CRE’s Next Big Thing: Innovation Centers March 25, 2016 | By Carrie Rossenfeld These emerging US markets are all attracting new businesses, residents and capital. What are these population magnets doing right? (From the 2016 Annual Review & Forecast Issue)

This is an HTML version of an article that ran in Real Estate Forum. To see the story in its original format, click here. Innovation is at the heart of any global market. Creating improved products, processes and technology is essential for any international player, and we have seen this innovation time and again in the primary American real estate markets. But as these markets become saturated and overheated, new markets are emerging—some on the outer rings of primary markets and others not as close in.One factor that has caused many of these markets to emerge is job growth, but not just any job growth. Amy Liu, VP and director of the Metropolitan Policy Program, recently wrote in her blog for the Brookings Institute that relentlessly chasing jobs can be costly; instead, it’s better for taxpayer dollars to be spent on strategic investments in public goods like research, training and infrastructure that support innovative firms creating good-paying jobs. “Only by boosting household incomes can regions stoke demand for local-serving industries like restaurants and retail, and create new jobs associated with them,” Liu wrote.In addition, each region has to play to its own strengths and not try to imitate hot tech markets like San Francisco and Silicon Valley if it doesn’t share their strengths, Scott Andes, associate fellow with Centennials Scholar Initiative, wrote in another Brookings Institute report. “Cities have unique technology competencies and pathways to venture capital.” Economic strategies to attract outside capital and bolster local funding should reflect those attributes and not simply default to what seems to have worked in the Bay Area.”With these unique strengths in mind, Real Estate Forum set out to explore what makes these emerging markets great, why people are attracted to them and how they’re impacting commercial real estate. SeattleSeattle is a very urban, downtown and livable community similar to San Francisco, only with a better cost of living, Berkeley Davis, director at RETS Associates—a national commercial real estate recruiting firm, in Seattle—tells Forum. “Because of the spur of development over the past several years, a lot of trendy submarkets have evolved that are walkable and transit oriented. For the growing number of working Millennials, this is a very attractive lifestyle.”Davis says a major component that makes Seattle attractive to employees in CRE is the culture. “Museums, shows, music and arts venues are all very affordable and accessible. This is a desirable element that stretches across all generations.”Seattle is also a tech-focused city—second only to Silicon Valley—which greatly influences the CRE community and results in a relatively high number of companies that promote flexible hours and working from remote locations. “One of our clients in Seattle has approximately 50% of its workforce in the office on a daily basis—the rest work from home,” says Davis. This is extremely attractive to Millennials and Gen-Xers with small children or those who do prefer to live further out in the suburbs.”Seattle has become so popular that available homes are growing scarce. According to RealtyTrac, due to Seattle’s growing economy, high in-migration and limited housing supply, “it’s no surprise that our market has a low number of vacant homes relative to the national average,” writes Matthew Gardner, chief economist at Windermere Real Estate in Seattle.One of the fastest-growing areas of Seattle has been South Lake Union. It began with the Fred Hutchinson Cancer Research Center’s relocation to the market in the late 1980s and continued through Amazon.com’s relocation of its urban campus in 2007, which spurred many like-minded businesses to move to the area, Lori Mason Curran, real estate investment strategy director for Vulcan Inc., tells Forum. Between 2010 and 2015, Vulcan delivered 2.7 million square feet of office space to the online retailer in South Lake Union, and soon the neighborhood became a hub for innovation and collaboration across companies and sectors.“Soon, start-ups, life-science and tech companies were relocating to South Lake Union because of its unique atmosphere,” says Mason Curran. “In 2014, South Lake Union was recognized as one of seven innovation districts in the US by the Brookings Institute,” which defines the term as geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators and accelerators. “They are also physically compact, transit-accessible and technically wired, and offer housing, office and retail.”Mason Curran expects to see more major employers moving into the neighborhood. “While there has been a strong focus on commercial office and life-science research facilities in the past decade, the amount of residential development is increasing. In the 1990s, there were fewer than 500 units of (mostly subsidized low-income) housing. Today, there are about 6,500 units (complete or under construction), including about 