Northwest Arkansas has been on the national radar from a number of perspectives for many years now. Our appeal has been well chronicled and justified in a number of quarters.
One segment of the investment sector, however, hasn’t been as “all in” on NWA as others. That would be institutional investors. But indications are that may be changing.
Not too long ago, the idea of institutional investment in real estate in NWA was akin to investing in China or India. International real estate investors, to a great extent, remain focused on the East and West coasts and Texas. The Washington, D.C., area gets its share of institutional investment, as do “NFL cities.”
But there are signs NWA is increasingly attracting the attention of institutional investors with an appetite for higher capitalization rates and comparatively low land and construction costs. The opportunity for the region is to continue educating institutional investors. We must “sell” the area to this important sector just as we have successfully done with other sectors. There are a number of selling points.
First, consistent population growth. According to the Northwest Arkansas Council, 24 net new residents have been added to Northwest Arkansas each day since 1990. Non-native Arkansans now represent 56 percent of our population. That staggering statistic reflects the fact that NWA has become an attractive destination for relocation.
Not long ago, I was on a flight to Boston full of MBA graduates from Harvard Business School and the Tuck School of Business at Dartmouth. They had been in NWA to interview the way they normally would on Wall Street. NWA has been named one of the most affordable places to live in the country. That’s resonating with recently graduated students looking to start careers and families.
A second selling point when it comes to attracting institutional investment is the fact that retail and office growth follows rooftops (i.e.: residentialgrowth). Flake & Kelley Commercial represents The Fresh Market, Starbucks, Whataburger and Cabela’s, among others in NWA. Their investments here are based in no small measure on our demographics. Walmart, J.B. Hunt and Tyson are core employers, and each core employee represents a number of new employees in non-core jobs.
A third component in the growing appeal of NWA among institutional investors is better cap rates and higher returns. Real Estate Investment Trusts (REITs) have outperformed the S&P 500, investment-grade and high-yield bonds since 2009. However, several investment research firms are estimating that shares of REITs are at peak. One valuation metric for REITs is the implied cap rate. The implied cap rate is derived by dividing the net operating income by the market capitalization, plus the debt. Right now, commercial property prices are considered about 15 percent above the 2007 peak, and the overall implied cap rate is at an all-time low. As REITs still need to place capital, they are going to be forced to consider alternative markets. U.S. investors may be less familiar with developing countries and the associated risk, but investing in the home of Walmart, J.B. Hunt, Tyson Foods is more comfortable. As headquarters for several leading players within several sectors, we are less risky with those company headquarters than other tertiary markets.
Keys to building on these and other strengths will revolve around continuing to attract millennials and burnishing our growing reputation as one of the best areas for startups. As with any kind of portfolio, diversity is the key to stable, sustained growth. And stable, sustained growth, along with low land and construction costs, is essential to attracting institutional investors, especially REITs.
We should be appealing specifically to non-traded or unlisted REITs since these are not followed by the large research firms and are less regulated, meaning they are seeking higher returns. Given the region’s sustained growth, its growing appeal to yet another generation of emerging business leaders and a proven ability to weather economic downturns, there is reason for institutional investors to be attracted to NWA.
Jessica Dearnley is principal broker/partner for Flake & Kelley Commercial in Northwest Arkansas. She is a chartered financial analyst (CFA), certified public accountant (CPA) and certified commercial investment member (CCIM).