Tech, Energy Firms Lift Real Estate Markets

Investor's Business Daily

Growth in the technology and energy industries is adding extra pop to the commercial real estate rebound in the biggest U.S. cities as well as smaller ones.

While New York and Los Angeles continue to rack up the highest dollar volumes of transactions, tech-heavy centers like Seattle and San Jose, Calif., are seeing some of the fastest growth rates.

The energy boom is heating up demand in Austin, Texas, which is also a tech hub. Elsewhere in the energy-rich state, Dallas and Houston have slower growth rates, but they were enough to lift the dollar volumes above Boston's last year.

And in Manhattan, technology and media companies are filling up commercial real estate that law firms and financial companies are vacating, said Marisha Clinton, capital markets research director at Jones Lang LaSalle.

The provider of real estate and investment services says Seattle drew 138% more transaction dollars in 2012 vs. 2011 for commercial properties worth $5 million or more. Austin leapt 131%, and San Jose jumped 105%.

By comparison, Manhattan rose 25%. Los Angeles, with some help from tech and financial services, saw 48% growth and topped the nationwide average of 27%.

U.S. sales volume is expected to grow about 15% this year to $271 billion, the most since the peak of $425.2 billion in 2007.

That improvement includes apartments, which have been in higher demand as Americans remain less willing or able to buy homes.

Job creation is gradually picking up too, and as Yahoo's (YHOO) recent decision to limit telecommuting showed, companies still find value in having employees in the same building.

Meantime, tech and energy companies aren't just driving sales of real estate for server farms and drilling. Their activity boosts demand for multifamily housing, warehouses and offices as well.

Online retailers like Amazon (AMZN), for example, are snapping up distribution centers to fill orders around the country.

"They need a lot of warehouses," Clinton said. "E-commerce has benefited industrial property.

While different property types benefit, tech's presence in places like Seattle and Northern California is clear. When Jones Lang LaSalle looked at properties traded over the last 12 months, the occupants have been tech firms, Clinton explained.

More funds are available for deal making too. In search of higher yields, institutional investors are pouring money into top commercial properties.

Pension funds and overseas sovereign wealth funds are also piling in, real estate investment trusts are raising record amounts of capital, and commercial mortgage-backed securities are recovering.

The additional funds have increased competition in top-tier cities, where the availability of high-profile "trophy assets" is limited. That's sending more investors to prime real estate in smaller cities, Clinton said.

Foreign capital going into U.S. commercial real estate is climbing too. Last year, cross-border transactions rose about 11% to $27 billion, with this year shaping up to increase another 15%-20%.

Houston shows that while the city is known for the energy industry, investment has been widespread.

Medical firms and companies relocating from higher-cost states are contributing to demand, said Darrell Betts, a Houston-based principal at commercial real estate services firm Avison Young.

"All property types in Texas are extremely competitive," he said, including multifamily, office, retail and industrial.

New construction is also improving, and the development of a nearby corporate campus for Exxon Mobil (XOM) is boosting residential activity, he added.

Foreign capital is leaving its mark too, and Betts sees the increased availability of flights to the Middle East and Asia as a sign of that.

"I've never seen this level of foreign investment in Houston over the last 27 years," he said.

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