Real Estate Investors View Small Cities as Big Opportunities

Even before the pandemic, institutional real estate investors were already training their focus on smaller cities and online commerce.

This is according to investment firm SEI and data provider Preqin. The two firms surveyed 117 fund managers and 60 institutional investors for a report on the future of real estate investing, expected to be released early Tuesday. Although the survey was conducted in the fourth quarter of 2019, it identified trends that are likely to be accelerated by the coronavirus pandemic, according to SEI vice presidents Ross Ellis and Jay Cipriano.

For example, asset managers and investors polled by SEI and Preqin reported an increased emphasis within the real estate industry on “secondary and tertiary cities” and rental properties. Specifically, around 60 percent of surveyed investors and 40 percent of polled fund managers expected smaller cities to play a larger role in real estate investments in the future. Around 30 percent of fund managers and investors said rental properties would get more attention going forward.

“There will be a lot more activity in non-first-tier places,” Ellis said by phone Monday. “The work-from-home experiment together with the sharing economy is going to make that even more true.”

One investor — a vice president at one of the largest sovereign wealth funds — told SEI and Preqin that their ideal residential property development strategy would be one focused on university towns that have “space constraints, an educated workforce, and potential for innovative micro-hubs.”

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The shift to working from home was also on investors’ minds prior to the pandemic. According to the report, roughly 40 percent of institutional investors believed lodging and infrastructure for “digital nomads,” or people who work remotely, would play a larger role in their real estate investment decisions.

Similarly, around 35 percent of institutional investors indicated the “declining popularity of traditional office blocks” would factor into their decision-making.

“Even at SEI, we thought we were going to be working at home for two to four weeks,” Ellis said, noting that he and his co-workers are now on their twelfth week of working from home. “We may not all be back in the office until the first quarter of next year.”

Per the report, 67 percent of institutional investors and 48 percent of fund managers saw the increase in online interactions prior to the coronavirus pandemic as an opportunity for the real estate business.

“We went from a hypothetical to a reality overnight,” Cipriano, managing director of business development at SEI, said by phone. “A large percentage of people’s work went remote. What we learned is that we can adjust. We can be flexible, and we can find a way to succeed in this model.”