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Markets where smart investors are focusing

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As real estate cycles become shorter and faster, investors are eager to find a way to invest in commercial real estate that avoids much of the lumpiness, and illiquidity, inherent in the asset class. For many, the answer is a focus on global gateway markets.

Tom Leyden, a partner at RSM US LLP, agrees that the city and the urban market are essential to any institutional investor’s portfolio, but believes cycle risk isn’t the only reason to focus on cities.

The city is increasingly becoming a place to live, as people reject the traditional commute from the suburbs, Leyden says.

“It’s all about how people want to work, how they want to live, and how they want to play,” he says. “And in my mind, what people are finally questioning is why they need to sit on a train for an hour or sit in traffic for one and a half hours, commuting.”

But rather than people using remote access technology to allow them to work and live in the suburbs, Leyden says people are increasingly opting to move to city centers to be closer to the office, and closer to the entertainment and diversity of downtowns across the United States.

“When you look to demographics and how people want to live, and how that’s being translated into commercial real estate investment, it’s much more an urban market strategy versus a suburban one.”

And while that doesn’t mean the death of the suburb, for Leyden, it means the continued outward expansion of cities as people search for affordable residential, office and retail on the edges of expensive metro and downtown areas.

Citing Oakland as an example of San Francisco’s expansion, Leyden says: “People are being pushed into the East Bay because of the expense of San Francisco and that, in turn, is leading a really interesting push, a gentrification of that area.”

Uber is set to open a 330,000-square-foot office in Oakland in 2017, a move that many brokers have argued will transform the local office market. According to broker Colliers International, asking rents for all office types in the Oakland metropolitan area rose more than 10 percent to $2.61 per square foot in the first quarter of 2016 as low supply and high demand drove rents higher.

“San Francisco’s Mission District is another area that’s seeing high-rise multifamily and condo developments,” Leyden says. “These are areas that had once been protected from development or you would never have thought would be developed. There’s a real expansion of our urban markets taking place.”

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