“Skate to where the puck is going. Not where it has been.”
Wayne Gretzky, arguably one of the greatest hockey players ever, was taught at a very young age by his father to rely on his instincts to anticipate the action on the ice, to “skate to where the puck is going” to gain an edge over his opponents.
Wayne Gretzky’s vision and ability to anticipate the action on the ice was what made him great and set him apart from his peers. He wasn’t in the right place at the right time because of luck, it was because he was able to analyze and process everything in front of him that allowed him to be one step in front of everyone else.
In commercial real estate (“CRE”) investing, what sets the great investors apart from the run-of-the-mill investors is the ability to anticipate “where the puck is going” and “not where it has been.” Right now, everything is trending towards the Heartland as where the action will be very soon.
There is a mass migration occurring right now away from the coasts towards the Heartland and it’s not just happening on one front. It’s occurring on multiple fronts – a migration not only of workers but of companies, talent and investment capital as well.
Worker Migration –
Since the beginning of the COVID-19 pandemic in March, many city-dwellers who saw their incomes pinched due to the pandemic started looking for more affordable housing in less crowded locales with lower costs of living.
Many workers whose jobs were converted to work-from-home positions were no longer confined geographically and saw no need to stay in high-rent New York, L.A., and other coastal towns, when they could live in the same space in the Heartland for third the cost in N.Y.C. or Silicon Valley.
This mass migration has had real effects on CRE values and prices.
According to Zumper, a San Francisco-based rental listing website, San Francisco’s asking rent dropped 3.3% from March to July, and New York asking rent dropped 2.8% from March to July.
Tech Migration –
Although U.S. tech companies have long outsourced work or set up satellite locations overseas to save money, an emerging trend has been to move operations to lower-cost areas of the U.S. instead of overseas. And in the U.S., the New York Times identified the Midwest as a “Hot Spot for Tech Outsourcing.”
Although outsourcing overseas is still a lower-cost alternative, outsourcing to the Midwest has advantages over overseas operations including reduced issues associated with time zone differences, cultures, and languages.
Venture capital is also following the tech migration from Silicon Valley to the Midwest.
Viewing the Midwest as “undervalued,” big-time venture capitalists like Mark Kvamme and Chris Olsen from prominent Silicon Valley firm Sequoia Capital are leaving California and setting up shop and their funds in Silicon Prairie.
Venture capitalists see the Midwest as flush with opportunities – opportunities that are grossly undercapitalized. Here’s proof Midwest opportunities are undercapitalized.
According to thehustle.co, the Midwest is home to 150 Fortune 500 companies, 25% of all US computer science graduates, and 60% of the country’s manufacturing base. It is a large market (it makes up 19% of America’s GDP) and is rife with innovation (19% of all US patents) — yet it accounts for only 5% of all venture capital funding.
This undercapitalization presents venture capital firms with value propositions that offer lower entry points but with higher upside than available on the coasts.
Investor Migration –
Tired of diminishing cap rates on the coasts from institutional and foreign investors, investors are flocking to the Midwest where similar properties can be had at cap rates 100 to 150 basis points higher. This is attracting investors from California.
According to research by CoStar Group, of all the multi-tenant pads in the Midwest sold at a below 7.0 percent cap rate recently, approximately 65 percent of these properties were sold to a California-based buyer. Similar metrics can be seen across single-tenant assets as well.
The future belongs to those who anticipate trends and capitalize on them and the future belongs to the investors who see all the trends pointing to the Heartland as the place to invest NOW.
Now is the time to invest when the upside potential is still substantial – not when the market peaks after the secret gets out.
Skate to where the puck is going, not where it has been.
NOW is the time to get in on the ground floor.
NOW is the time to invest in the heartland.