AMERICAS GC: Investing in tomorrow’s tech hubs

What is the best way to access real estate demand driven by growth in science, technology, engineering and mathematics employment? For MetLife Investment Management, one strategy has been to bypass the usual tech markets, and target the next generation of tech markets instead.

We believe that STEM job growth will continue to be one of the strongest drivers of real estate demand well into the future, as knowledge workers play an ever-larger role in the US economy. To gain exposure to this trend, investors have traditionally allocated heavily to core tech markets like Austin, Boston, Raleigh, San Francisco and Seattle. These large allocations increase concentration risk and the likelihood that poor performance in any one market may have a substantially negative impact on the overall portfolio. Our desire to minimize this risk without reducing our exposure to positive long-term trends in STEM job growth resulted in the creation of what we call the ‘NextTech’ markets.

The NextTech markets represent the next generation of emerging technology hubs. Often boasting strong university systems and lower costs of living, these markets typically exhibit a large base of STEM employment, growing at a rate well above the area’s employment base as a whole. Unlike the core tech markets, many of them also exhibit specializations in specific tech industries such as defense, robotics, or aerospace. By allocating to the NextTech markets as a group, investors can substantially reduce their concentration risk. Additionally, targeting specific NextTech markets can allow investors the ability to bet on the future prospects of specific tech-driven industries. Many of the NextTech markets, in some cases due to their less mature capital markets, can also offer substantially better pricing than those in the core. While cap rates in the core tech markets typically hover around 4.5 percent, according to data from NCREIF, those of the NextTech markets average upwards of 100-150 basis points higher.

MetLife Investment Management is not alone in recognizing the investment potential of markets such as Pittsburgh and Salt Lake City. In addition to early movers like private equity firms King Penguin and Lionstone, whose Bakery Square mixed-use project counts Google among its tenants, Pittsburgh has increasingly caught the eye of institutional investors such as UBS and major public real estate investment trusts like Kimco. Salt Lake City is also not short on big names, having drawn private equity players like Starwood Capital Group to its multifamily assets, as well as institutional investors like USAA to its warehouse market. Transactions volume in both of these markets has improved throughout the current cycle and so, too, has liquidity as their buyer pools grow more diverse.

Big Apple’s big driver

We believe that the approach used to create our internal list of NextTech markets will allow us to be among the first to identify both new tech hubs as they emerge, as well as markets where STEM job growth has become one of many potent drivers of real estate demand. A prime example of STEM job growth emerging as a significant driver is that of New York.

During the last three years, New York has been among the strongest producers of STEM employment in the nation, adding 22,000 jobs that fueled significant absorption of office and residential space and supported demand for retail and industrial assets. Our research, however, shows that tech job growth is not yet the prime mover of real estate demand in New York, even if some headlines may suggest otherwise. Several other large markets that produced strong STEM job growth, including Atlanta and Dallas, share a similar story. It is nonetheless clear that even in markets where STEM jobs remain only a small share of the economy, they are playing a more significant role in driving demand than in years past.

Whether an investor’s goal is to access strong labor market trends at favorable pricing, reduce concentration risk, or make strategic bets on specific industries, we believe the NextTech markets are well positioned to help them achieve it.