25% workforce/affordable housing, with several thousand more units in the pipeline.”South Lake Union is now where many of the city’s young, well-educated newcomers are concentrating, elevating the neighborhood to number one in Seattle for population growth, she adds. “Several hotel developers are also proposing hospitality uses.”Vacancy in many property sectors is low in Seattle, which is causing a lot of development, specifically for multifamily and office, says Davis. “Most of these projects will be delivered this year or next. Then the head of development will most likely settle, with few new construction starts. It’s a cautious but optimistic market, and we anticipate there will be continued job opportunities.” Portland, ORPortland is less than a three-hour drive from Seattle, but has a different vibe and therefore attracts a different crowd, Davis tells Forum. “The city has a little slower pace; it’s a less urban and has a bit of a free-spirited vibe inside and outside of the office. This is the location that is attractive to Millennials who seek a relaxed environment that is still rich in culture. From a quality-of-life standpoint, Portland is very attractive.”Adam Lewis, regional manager for Marcus & Millichap, tells Forum that Portland continues to rank among the top 10 fastest-growing metros, competing with other West Coast locales such as San Jose and San Francisco, but at a much lower cost of living. “It also benefits from its proximity to some of the best outdoor activities and scenescapes in the country. Mixed-use development throughout the urban core is barely keeping pace with population growth, as the aptly named ‘Silicon Forest’ continues to draw talented Millennials to its growing community of tech firms.”Lewis adds that decades of urban planning have created a desirable city with vibrant communities and protected natural areas. “Forward-thinking community leaders established the Urban Growth Boundary and Metro, which set the stage for Portland to become the jewel it is today. The city continues to invest in its residents’ quality of life, green development and transit improvements and attract businesses that will only increase its growth and appeal.”Employment has been growing exponentially in Portland, too. Asim Hamid of the Praedium Group recently told Forum’s sister publication, GlobeSt.com, “We’ve witnessed a recent explosion of jobs in Portland, particularly within the tech and consumer product sectors.” He cited Intel Corp. and Nike, both of which employ thousands in the area and are expanding. Oakland, CATraditionally out of the limelight that its neighbor San Francisco enjoys, Oakland is beginning to be recognized in its own right. Christopher Economou, regional manager for MMI, tells Forum that Oakland shares a lot of similarities with San Francisco’s South of Market district before it became one of the most highly sought areas in the country. “What makes Oakland an innovation district and population magnet is its greater economic diversity than SOMA’s. Oakland also benefits from the Bay Area’s unique culture that supported San Francisco’s tech boom and which attracts people today.”Economou says the entrepreneurial spirit that lifted San Francisco in 2010 recognizes Oakland as the next area of innovation. “Millennials are flocking to Oakland to take advantage of employment opportunities, comparatively lower rents to San Francisco’s and convenient transportation. Simply put, people are drawn to the vibrant energy, cost effectiveness and culture.”Kent Elliott, a principal at RETS Associates, tells Forum there is a growing attraction to living and working in the East Bay, the larger region in which Oakland is located. “The piece that makes the East Bay desirable to candidates is that the overall family situations—cost of living, open and private space, better choice of schools, etc.—are better in the suburbs of the East Bay compared to the dense city. With development on the rise in the East Bay, we’re anticipating a continued attraction to the region from all levels of employees.” San DiegoElliott says San Diego ranked the most desirable city to live in per the results of RETS’ survey of the top 10 western markets, completed in the fall of 2015. “The primary driver for employment in San Diego is the quality of life, followed by the weather and the abundance of space that balances the dense city. From our experience, people that usually move to San Diego stay in San Diego. It’s a tight-knit city with great companies, opportunities and culture. Many companies search for candidates that are locals and know the market well.”He adds that there is a not a tremendous amount of activity in San Diego, so the number of available mid-to-high-level positions in commercial real estate is lower than in cities like Los Angeles and San Francisco. “When these positions do surface, they’re typically paired with a great opportunity so the hiring company can secure a high-quality candidate.”There’s a lot to be optimistic about given the solid 2015 that San Diego just experienced, Michael Combs, research manager for CBRE, formerly with the San Diego Regional EDC, recently told GlobeSt.com. “The region added the most jobs in 16 years, led