| FEATURE ARTICLE, JUNE 2007
FINANCING FOCUS: INVESTING IN THE SUNBELT
COMMERCIAL REAL ESTATE MARKET
Scott Derrick
The southern states — Georgia, Texas and Florida — are home to some of the hottest real estate markets in the country. These Sunbelt states benefit from corporate relocations and affordable housing and have piqued out-of-state investors’ interests in the region. According to a recent article in Financial Times, the commercial real estate market in the area is booming because of job creation and an increasing population. The growth in the region is causing investors to take notice of the investment opportunities in the Sunbelt.
Factors of Continued Growth
The availability and affordability of land in the Sunbelt is catching the attention of companies looking to relocate and expand. The Dallas Morning News reports that in 2005, over 300 businesses added offices or relocated to the Dallas area, an increase of 11 percent from 2004. Some of the major businesses include Fluor Corporation, Allied Electronics and T-Mobile. Each new company that relocates brings a new and expanded labor force to the area — professionals and families — in need of housing, entertainment, and lifestyle opportunities. According to Expansion Management magazine, the new and expanded businesses in the Dallas area in 2005 helped to create 33,000 new jobs.
Dallas isn’t the only metropolitan area experiencing an economic development boom. Atlanta is now home to seven major new or expanding businesses, including Arby’s, Novelis and Newell Rubbermaid. Fortune magazine ranks Atlanta third in the nation for the number of Fortune 500 companies headquartered in the metro area. In 2006, 60,000 new jobs were created in the area, and according to the Atlanta Chamber of Commerce, the city ranks third in the nation for job creation.
The current and projected influx of people into the region has created a high demand for multifamily housing and retail power centers. These properties offer excellent investment opportunities, as their value increases with the region’s growth.
A retail center SCI Real Estate Investments ac-quired in the Dallas/Fort Worth area illustrates the synergy between retail and multifamily properties. Watauga Towne Center is a grocery-anchored shopping center that enjoys a 95 percent occupancy rate and a rapidly growing regional population. Two other SCI purchases — multifamily properties — provide more that 600 housing units in nearby cities that supply the retail investment with shoppers.
The Appeal of TIC Investments in the Sunbelt
Tenant-in-common (TIC) investments are one way to participate in the Sunbelt opportunities, as they make it possible for individuals to own a partial interest in a larger property. Up to 35 individuals essentially pool their money together and invest in large institutional properties. These properties range from Class A office buildings, to luxury multifamily apartment complexes and shopping centers with big-name retail anchor tenants. For example, an investor seeking part ownership in a multi-million dollar retail center would work with a commercial real estate broker and a TIC sponsor to help the investor work out the details of the transaction. The investor would then become a landlord of the property and begin reaping the benefits, including a percentage of the monthly rent from retail brands and corporations. TIC investments also offer investors the opportunity to step away from day-to-day property management hassles. The collective group of landlords are given full voting rights in all major decisions about the property, including the hiring of a third-party property management company.
Real estate investments in the Sunbelt offer the potential for long-term profit. In Texas alone, SCI has acquired over 3 million square feet of multifamily and
retail property. Conversely, in-vestments in the coastal states often require a significantly larger amount of equity upfront and generate lower cap rates, making regions like the Sunbelt significantly more interesting to a wide range of investors.
What’s Next for Sunbelt TICs
Out-of-state investors have been the driving force behind development and investments in the Sunbelt; however, more local investors are beginning to take advantage of investment opportunities, including TICs. As major cities in the region continue to grow in size and wealth, there are more investors looking to diversify their portfolios and invest in local properties.
Each of the factors contributing to the market boom in the Sunbelt work together in a cyclical fashion, creating new demands and influencing new investors. As long as housing remains affordable, the Sunbelt region will continue to grow, and demand for development will continue to rise, supported by active investment.
New opportunities, such as luxury student apartment communities, are already presenting themselves and are becoming very popular with investors, proving that the sun is shining on the Sunbelt — and the future is bright.
Scott Derrick is chief acquisitions officer with SCI Real Estate Investments.
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