In times of economic headwinds that have permeated all sectors of commercial real estate, investors and developers are increasingly turning to previously overlooked smaller markets to stay active or even grow.
And the coastal areas and the Sun Belt are not the only regions where they are willing to place their capital. The secondary and tertiary markets in the Midwest are bringing a number of advantages that have the potential to change the way investors look at new ventures. One company looking to take advantage of these benefits is Hines, which recently announced a joint push into the Midwest.
We asked Senior Managing Director Will Renner to talk about the company’s decision to expand into Oklahoma and Northwest Arkansas, and also touch on why smaller markets are poised for long-term growth.
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What is behind your decision to pursue new opportunities in these secondary and tertiary markets?
Renner: In addition to Hines’ broader analysis, I have personally followed both markets for many years and have observed the growth and economic trajectory of the two regions, especially when we worked on our first projects in those areas. We recognized that Hines could further build on Devon Energy Corp.’s legacy. Headquarters—also known as Devon Tower—in Oklahoma City and Crystal Bridges in Bentonville, Ark., and invest in all types of products in a more meaningful way. Both projects were essential in shaping and cementing our investment strategies for these areas…
More specifically, the long-term bet on smaller, dynamic markets is a prominent strategy given current lifestyle patterns and preferences. On a personal note, I recently moved to Tulsa, Okla., because my wife is from Tulsa and we were drawn to the quality of life, business-friendly environment and open spaces in the area. In many ways, my family is a case study in why many people choose to move to these markets—you can hold down a job in the big city and live a small-town life. It’s not for everyone, but we enjoy it.
What types of assets will Hines focus on in these Midwestern markets?
Renner: We will likely be most active in multifamily, industrial and large mixed-use or cultural anchor projects. We have a particular expertise in sports anchored mixed-use districts. I also think that custom-built office projects and headquarters development are a natural fit for us.
Finally, there is precedent for acquiring retail assets for the long term and we are increasing our retail activity, but in most cases the retail is a supporting element of a larger mixed-use project.
Why these specific assets?
Renner: Multifamily on land is a direct response to existing relatively old stock in smaller markets and the growing demand for best-in-class product from people moving to Oklahoma and Northwest Arkansas from larger markets. People who move to these areas are used to quality products and professional management and they don’t want that to change.
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In terms of industry, both markets provide relatively central locations for regional, or perhaps even national, distribution models.
Large mixed-use projects don’t happen as often in these markets as they do in larger, primary markets, but Hines is uniquely qualified to lead these initiatives given the fact that we’re fluent in all classes. of assets and have a track record of developing successful, mixed-use, city-defining projects in markets around the globe…
Finally, we have always prided ourselves on development fees for service-oriented work on larger cultural anchor projects such as sports arenas, museums or other important city assets.
All of this appears to be part of a long-term expansion plan. How will it be done?
Renner: We see markets like Oklahoma and Northwest Arkansas as ‘and’ not ‘or’ to primary markets. We are very keen on the role of big cities and continue to be active in them. From an expansion standpoint, we are selective about the cities we decide to grow our presence in, like Columbus, but our expansion will likely come by going deeper into existing asset classes and some of the maturing products like data centers, student accommodation etc.
Secondary and tertiary markets come with their own sets of challenges. What do you think are the main ones and how do you plan to address them?
Renner: The flexibility required in project structuring and the smaller size of these markets can be challenging. Structurally, liquidity windows can be smaller, rewarding owners with the option to hold longer if necessary. I think that’s changing, but it remains the case, at least for the bigger projects… For the smaller projects, you could argue that some smaller markets are more liquid than the bigger ones, at least right now.
For Hines, given our typical project scale, we cannot do all the projects we would like in these markets as many of them are likely to be very small. So being disciplined about the projects we take on and making quick decisions out of respect for people’s time are critical. On the other hand, we really dig into the opportunities where we can honestly say we are the best fit and likely to bring the most value to the client or investor.
Overall, market fundamentals are weakening in the US To what extent do you expect this to affect your long-term strategy?
Renner: We are long-term thinkers, and especially for development deals, we tend to think in multi-year increments and not make decisions based on daily news. The current environment is great for initiating development or acquisition deals because while it is impossible to know if we are at the bottom, there has certainly been a reset of prices and expectations in much of the US market.
How do you expect the commercial real estate sector in these lesser-known markets to evolve in the coming years?
Renner: I would say these markets are overlooked rather than unpopular. Clearly, larger institutions have historically been reluctant to invest in smaller markets, and thus liquidity windows may be shorter and project sizes smaller. However, this does not mean that there are no successful projects and economic results. I think it just means that the players on the field are different than those on the market.
Few would have predicted the rapid growth of markets like Nashville, Tenn.; Raleigh-Durham, NC; Austin, Texas and Denver, among others, 15 years ago. These examples certainly represent larger and more in-demand markets now than Oklahoma or Arkansas, but they share common traits.
Given the flexibility with remote and hybrid work that I believe is here to stay in a post-COVID-19 economy, people moving to markets like Oklahoma City, Tulsa, or Northwest Arkansas is really just an extension of patterns of migration that started a long time ago. And to be clear, people are certainly migrating to these markets. Both Oklahoma and Arkansas are in the top 15 nationally in terms of aggregate — not per capita — moves in recent years.
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So what is your outlook for commercial real estate investments in these secondary and tertiary markets?
Renner: I would reiterate the point that I believe the next investment cycle should be an excellent harvest. One way to meet this momentum is by launching Hines Private Wealth Solutions. High net worth investors and family offices within the private wealth ecosystem have a sophisticated understanding of secondary and tertiary markets, so they are open-minded and often excellent capital matches for deals in these smaller regions versus some of the larger institutions. big. who probably have a more defined list of markets in which to invest.
Many of these private investors live in markets like Oklahoma City, Tulsa, or Northwest Arkansas—they understand the value proposition these places offer, have witnessed their growth firsthand, and have a strong desire to be a part of their future. .
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