Once viewed as a sector ignored by the venture industry, real estate tech (PropTech) has now become front and center, most notably producing two of the seven most valuable startups in the United States, WeWork and Airbnb. The housing market has plenty of momentum, and second-tier cities are finally having their moment.
The driving force behind this investment explosion is the evolution of real estate tech. It has evolved from its initial phase of software and small players to a new era where tech-enabled startups are going head to head against the sector’s largest incumbents (hotels, commercial landlords, brokerages) and consuming massive amounts of investor capital.
Tier 1 cities are ones with an already established real estate market. They tend to be highly developed with desirable schools, facilities, and businesses. They also have the most expensive real estate. Tier 2 cities, by comparison, are still in the process of developing their real estate markets. These cities tend to be up-and-coming. While many companies have invested in these areas, they haven’t yet reached their peak and real estate is usually relatively inexpensive.
As tier 2 cities continue to expand, investors are looking at them when deciding where to go with their money. Curbed consulted a number of experts, including Urban Land Institute (ULI), RCLCO Real Estate Advisors, Zillow, Trulia, and Realtor.com in order to find the fastest-growing and most dynamic markets in 2018. “The findings showed a need for a new philosophy on assets, now that technology is a vital part of doing business… It’s not about renting out square meters anymore. It’s about providing a service”, according to Urban Land Institute Europe Chief Executive Lisette van Doorn.
However, she points out that secondary does not necessarily mean smaller. Investors will always go to the biggest markets, but they are also going to look at cities trying to create sustainability, vibrancy and a good infrastructure. Places that are good at attracting talent and businesses can put themselves on the map. There is also less overbuilding in these cities, which makes investors happy because they want to enter markets noted for economic growth potential.
Another reason second-tier cities are becoming hotter is supply and demand. The “Emerging Trends in Real Estate, Global Outlook for 2018” report identified a lack of product for active investors. There’s too much capital and not enough assets. This disconnect between the sheer volume of capital and the lack of opportunities has led to investors getting involved in properties earlier in the development process. Landlords are now joining startups driven by younger, innovative companies in order to get a better hold on technology. For example, Blackstone made a deal to buy a majority stake in London-based The Office Group and the Blackstone-owned EQ Office now has a license agreement with Industrious.
While each second-tier city has different strengths and upsides, they all present unique opportunities. Austin, for example, is known as the “city of the eternal boom”. Local firm Indeed.com plans to lease space in an 11-story tower, which has attracted job seekers and prospective buyers/renters. In order to meet these needs, new construction like The Independent is being built. Dallas has added 717,000 jobs since 2010, and recent corporate relocations, such as Toyota, suggest more companies see a bright future there. Outside of Dallas, huge developments in the $5 Billion Mile confirm the scope of this Texas-sized expansion.