largely by innovation economy jobs. Investment trends were very positive, and a healthy flow of capital is essential to our innovation economy. A recent study by the Martin Prosperity Institute found that San Diego received the sixth most venture capital investment in the world, ahead of global cities like London and Paris. There are a lot of signs that the region isn’t going to slow down significantly in 2016.” Not bad for a market that was once heavily reliant on the defense sector for its income.For Stacey Pennington, urban planner for Makers Quarter in the East Village area of Downtown San Diego, the market’s rise began with UCSD decades ago, when the city recognized the importance of creating a university presence in La Jolla and worked out a very beneficial deal with the school. “Pueblo land was given to UCSD at a discounted price, and it flourished into its own innovation cluster, becoming an internationally recognized hub for biotech and related industries,” she says. “It’s spurred a lot of clusters throughout the region.”Today, Pennington says, San Diego is #3 in the US for life sciences and attracts more than 60% of the region’s venture capital. It’s home to over 600 life-science firms and more than 80 research institutes. “That kind of density and cross-fertilization between education, research, innovation and entrepreneurship is tightly intertwined.”The region is also home to more than 1,200 sports and active-lifestyle companies, particularly in the North County coastal area, which employs more than 20,000 people and generates $2.24 billion in economic impact to the region, says Pennington. It also boasts a huge cleantech presence, is #1 in solar installation nationwide and was highlighted by the National Geographic Channel as a Smart City. And San Diego is #1 in telecommunications in the US, and its cross-border relationship and proximity to R&D hubs in Mexico has caused Downtown San Diego to be the center of a megaregion, rather just than the southern edge of the city of San Diego. “That’s the transition point between the regional story and the story of Makers Quarter, in many ways,” says Pennington.Indeed, Makers Quarter, a new and developing urban district in the East Village, is a big part of that submarket’s success story. A new development hub for apartments, education, retail and eventually one million square feet of office—all punctuated by a distinct arts and cultural presence—Makers Quarter aims to capture the innovation vibe that exists in other parts of San Diego and create a unique neighborhood to attract talent and companies.While much of the development and redevelopment in the Downtown San Diego market has been residential, that looks to be changing. Kris Michell, president and CEO of the Downtown San Diego Partnership, recently told GlobeSt.com, “I’m hearing that development is skewing toward commercial. For the first time, we’re having discussions with developers who want to build spec office Downtown, not just build-to-suits. I think over the next few years you’ll see more commercial construction here.”Salt Lake CityAlthough not on many CRE executives’ radar screens yet, Salt Lake City is growing in recognition. Recently, Vestar, in a joint venture with funds managed by Oaktree Capital Management LP, acquired a 625,205-square-foot, open-air retail and entertainment center within the Gateway in the heart of Downtown Salt Lake City. The buyers plan to invest $30 million in revitalizing and rebranding the center to attract an eclectic mix of national and regional retailers catering to the “vibrant, multicultural landscape of the Salt Lake Valley,” according to Vestar.Regarding the acquisition and choice of market, David Larcher, president of Vestar, says, “Salt Lake City is undergoing a dramatic transformation, rapidly attracting Millennials and entrepreneurial firms in the private sector, including technology and finance.” He added that Salt Lake City is one of the leading areas for educated urban professionals, and the firm’s goal is to “create a social hub that offers an unbeatable retail mix, full range of dining options and broad array of entertainment.”Larcher tells Forum Utah officials created an economic environment that is inviting to businesses, particularly in tech sector, that are considering a relocation of their headquarters, earning Utah the name “Silicon Slopes.” The city itself is “ideally situated minutes from world-class outdoor activities, such as skiing, hiking, mountain biking and watersports on area reservoirs, which makes it an appealing place for potential employees to relocate.” The city also gained extensive positive PR during the 2002 Olympic Games, known as one of the best-managed Olympics in recent years.Moreover, as global corporations including Goldman Sachs create “campus” locations in the heart downtown, employees, particularly Millennials, are looking for urban living opportunities, says Larcher. “To accommodate this growing interest and housing need, thousands of residential units have been, and are currently being, built throughout Salt Lake City’s diverse patchwork of neighborhoods.” DenverLong appealing on the regional scale, Denver’s expanding economy, surging Millennial-age