During a conference call last week with a west coast-based institutional lender, the question was asked if they would consider secondary and tertiary markets. The lender’s paraphrased response was, “We have looked at some deals in Dallas and Houston; however, our focus is on primary markets.” Dallas and Houston are considered “secondary” markets. What gives? Dallas-Fort Worth (DFW) is the 4th largest MSA in the country, behind only New York, Los Angeles, and Chicago, and is, along with Houston, San Antonio and Austin, among the top-5 fastest growing MSA’s.
Despite “everything being bigger in Texas,” size alone does not elevate Dallas or any other Texas city to “primary market” or a “Tier 1” investment market status in the opinion of many real estate capital providers. Neither does the fact that DFW weathered the recession better than most other major metropolitan areas, and the recovery continues to solidly progress. Most certainly, DFW has consistently demonstrated that it has a sustainable economy that has, and will continue, to outperform the rest of the nation. With unemployment figures well below the national average and steady job growth, it is no surprise to see DFW at or near the top of the list when the likes of Forbes, BusinessWeek, and other publications compile various rankings of the best cities in which to live, work, locate a business, etc.
So what is it about the fourth largest MSA with a seemingly strong economy that keeps Dallas from being considered a “primary” market for real estate capital providers? “Everything is bigger in Texas” does not hold true when it comes to real estate investment. For many capital providers, especially those of the institutional nature, size does matter. Not the size of a building or a piece of land but rather the size of the investment in dollars. Many capital providers will not consider an investment unless it means putting in tens of millions of dollars at a time. In an MSA that is geographically larger than Connecticut and Rhode Island combined, there are just not that many opportunities for large investment compared to the gateway cities of New York, Boston, Washington DC, Los Angeles, or San Francisco, where institutional and foreign investors tend to focus. DFW real estate can cost a fraction of what it would on the west coast or the east coast. Affordable real estate is yet another reason why individuals and businesses continue to move to the DFW area.
Texas will never compete with so-called “Tier 1” investment markets in terms of pure capital investment size; however, the laws of supply and demand indicate that institutional and foreign investors will look to new markets as competition continues to drive prices upward and as available product dwindles in the gateway cities. Texas is poised to benefit as investors shift their investment strategy and focus on new markets. Our firm’s primary focus has always been on Texas and the Southwest, as we have completed well over 1,000 transactions in DFW and other “secondary markets” such as Houston, Austin, and San Antonio. Despite our success, we look forward to DFW and the rest of Texas evolving in the minds of all investors to “Tier 1” status. As an intermediary, having access to more institutional and foreign capital can only enhance our ability to successfully close financing assignments on behalf of our clients.