Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Read the article-You are citing average rents for THE CITY. Again, San Francisco, Boston and DC are physically tiny cities that are nearly 100% gentrified as they have easily priced out poverty. This drives supply down and costs up as the overall size of the Metro economy is just about on the same level of Chicago, Philadelphia, Houston, etc. which have much larger CITIES and more diversified housing prices within them.
DC is nowhere near 100% gentrified and there are plenty of poor people still here. If anything it's the middle- class that's been priced out.
Why are the gateway cities more expensive than the other's? What makes them expensive?
Investors buy commercial real estate for the yield, just like they buy bonds or CDs. Shopping for a CD is easy -- banks post the percentage interest rate for everyone to see. Property's obviously more complicated, but if you know how much a building rents for (net of expenses), and its price, you can compute a "capitalization rate," or "cap rate," which is the metric most large investors use to price-compare property.
In cities where enough buildings are being bought and sold, commercial brokers can survey buyers/sellers to see what sort of yields they're seeing out there. Big brokerages, like CB Richard Ellis, publish these numbers; here's an excerpt from their 2nd half 2014 report, for Class A downtown offices in the northeast & mid-Atlantic:
As you can see, buyers in Baltimore expect 7% yields on their investments, while buyers in DC expect 4.75%. That doesn't sound like a huge spread, but it's a 47% difference, which means that a building earning $1M a year in income would command a price of $14,285,714 in Baltimore -- but $21,052,631 in DC.
Note that the list is bifurcated: Boston, DC, and NYC are all 5% or under, and everywhere else is 6% or up. That's why the first three are "gateway cities." They're so much more popular with real estate investors that investors are willing to pay a lot more money to get the same yield, and so prices get bid up. In particular, the term first described cities that are "gateways" for foreign investors, who like to buy property in cities that they're familiar with. But it's not just foreign investors who buy in gateway cities, but also pension funds, insurance companies, banks, real estate investment trusts -- anyone seeking a reliable income stream.
Why do investors gravitate towards gateway cities, and why does this difference persist? They have larger, more stable property markets, and good track records. Owning property in these cities is like owning a high-quality bond: You'll get a steady income stream, and when you want to sell, you'll easily find a buyer. Owning property in a "second-tier" city is more like owning a junk ("high-yield") bond: You might earn more money, but it's riskier, and since assets are thinly traded, it might be hard to find a buyer. (What's worse than a money-losing investment? A loser that you can't get rid of.)
Since there's so much big money chasing after property in gateway cities, their property prices are higher across the board. Since big investors also buy apartments, they also directly influence the housing market.
OTOH, residents of many gateway cities also usually have the opportunity to earn more money to make up for that fact, since our larger and better-educated labor markets allow for greater specialization and thus more value added. Hence, we can spend more on rent/mortgages. Once you control for local incomes, Baltimore is no more affordable than DC, and Boston is no less affordable than Houston.
Hum...I guess gateway city is defined here as high office rent cities.
Personally, I tend to think of "gateway" cities as big cities that offer sophisticated urban living. To me that basically includes: NYC, Chi, SF, Bos, DC, Philly, and increasingly Seattle. Chi and Philly have lots of crime and poverty which hold down these cities' averages, but they both have world class urban centers.
LA and Miami would be honorable mentions, they have some good world class urban amenities and urban districts, but aren't really great traditional urban centers. Atl, Hou, and DFW are clearly world class economic hubs, but I don't think they have evolved into world class cities just quite yet.
What a bizarre use of the term "gateway". Why on earth would that term be used for something like quantity of office real estate, instead of say...how many direct flights a city has to other continents or what % of its population are 1st generation immigrants?
Philadelphia has not traditionally been considered a "gateway market".
Really, the only undisputable "gateway markets" for the past few real estate cycles have been NYC, Boston, SF, and DC. One could make a case for Seattle, LA, Miami, Chicago, and [nowadays] Houston as well, and I've heard the term applied to places as small as Portland, described as an "upcoming gateway market". I've never heard the term associated with Philly, Atlanta, or Dallas, ever. Certainly not other cities.
The term attempts to tie global status/connectivity with real estate trends. It is no coincidence that the most globally connected cities in America are NYC, Boston, SF, and DC, and they are perhaps the most "institutional" real estate markets with the most foreign interest and highest prices, but highest perceived degree of safety for returns, or "yields" on investments made. They have the highest barriers to entry, the most regulations, etc etc.
There are perceptions and realities that come with being a top tier "coastal" financial or otherwise market. NYC, Boston, and SF are coastal global financial centers. DC is the nation's capital, and is considered "coastal"/East Coast. SF and Boston are global tech/biotech hubs. All 4 are major centers of immigration with major global connections across the board, economically, physically, historically/tangentially, etc. All 4 have arguably the highest regulatory structures in place, and at least 3 have arguably the highest barriers to entry of any cities in America, but given DC's small land size, one could make the case for DC having high barriers to entry, as well.
DC (Government expansion, war, etc.), NYC (finance) and San Francisco (technology) have dominating industries that attract a large amount of people that need to be in close proximity to their job. They also probably pay the most of any industries.
Other cities with lower costs of living (Chicago, Philadelphia, Houston) do not have such dominating industries. Boston maybe is an outlier in this theory, but it's relative isolation and designation of being the Capital of a large region within a mega-region explain its COL.
Boston's not an outlier...you're forgetting it has a dominating industry as well: life sciences. Its top industries are life sciences (biotech/pharmaceuticals/hospitals), finance (asset management/private equity/venture capital), high technology (internet services/big data), and higher education. It has the third highest median income in the United States (source) and a housing shortage. That's why it's so expensive there.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
