Tech-driven analysis reveals opportunities in primary cities

In the ever-changing real estate arena, investors need to stay abreast of which property sectors are performing well and which are facing headwinds. But it is often not that simple. The office market may be hurting in one city but outperforming in the next. Retail market fundamentals could be faltering in a central business district while demand for high-quality industrial and logistics space there keeps rents climbing.

As they say, all real estate is local. And that is why global property investment firms, fund managers and advisers are continually scouring data to get an edge in finding the best property markets to invest in or to direct their clients toward.

A tech-fueled analysis of the data shows that many property sectors in primary gateway cities are continuing to garner interest from occupiers and investors.

Commercial real estate investors favored opportunistic strategies and were showing a preference for secondary markets earlier this year amid concerns about higher interest rates and tighter financial market conditions, according to findings from CBRE’s US Investor Intentions Survey. However, the outlook is expected to improve towards the end of the year as inflation should fall and interest rates begin unwinding, according to JLL’s Global Real Estate Perspective report.

In another report, the global brokerage notes that many CBDs are ripe for reinvention. JLL’s The Future of the Central Business District shows that major global cities could reposition aging office product amid shifting demand, especially in the US where the ongoing prevalence of remote and hybrid work has kept many offices empty. Traditional CBDs face competition from new mixed-use neighborhoods, and a collaboration between real estate investors, developers and local governments could lead to the addition of hundreds of thousands of much-needed residential units, according to JLL research.

There are many themes emerging in how investors and advisers go about picking which global cities to target.

Tech uncovers opportunity

Amid the challenges of today’s real estate market, investors are rethinking their approaches. While some are revisiting major cities, others are exploring smaller tertiary cities. Technology continues to play a central role, along with digitalization, machine learning and data analysis tools, in reshaping the industry.

One such tool is the Amenities Magnet by Patrizia, which leverages spatial data to assess property values based on external factors like parks, schools and industrial zones.

These and other factors are categorized and the tool assigns a score to reflect the quality of life in a given location. A higher score signifies a more appealing locale as renters are willing to pay more for properties near such amenities.

Additionally, the tool analyzes historical data, providing insights into the evolution of locations over time, which proves invaluable for long-term investment decisions.

It is a long-held belief that larger cities tend to offer more amenities. Yet, data analysis shows that cities with lower household densities can experience a more pronounced increase in amenities over time. A data-driven strategy is essential as investors navigate diverse city tiers, emphasizing the fusion of local expertise with data-driven decision making.

Such a data-focused analysis helps reduce uncertainty from an investor’s perspective, explains Marcelo Cajias, head of data intelligence, investment strategy and research at Patrizia.

Data drives decisions

Investors continually rely on data to discern the drivers of global real estate performance in identifying promising cities for future investment.

One method entails an intricate screening process that factors in metrics including city size, stability, population growth, connectivity, quality of life and cultural aspects, then using that data to compare cities and find resilient prospects for potential investment opportunities.

Using external or in-house data sources to assess market risks and opportunities allows managers and advisers to make agile investment decisions about which cities to target for investment.

Global cities across the world are rebounding since the onset of the pandemic. For example, Tokyo, Osaka, Sydney and Melbourne are experiencing population growth due to various factors, according to Nuveen.

In the US, Nuveen’s gaze has shifted from previously popular Sunbelt cities to more promising urban centers like New York and Chicago, having identified 35 “tomorrow’s cities” for their investment focus. San Francisco, a thriving AI hub, may hold promise due to the flourishing tech sector there.

Nuveen also keeps a keen eye on resilient European markets, like German cities with below-average office vacancy rates.

Still, in cities around the globe, local governments need to adapt to remote work trends and focus on crafting dynamic, cost-effective living environments, notes Donald Hall, global head of research at Nuveen.

Granularity gains momentum

Participants in the logistics and light industrial sectors have seen rising rents and increasing demand that has only recently started to slow.

But a growing emphasis on sustainability, combined with the still booming e-commerce sector, has led to a heightened demand for last-mile logistics spaces and urban industrial buildings. The expansion in inner-city logistics and industrial property sectors hinges on granularity – smaller building sizes and a diverse tenant base.

This trend has paved the way for opportunities in top-tier urban logistics and light industrial properties, according to the real estate investment management group at Edmond de Rothschild.

The firm displays a preference for prominent German cities like Berlin, Hamburg and Munich, as well as regions around Paris and Lyons in France.

Reshoring and decarbonization are enduring trends shaping the future of inner city logistics, and sustainability is set to become a pivotal distinguishing factor in real estate valuations.

Theo Soeters, head of fund management at Edmond de Rothschild, predicts the industrial sector will face the same flight to quality as downtown offices, and the same risk of stranded assets.