Mid-tier private real estate fundraising remains significantly dominated by North American firms; of this year’s PERE 200, 71 are headquartered in the US. But dig deeper and you will find signs of a widening spread of influence within the country.
No longer does Wall Street dominate US private real estate fundraising. Dynamic and growing cities such as Denver, Dallas, Nashville, Atlanta, Boston and Miami are demonstrating increasing pulling power when it comes to institutional dollars.
Of the 71 US-based firms on the ranking, 44 are not based in New York – or even Philadelphia, Chicago, San Francisco or Los Angeles. Moreover, six of the 10 top risers in the ranking operate from non-gateway markets, including Nashville’s Covenant Capital Group, which climbed 46 positions to 104. This January, the firm, which invests in apartments via a value-add strategy, raised $748 million for Covenant Apartment Fund XI, its largest vehicle yet. Another example is Atlanta-based Cortland, which rose 41 places to 136, thanks to $1.3 billion raised during the ranking’s catchment period.
“I would say: definitely yes,” says Jason Kern, president of investment management at Cortland, when asked if real estate capital markets in the US are becoming more geographically dispersed. “The age-old reasons for new talent entering the real estate industry to be based in large, global cities was to be as close as possible to the most transaction volume and the most experienced senior leaders in the industry. If one were to plot real estate transaction volume or industry senior leadership across the US today, the heat map would look a lot more dispersed than in years past.”
Shifting preference
New York retains the crown as the PERE 200’s top fundraising city globally. But its share of aggregate capital raised over five years has dropped to $15.4 billion this year, from $17.5 billion last year. Meanwhile, other US cities in the ranking’s top five, namely Chicago, Boston and Atlanta, each recorded year-on-year growth. Other outperformers included Dallas, where fundraising increased from $1.1 billion in 2022 to $3.3 billion in 2023; Miami, $710 million to $2 billion; and Denver, $1.6 billion to $2.3 billion.
This finding contributes to growing evidence of investors backing managers based outside of traditional finance hubs. It also correlates with growing investment appetite for secondary US cities over recent years, with many of these managers having localized investing programs.
In the 2022 International Investor Survey by association AFIRE, 71 percent of respondents said they planned to increase investments into secondary US cities over the next five years, with Boston, Dallas and Atlanta featuring among the top picks. The appetite has not wavered in 2023. High-performing secondary cities continue to attract investors, especially those seeking higher-returning investments in a rising interest rate and liquidity-constrained environment, according to research by property brokerage CBRE.
“There was a time when investors, especially foreign investors, would focus their investments on the larger ‘gateway’ US cities they understood better and which had the perceived benefit of deep institutional demand, and therefore superior liquidity, especially in downturns,” says Kern. “Many of these investors also started their US investment journey by investing in high-quality CBD office towers, which by definition were clustered in those gateway markets.”
Kern says this is no longer the case, particularly as weightings toward the industrial and multifamily sectors have proliferated. The appeal of Sun Belt markets has also increased with international investors. Dallas and Atlanta, for example, were among the top 10 most targeted US markets by cross-border investors in the second half of 2022, receiving inbound investments of $645 million and $499 million, respectively, according to CBRE.
With investor strategy and sector preferences undergoing a shift, Matt Hershey, partner at capital advisory firm Hodes Weill & Associates, says there has been a longer-term shift toward investing with, and in, vertically integrated operating companies as opposed to financial sponsors. “Operating companies are often based closer to their assets in secondary markets, especially for the multifamily and logistics sectors,” he explains. “Financial sponsors generally are located closer to capital sources, which generally congregate in primary markets.”
Post-pandemic benefits
Some of these markets also benefited from the pandemic-triggered changes in how we live, work and play, providing impetus for firms to relocate. In the multifamily sector, for example, Sun Belt markets of Nashville and San Diego lead the top 20 US markets for forecast rent growth over the next two years, at 6.8 percent and 6.7 percent, respectively, according to CBRE. Within industrial, Atlanta reached record leasing figures in 2021 and 2022, and outperforms most US metros with nearly 5.8 million square feet of new leasing in Q1 2023, according to Cushman and Wakefield.
“Industrial and residential are generally less urban or more broadly distributed across the US. This is also the case for other niche sectors such as storage and student accommodation,” says Hershey. “They are also less capital intensive, allowing organizations to establish themselves with a smaller initial capital base. This causes more of these businesses to locate in secondary markets and increases the probability that winners will rise up out of those markets.”
As investors continue hunting for yield while post-pandemic megatrends become entrenched, the map of the most sought-after US cities is undergoing a redraft. Gateway locations have long been the heartbeat of private real estate investing. But the rising prominence of secondary cities is challenging that concept.
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