The Rise of the NERDS
No, not those types of nerds. We’re not talking thick glasses, pocket protectors, or the popularity of The Big Bang Theory. It’s the five office markets you should be keeping an eye on for strong talent, affordability, and investment opportunity.
JLL coined the term at the end of 2014 to describe five hot secondary markets—Nashville, East Bay (California), Raleigh-Durham, Denver, and Salt Lake City—for their ability to attract investors and occupiers as the economy expands and larger metros overheat or tap out on talent. Among their attributes, according to JLL:
- Their populations have grown by an average 7.4% since 2010, more than double the national rate;
- Educational attainment in NERDS is higher than the national average, and they employ a higher percentage of their workforces in corporate office environments;
- In the past year, they recorded occupancy growth of 7.9 million SF, nearly two times faster than the U.S. overall, while still offering close to a 25% discount on office asking rents;
- Investors are able to acquire core product without sacrificing yield, as average PSF pricing for Class-A buildings is between $150 and $300, with discounted cap rates ranging between 4.9% and 6.1%.
If you’re an investor and haven’t been looking at these markets already, now’s the time. JLL recently warned that the window to catch these market on the upswing is beginning to narrow—and you may miss the opportunity to open a satellite office or relocate at a fraction of the price of other popular markets.
Last year, these markets attracted strong corporate demand and population migration—but as this interest grows, so does pricing. And NERDS saw large leasing activity from companies such as Anadarko and URS (Denver), Dell (Nashville), SAP (East Bay), Allscripts (Raleigh), and Health Equity (Salt Lake City), contributing to a dwindling amount of space. Overall vacancy remains well below average at 10.2%, compared to the total U.S. vacancy rate of 14.7%, JLL reports.
Crash Course: The NERDS Today
Nashville: Seeking appreciation? Music City is one of the few markets tracked by JLL that has not exceeded peak pricing. Institutions have taken note, snapping up seven properties for $160 million in 2015, which may rep a shift in Nashville’s buyer landscape. The result: Yield compression was down 81 bp in 2015, to 6.1%.
- Vacancy: 6.7% (Class-A, 2.7%)
- Asking Rents: $20.32 (Class-A, $26.45)
- Under Development: 2.8 million SF (81.9% preleased)
- Total Sales Volume: $717 million ($137/SF average price)
East Bay: While previous years saw a focus on Class-A space, 2015 was all about Class-B, which JLL expects to continue. Institutional investment hasn’t been as strong here as in the other NERDS, but the argument for acquisitions is strengthening as rents go skyward in fellow Bay Area markets.
- Vacancy: 13.1% (Class-A, 14.3%)
- Asking Rents: $31.46 (Class-A, $35.94)
- Under Development: 0 SF
- Total Sales Volume: $751 million ($235/SF average price)
Raleigh-Durham: Unlike its fellow NERDS, this part of the Research Triangle saw softening prices and higher cap rates than secondary markets as a whole, JLL reports. But it had the largest transactional increase, from $493 million in 2014 to $1.2 billion in 2015, mainly due the Trinity-Starwood-Vanderbilt JV’s purchase of Duke Realty’s portfolio, $500 million of which was in Raleigh. As the Research Triangle continues to grow, this market will likely have strong positioning in coming years.
- Vacancy: 11.9% (Class-A, 9.8%)
- Asking Rents: $20.53 (Class-A, $23.71)
- Under Development: 629,214 SF (63.3% preleased)
- Total Sales Volume: $1.0 billion ($143/SF average price)
Denver: The Mile High City also saw a notable uptick in institutional investment, with institutions accounting for 48% investment activity over 2015. While it compressed to a 4.9% cap rate last year, it’s unlikely that the trend will continue, as the market has reached peak pricing levels (highest since 2000), according to JLL.
- Vacancy: 13.1% (Class-A, 11.4%)
- Asking Rents: $25.62 (Class-A, $31.53)
- Under Development: 2.7 million SF (24.1% preleased)
- Total Sales Volume: $2.2 billion ($182/SF average price)
Salt Lake City: Although it is currently the smallest market on this list for investment, Salt Lake City is experiencing a change. The 2014 transaction that brought Goldman Sachs’ largest corporate office outside of New York (222 Main Street) represents the diversification and growth of the city’s tenant base, which will attract further investment, JLL says.
- Vacancy: 6.4% (Class-A, 6.0%)
- Asking Rents: $25.62 (Class-A, $31.53)
- Under Development: 2.7 million SF (58.3% preleased)
- Total Sales Volume: $81.1 million ($167/SF average price)
Looking Ahead: The NERDS in 2016
In 2016, JLL expects the NERDS markets to remain some of the most active office markets in the U.S., particularly if they continue to take on demand from markets with high barriers to entry. But if you miss out on the opportunity in the NERDS, there may be other markets to consider. JLL expects similar geographies — such as Austin, Charlotte, Fort Lauderdale, Minneapolis, Pittsburgh, and Portland — to complement NERDS in output and innovation.