population and fast-growing innovation and high-tech scenes have helped land it square on the radar of investors and users alike, JLL research manager TJ Jaroszewski tells Forum. “To support an expanding population, Denver has regularly chosen to invest in infrastructure. Beginning in 2016, the regional public transit authority will add almost 70 miles of commuter and light rail lines, including the long-anticipated airport corridor—a direct connection between Union Station and the airport.”At 3.1%, Denver also has the nation’s second-lowest unemployment rate, trailing only Salt Lake City, Jaroszewski adds. Denver payroll levels measure 10% above pre-recession peak employment and average job growth here is outpacing the national level by a multiple of 1.5. Employment gains have been broad; led by construction and education and healthcare, all major sectors except information have added jobs in the past year.Affordability is a big factor in population magnets, particularly among Millennials. Origin Capital Partners senior associate Jared Friedman tells Forum, “It’s extremely affordable to live here. A lot of the companies have followed the Millennials and set up shop in Denver because one of the hardest things to do is attract good talent.”Elliott says, “Denver was the second most-desirable city in our western cities survey. The major employment drivers are the accessibility to outdoor activities and high quality of life. This is attractive to candidates across all generations and has allowed companies to attract talent from other primary or secondary markets.”One of the firms banking on Denver is DISH Network, which recently announced plans to open a software-development office Downtown and expects to add up to 100 new technology jobs at the location. The initiative is part of DISH’s expansion of its in-house software development capability to support its products and services including the Hopper DVR platform and Sling TV, the first live and on-demand Internet TV app. According to Colorado Gov. John Hickenlooper, “DISH has continued to invest in Colorado since its founding in 1980, employing more than 4,000 employees across the state today. This step not only helps expand its presence, but it also gives another meaningful boost to Colorado’s thriving tech community as we welcome a new neighbor Downtown.”Austin, TXAustin is a very dynamic market, Rick Gillham, president of Gillham, Golbeck & Assoc. Inc., a real estate executive-search firm in Texas, tells Forum. “The real estate talent there is very strong, but the talent pool is very shallow. From a tech standpoint, there’s a lot of activity and growth resulting in a continued demand for housing. With continued development, especially in multifamily, the city is nearing a tipping point between having more real estate or construction jobs than people to fill them.”Gillham adds that the quality of life in Austin is desirable to Millennial and Gen-X candidates. “Many companies in Austin place a strong value on a balance between life and work—so much that if one company does not have that same emphasis, they will lose talent to the company that does. Candidates here are very passionate about that balance. From our experience, we’ve offered candidates the opportunities to relocate, and if we receive a ‘yes,’ it’s most always accompanied by the stipulation ‘if the relocation is to Austin or Denver.’”Austin’s thriving economy continues to add good, well-paying jobs for a range of skill levels, while the cost of living remains well below other growing metros, Craig Swanson, regional manager for MMI, tells Forum. “A popular entertainment scene, highly educated workforce, a warm climate and vibrant local culture attract people seeking a compelling lifestyle. The city’s continued investment in creating a meaningful way of life will make Austin an in-migration destination for years to come.” Plano, TXLocated 20 miles from Dallas, Plano has become a population magnet due to its access to an educated employment base and talent at very reasonable wage levels, says Denton Walker, senior managing director within Trammell Crow Co.’s Dallas-Fort Worth business unit. In October 2014 TCC delivered the first phase of Legacy Towers, a two-phase office project in Plano that is considered the gateway to Legacy Business Park, a 2,600-acre master-planned business, retail and residential community located along the Dallas Tollway. The park has more than 16 million square feet of headquarters and regional office space and has attracted 18 top corporate firms.Walker says Plano’s infrastructure is exceptional; the restrictions in place protect the zoning and design quality, which ensures long-term value. The city is located within 25 minutes of DFW and Love Field airports; it offers very accessible amenities to its residents; its school district is blue ribbon; and region’s stock of affordable housing is very good. “The City of Plano is great to work with. The mayor sets a standard of excellence that extends to the staff of Plano and throughout the city.”Additionally, Plano is home to a number of global companies that selected the city as the smart place for business, says Walker. “Visionary companies quickly discover