleveland was hit by the loss of its steel industry and then suffered the blight which followed during the housing crisis we heard the term “Mistake On The Lake” being thrown around a lot. What’s funny is that term was something you heard more from the citizens of Cleveland than anyone else. It seemed that low expectations were coming from everywhere including branches of the local government, business communities, and the general population.
But around the beginning of 2009, we started to see a change. What followed was a development boom of luxury apartments in the urban core, a reinvestment in the city nightlife by many household names, and a slew of events coming to town including the 2016 Republican National Convention. And, when talking about comebacks and Cleveland, we must mention the rewards for our patience: an NBA Championship for the Cleveland Cavaliers and an ALCS Championship for the Cleveland Indians within the span of six months. But I digress.
Those of us who procured assets in these down markets, during the crisis, saw a large return following the development boom. But, it is not something unique to my hometown. Throughout the country, we’ve seen this trend emerge for cities in Midwest, East Coast, and Southern markets.
To identify if a commercial asset is in a potential comeback city, you will want to find a market which has lost at least 5%-15% of its population over the span of 7-10 years. Then you have to ask yourself whether or not the property’s location meets the following criteria:
- Is this a safe location? You will never be able to fill a rent roll for apartments, retail, or office space if the area has a high crime rate.
- Is the job market sustainable? If you want an investment to be worth your while, look for markets with a steady median household income. These markets allow you to attract good, creditworthy tenants.
- What amenities does the market provide? When we say amenities, we are talking about transportation, schools, and general city services. For the market to stay stable, the local government is going to have to work to keep their population.
If the property is in a location which meets these three requirements, then there is the potential for you to reap the benefits of acquiring property in a comeback city.
Although these changes will not happen overnight, a new set of migrants will come in to replace those who have left as city officials attract new industry. This, in turn, will create the need for housing and retail spaces to meet the demand of the new population.
When it comes to commercial real estate, there are no rules to what a property can be which is why properties in comeback cities can not only be profitable to your bottom lime, but fun to overhaul. This is something my hometown proved again and again. We saw a 100-year-old bank repurposed to house a large grocery tenant, an office building with 30% occupancy became 120 luxury apartments with a two-year waiting list, a dilapidated county building became a 189-room boutique hotel, and occupancy rates grew by 20% in just one year. This type of transformation can apply to any asset regardless of its size so long as the market has a need and the economy to sustain it.
So, when looking to purchase a property in the next comeback city, remember to look for the signs. Do you see corporate partners and city governments working together to create synergy and motivation? If the answer is yes, then it is time to start making deals. These groups will rebuild in small steps, which will give you the time to find the commercial real estate assets to meet your needs.