Stocks mentioned in this story: UNH, TGT, GWPH , INSY
As millennials and baby boomers flock to more walkable urban environments where they can live, work and play, many are seeking mid-sized, 18-hour cities full of activities past the traditional 9-to-5 hour workday.
With the perks of a large urban setting and at a cheaper price than some of the bigger markets, 18-hour cities are second-tier cities with a good urban population growth and a lower cost of living. They include hot spots such as Dallas-Fort Worth, Seattle, Denver and Atlanta, all of which are highly ranked in a recent report by the Urban Land Institute and PricewaterhouseCoopers on emerging real estate trends.
Investors looking to follow these trends are seeking markets outside of the 24-hour gateway cities of New York, Boston, Chicago, Los Angeles, San Francisco and the District of Columbia.
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“These 18-hour cities have really have found a sweet spot,” says Michael Zovistoski, a certified public accountant and co-founder of UHY Advisors in Albany, New York. “Some of the larger 24-hour cities have old infrastructure and are struggling to maintain, and on the other side, smaller cities are struggling to attract people.”
Eighteen-hour cities are becoming more popular for investors because they have a lower cost of doing business and provide residents a lower cost of living, says Mitch Roschelle, partner and real estate advisory leader for PricewaterhouseCoopers in New York.
“If you look at cities that are rising to the top, they have both,” Roschelle says. “That is fueling the cycle of employers and employees wanting to be there. You can pick which one is the chicken and the egg. It’s quite a virtuous cycle.”
Before investing in second-tier markets, here are some tips and trends to consider.
What’s hot. Austin, Texas, has served as the poster child for the 18-hour city with nightlife, entertainment and restaurants and other late-night businesses.
But in the last year another city has grown in similar popularity — Nashville, Tennessee, thanks to its thriving music industry and universities such as Vanderbilt and Belmont. It has a diverse industry that retains 60 percent of those who graduate from nearby two- and four-year colleges and universities, according to the Nashville Area Chamber of Commerce — and employers who want to find and grow their businesses with talent, Roschelle says.
Avoid the herd. Investors should keep in mind that real estate is a cyclical asset class that is illiquid. Unlike gold, which can be quickly sold, investors have to hold onto their investment for a while. Investors are also more likely to take risks with real estate that that they won’t with other investments, he says.
“A lot of folks jump on the bandwagon and try to capture the American dream,” Roschelle says. “There’s a herd mentality with real estate and people are always trying to get ahead of the herd.”
Instead, he suggests looking at other college towns that are home to Fortune 500 companies, such as Raleigh, North Carolina, or Columbus, Ohio. Or, look at “places left for dead,” he says, such as Detroit, Pittsburgh and Cleveland, which were heavily dependable on the manufacturing industry and have repositioned their job market.
Although Minneapolis doesn’t have as many universities as other cities, Roschelle says its concentration of Fortune 500 companies, including UnitedHealth Group (ticker: UNH) and Target Corp. (TGT), also make it a city to watch.
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“Look for cities that are more stable,” says Andrew Warren, director of real estate research at PricewaterhouseCoopers in Des Moines, Iowa. Austin has a strong track record; Seattle boasts a diverse economy anchored by the biotech, aerospace and e-commerce industries that compares favorably to Charlotte, where the economy is tied heavily to the banking industry.
Look for common characteristics. Most 18-hour cities have a strong concentration of tech, health care and medical industries, Warren says. Typically that’s coupled with a major university or several colleges and a good housing base, including multifamily, apartment or condos in an urban setting or within the inner ring of suburbs, he says.
But not all second-tier cities fit the mold. “Philadelphia is a second-tier city and it’s coming on but it doesn’t quite have the quality of other cities yet,” Warren says.
Investing strategies to consider. Scott Cody, partner of Latitude Financial Group, a full-service financial planning firm in Denver, suggests looking at publicly traded companies that have their headquarters or a strong presence in 18-hour cities and buying stocks in those companies.
In Colorado, he says that could mean buying stocks in cannabis-focused agriculture companies such as Terra Tech Corp., GW Pharmaceuticals (GWPH) and Insys Therapeutics (INSY). For long-term investors, Cody says consider municipal bonds, such as Colorado Bond Shares Tax Exempt Fund (HICOX).
Another possibility is the Mairs & Power Growth Fund (MPGFX), which focuses on Midwest-based companies, Cody says.
Alternative options. Eve Picker, founder and CEO of smallchange.com, an online real estate equity crowdfunding site that has included investments in Pittsburgh and Rochester, Pennsylvania, says she started her company because it can be difficult to get bank loans in cities and neighborhoods that don’t have a strong existing marketplace.
“There’s an enormous need for alternative financing for projects in underserved communities in urban areas that need change and transformation,” says Picker, whose site raised $100,000 from 14 investors for a tiny house in the Garfield neighborhood of Pittsburgh and is reviewing projects in New Orleans and the District of Columbia.
Other companies such as Holdfolio, an Indianapolis-based real estate crowdfunding site, have specialized in the local market. Founded by Jacob Blackett and Sterling White, Holdfolio buys rental houses and bundles them so multiple investors can invest a minimum of $10,000 in a fractional ownership of 10 properties. Blackett says Holdfolio retains 25 to 30 percent ownership in properties and allows individuals to invest in the remaining portion.
“It’s important to be in the right place and to have the capital to make the right investment,” Blackett says. “We disclose you shouldn’t be investing money you might need in the foreseeable future, in the next three to five years.”
Blackett says Holdfolio now has nearly 50 properties — 40 that were acquired this year — and about 35 investors.
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“A lot of millennials grew up in suburban settings,” he says. “And we are looking for something new. We don’t like to commute or drive a long distance. Walkability and amenities are very important to us. Most cities have caught on to this and have reinvested in their downtown and urban neighborhoods.”
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How to Invest in 18-Hour Cities originally appeared on usnews.com