that Plano’s smart workforce is key to their success.” He adds that with a population of more than 271,000, Plano is a prosperous place, and the location will only get better.The market also offers a highly educated workforce: 54% of adults hold a bachelor’s degree or higher, which is twice the US average. It’s also been ranked as the third-hardest-working city in America and the 10th best city to find a job, according to WalletHub. And in the next 24 months, says Walker, Legacy Towers will bring more than 21,000 new jobs to Plano. MinneapolisMinneapolis has always had an allegiant and highly educated workforce, John Carlson, a principal within TCC’s Midwest business unit, tells Forum. “As employers learn how committed Minnesotans are, they deepen their corporate commitment to the market, which is why there are 17 Fortune 500 firms headquartered here. More importantly, these companies, as well as the metro area economy in general, are very diverse.”Despite Minneapolis being one of the hardest markets to convince someone to move to, it’s also among the most difficult to make someone leave, Carlson says. “This helps to illustrate the quality of life in here. There’s an active employee base, great public schools and infrastructure, a balanced state budget, great cultural resources, successful companies and great places to live.”Grady Hamilton, managing director in TCC’s Midwest business unit, relates that the economic diversity helped to drive Minneapolis-St. Paul’s unemployment rate in Q42015 to the lowest among all major metropolitan areas with one million or more in population. “This is a function of the deepening technology industry, the long-consistent medical technology industry and creative-class professions that have grown to meet the needs of the large corporations that are headquartered in the area.”As an example, Hamilton says tech salaries in the metro area increased 9% in 2015, the third-highest percentage increase among all US markets, behind only Los Angeles and New York. “The influence of the growing tech sector has opened new submarkets in which developers and investors can meet demand.” NashvilleNashville, one of the country’s 18-hour cities, has far more to offer than just music—and people are catching on. “When you combine strong job growth in a variety of employment sectors—including healthcare, entertainment, real estate, tech, education and government—with a unique culture recently popularized by the television show Nashville, people move to your city,” MMI regional manager Jody McKibben tells Forum.Panattoni Development Co. has recognized what Nashville has to offer. The firm has built 500,000 square feet of class A office space on Music Row since it entered the market in 1998, director Whitfield Hamilton tells Forum. “Historically, Tennessee has been one of the largest states outside of California for us, and as the company grew Nashville became a very large market for Panattoni. We entered the market because we realized there was an emerging industrial market here.”From music to healthcare to automotive manufacturing—Nissan’s North American corporate headquarters relocated there from California nearly a decade ago—a diverse range of industries calls Nashville home, and the influx has picked up steam in the past five to 10 years, says Hamilton. “Office and finance jobs are strong—Nashville goes back 100 years as a regional finance center. It’s a good, strong headquarters for state banks; some merged, but homegrown local banks are doing extremely well. The cost of doing business can’t be beat and the finance community is the cornerstone of the economy here.”Hamilton says construction is huge in the region as well, and Bridgestone’s North American headquarters and two divisions of HCA are moving to Nashville. “How many cities have two 600,000-square-foot headquarters at the same time?” Raleigh, NCPart of North Carolina’s famed Research Triangle, Raleigh’s growth has been hugely influenced by local universities and medical systems. Washington, DC-based Federal Capital Partners has been investing in secondary cities up and down the East Coast, and Raleigh in particular has been a target for the firm. Bryan Kane, VP for the Carolinas, says FCP’s investments have been concentrated in locations that are either positively impacted by the universities—including such properties as West Village, Erwin Square Plaza, Venable Center, Level 51 Ten, Stanhope, Glen Lennox and Forty540—or the urbanization that appeals to Millennials (including Dartmouth, Midtown Green, Allister, West Village, Venable and Dillon Supply).