CRE is doing better in cities where tech dominates

Trepp’s ranking of secondary U.S. metros places Austin at number one

National Insights /
Sep.September 04, 2020 08:00 AM
Dell CEO Michael Dell, Google CEO Sundar Pichai and Tesla CEO Elon Musk (Getty; iStock)

Dell CEO Michael Dell, Google CEO Sundar Pichai and Tesla CEO Elon Musk (Getty; iStock)

In smaller U.S. metros, big tech can mean the difference between boom and bust for commercial real estate.

That’s according to a recent report from the commercial mortgage-backed securities data provider Trepp, which tallied the top secondary metro areas using several key industry metrics.

Trepp ranked those markets by average occupancy rate, CMBS loan delinquency rate and projected growth in loan balance, as well as general economic indicators such as unemployment rate and population growth.

Commercial real estate loans have performed best in cities where tech companies have set up camp, and the worst in metros with lots of malls and hotels, according to the report.

Texas’s Austin-Round Rock metro area ranked first. Dell Corporation is headquartered in Round Rock, and newer tech giants such as Google and Amazon have leased up office space there. Most recently, Elon Musk’s Tesla announced it would build a $1.1 billion assembly plant in the Austin outskirts.

Sturdy employment, coupled with steady annual population growth, has translated into stability for the commercial real estate industry, chiefly in the multifamily realm.

In recent months, multiple apartment complexes — many of which were collateral for CMBS debt — traded hands. The Triangle Apartments, a 529-unit apartment complex in Austin, traded for $129 million, and secured a $78 million loan that was later packaged into a CMBS deal.

Technology companies have similarly buttressed the San Jose metro area against economic downturn.

Three-quarters, or $7.6 billion, of the outstanding CMBS debt in the San Jose metro area is backed by offices whose anchor tenants are profitable tech companies, Trepp’s data show. Such loans have performed better than any other securitized debt deals backed by commercial properties in the U.S.

Exceptional office leasing performance, driven by tech companies who have continued to pay on time even though they’re employees are working remotely, has driven the average occupancy rate up to 95 percent and the overall CMBS loan delinquency rate down to 1.3 percent — the lowest among secondary metros.

All borrowers of CMBS loans backed by offices in the San Jose metro have remained current on their payments, according to Trepp.

On the other side of the spectrum are metros where malls and hotels back most of the commercial real estate debt.

In the Minneapolis-St. Paul metro area, 48 percent of CMBS debt is delinquent, which led Trepp to place the metro dead last in the ranking. Nearly two-thirds of the commercial properties in the city are retail and lodging.

The owners of the Mall of America fell behind on payments for a $1.4 billion CMBS loan backed by the mall in May.


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