Commercial real estate investors look to smaller cities for higher returns

As trophy office markets strengthen,  investors are increasingly chasing the bigger yields in smaller cities have to offer, Bloomberg Businessweek reported. The market for prime office space is in the process of recovering in cities like Minneapolis, Seattle, Nashville, Houston and Denver, and there is often more supply in those places than in much larger cities, such as New York and Chicago.

Through the third quarter of this year, 31 percent of office transactions occurred in America’s second-tier cites, compared to just 23 percent in all of 2011; and in the first half of 2012 investors paid on average only $161 per square foot, rough half the cost of a prime city, according to the magazine.

“You’re starting to see a healthy rise in volume as sellers try to take advantage of the recovery,” Greg MacKinnon, economist and research director at the Pension Real Estate Association, a trade group for institutional property investors, told Businessweek. “It’s spreading to the smaller markets because yields are pretty thin in the gateway cities.”

Moreover, as confidence in the housing market improves among investors, demand for debt tied to skyscrapers and commercial buildings in regional serving cities is also on the rise. This year, bonds downgraded during the financial crises grew 16.1 percent to 65.7 cents on the dollar. [Businessweek] – Christopher Cameron