“Much of the innovation is driven by the strong universities and their medical systems along with Research Triangle Park,” says Kane. “The strong job market, quality of life and reasonable cost of living make it an attractive place for people to relocate.”Kane adds that existing jobs are very stable due to the significant presence of state government, healthcare and universities, as well as the tech and creative industries. “We expect the area to continue to become more urban, with ongoing job and population growth. Our investments in Downtown Raleigh projects such as Dillon Supply”—a JV redevelopment project with Kane Realty Corp. of the 2.5-acre Dillon Supply site in the Warehouse District—“reflect the demand generated from this trend.”New Jersey’s Gold CoastThe Hudson Waterfront, sometimes called the Gold Coast—an urban area of northeastern New Jersey along the lower reaches of the Hudson River, the Upper New York Bay and the Kill van Kull—became a population magnet because of great public transportation linkage to the job engine that is New York City, Brian Whitmer, senior director-capital markets for Cushman & Wakefield, tells Forum. “With the PATH, light rail, water ferries and NJ Transit, there are multiple ways to get to your job in the city, with a commute that rivals being in New York City itself. With the cost of housing being one-third to one-half less expensive than NYC and the surrounding boroughs, there’s a big value proposition to living between Fort Lee south to Bayonne. Plus, the high quality of living and entertainment along the Gold Coast is very appealing.”Lloyd Goldman, founder and president of BLDG Management, reports that major employers, including Goldman Sachs, have made the move across the river, creating a live/work/play environment that rivals the best of Manhattan or Brooklyn. “The Gold Coast is able to contend with nearby NYC markets because of the optimal cost of living.” For example, luxury renters at the One—BLDG’s high-amenity luxury apartment complex along the Jersey City waterfront—“don’t have to sacrifice space or amenities at the expense of higher rents.”The expansion trend along the Gold Coast will only continue over the next decade, Elie Rieder, CEO of Castle Lanterra, tells Forum. Late last year, the firm acquired the 544-unit Harbor Pointe apartments for $147.5 million. “While the urban core markets along the Gold Coast will see redevelopment, there will also be an expansion into new markets in the southern part of the Gold Coast, specifically Bayonne, which offers one of the last large, completely vacant, land parcels master-planned for urban mixed-use development.”Long Island City, NYThe westernmost residential and commercial neighborhood of the New York City borough of Queens, Long Island City is increasing in popularity largely because of rising residential rents in other parts of the city—especially for Millennials, who are driving the area’s resurgence. This cohort is also attracted to the “cool factor” of living among former industrial buildings, brought about by the decline of the industrial economy both nationally and locally.Elizabeth Lusskin, president of the Long Island City Partnership, says LIC is home to Fortune 500 companies, world-renowned arts and cultural institutions, award-winning restaurants and prominent film and television studios; has a large industrial base and nascent tech sector; and now thousands more residents, creating a great synergy. “The workforce in LIC is dynamic and ever-changing, and you’ll often find these companies using each other for products and services, leveraging each other’s technology or expertise, or networking after hours in LIC’s breweries and eateries. Meanwhile, more and more of the residents also work in the neighborhood, take advantage of the amenities it has to offer and raise their family there.”Real estate players have been eyeing this emerging area. Last November, a partnership of Drake Street Partners, Normandy Real Estate Partners and GEM Realty Capital bought 47-37 Austell Pl., a four-story office-warehouse, for $35 million. Normandy principal Travis Feehan tells Forum, “Generally, we think formerly secondary markets within CBDs such as LIC will continue to grow in popularity as the Millennials workforce ages, amenities increase and hopefully transportation access improves. Within LIC, you have 20,000 new residential units expected over the next five to 10 years, which will have a drastic impact.”Commercial tenants have also been flocking to this market. Brian Waterman, vice chairman of NGKF, says that the tech, advertising, media and information (TAMI) sectors have seen the fastest rate of employment growth in New York City, with a 26% increase in jobs since 2010, far outpacing the 9% increase in FIRE employment during the same time. “Last year, TAMI tenants accounted for 64% of leasing in Midtown South, and they’re likely to continue driving demand since they comprise the largest percentage of tenants in the market for space, at 31%. With tightening supply and soaring rents in Midtown South, the rapidly expanding TAMI sector is finding Long Island City’s repurposed industrial buildings at a much lower price point.”While trendy tech centers like San Francisco, Seattle and Denver hogged the spotlight in 2015, this year the markets that shine brightest will be those that manage to strike a good balance between strong income growth, low unemployment and solid home value appreciation, Zillow’s chief economist Dr. Svenja Gudell recently told GlobeSt.com. “As the job market continues to hum and opportunity becomes more widespread, the best housing markets are no longer limited to the coasts or one-industry tech towns. This year’s hottest markets have something for everyone, whether they’re looking for somewhere to raise a family or start their career.”