Why smaller US cities are emerging as commercial real estate hotspots
South Carolina ranks first among US states for future potential demand for commercial real estate, according to a new index by the National Association of Realtors (NAR) that tracks economic indicators linked to demand across the sector.The index covers more than 300 metropolitan markets and assesses future demand across four commercial real estate segments, office, industrial, retail and multifamily.Rather than focusing solely on current property prices or investment returns, the index uses economic and demographic indicators to identify markets where demand could be building.“It doesn’t say, ‘OK, go there and just buy property,’ but it says … where the data shows that the momentum is building, the demand is building,” Nadia Evangelou, principal economist and director of real estate research at NAR, told CNBC.
How the NAR index measures future demand
The index uses government data from the Bureau of Labor Statistics and the Census Bureau, including information on employment, population growth and migration.For the office sector, NAR tracks growth in professional and business services employment.For industrial real estate, it looks at employment growth in manufacturing, transportation and warehousing.The retail measure incorporates growth in retail trade as well as leisure and hospitality employment.For multifamily housing, the index considers population growth and net migration, including both domestic and international migration.These indicators are combined to produce an overall measure of potential commercial real estate demand.
St George, Utah leads among metro markets
The strongest individual metropolitan market in the index is St George, Utah, which recorded the highest office employment growth in the country.The market also has strong population growth and in-migration, while its industrial demand is above average, Evangelou said.“So St. George, for example, is the No. 1, because one industry happened to have a good year, so there is a broader momentum over there,” she said.The index also highlights smaller and midsized markets that are showing strong momentum.Evangelou cited Fayetteville, Arkansas; Huntsville, Alabama; and Spartanburg, South Carolina among the markets that could offer opportunities for investors.Fayetteville is recording broad-based growth, while Huntsville has one of the strongest multifamily scores in the country, she said.
Raleigh stands out from 2022 peak
The NAR index also compares current market conditions with 2022, when pandemic-driven migration was at its peak.Raleigh, North Carolina, is the only major US market that the index finds to be stronger today than it was in 2022.Several markets that had experienced particularly strong growth during the pandemic migration boom have weakened since then. These include Austin, Texas, Miami and Naples, Florida, all of which have declined markedly from their 2022 levels.The index also ranks individual markets according to the sector showing the strongest demand. Salem, Oregon, and Fairbanks, Alaska, rank highest for industrial demand.
Smaller markets outperform major coastal hubs
The index points to stronger momentum in several fast-growing Sunbelt and smaller markets compared with some of the country’s biggest coastal metropolitan areas.“When we take a look at New York, San Francisco and the big coastal markets, we see that the large markets are still generally weaker than the fast-growing Sunbelt and smaller markets in this index,” Evangelou said.The findings are based on economic and demographic conditions rather than a recommendation to buy property in any particular market, with the index intended to indicate where commercial real estate demand may be gaining momentum.
