Decoding the Heartland Phenomenon
Westrock Coffee Company - Conway, AR
The heartland of America is swiftly emerging as an investment hotspot that cannot be overlooked. This region, once underestimated by investors, is now experiencing a surge in interest due to population shifts triggered by the pandemic. Global influencers are leaving their coastal habitats to spark new centers of innovation across the bountiful heartland landscape. But how does this lifestyle and innovation trend translate into a viable investment strategy for commercial real estate? Let's delve into the reasons that make mid-America an attractive proposition for investors today.
The Rise of the Rest
Over the past decade, there has been a significant shift within the investment landscape. What began as a minor trend in the early 2010s has evolved into a movement drawing increasing numbers of individuals who see a promising future in the heartland of America. This phenomenon, aptly named the 'Rise of the Rest' by tech pioneer Steve Case, highlights the belief that technological advancement will spread beyond traditional hubs like Silicon Valley and New York City, reaching across the nation, particularly in the heartland. Case's foresight, reminiscent of his early predictions about the internet's potential, might even be an understatement when it comes to the potential of the heartland.
The Allure of Investing in Middle America’s Real Estate
Commercial real estate in the heart of America has become an appealing investment prospect. As economies flourish, property values grow. Many investors see commercial real estate as an excellent means to leverage the ongoing trends of the 'Rise of the Rest'. While some may wonder if the opportunity to profit from this transition has passed, the pace of commercial real estate is slower than that of individuals or corporations. This lag presents significant opportunities for those who identify well-established trends with plenty of room for growth.
Uncovering the Value of Mid-America’s Commercial Real Estate
Understanding the attractive valuation of commercial property in the heartland begins with grasping the basics of real estate investment. The value of a property is derived from the cash inflows it will yield and the associated risks. These elements are often simplified into metrics such as Net Operating Income (NOI) and capitalization rates (cap rates). Despite the shifting demographic trends moving growth towards America’s middle, repeated surveys indicate that cap rates for industrial properties in heartland markets are significantly higher than those in coastal markets. This suggests that investors are willing to pay more for properties in coastal markets, despite potentially stronger prospects in the heartland.
For those confident in the renaissance narrative of middle America, the prospect is clear. Investing in heartland economies with stronger prospects at more appealing valuations presents an enticing opportunity.
Stay tuned for the second part of this series where we’ll explore the challenges of investing in middle America real estate and solutions to bridge the gap.
Dan Andrews
CEO and Managing Partner