The investment chief of US Bank's $170 billion wealth management business breaks down why he's betting heavily on Midwest cities like Minneapolis and Pittsburgh

REUTERS/Peter Nicholls/File Photo

• Eric Freedman of US Bank Wealth Management says he's guiding his real estate investments away from big metro areas on the coast and toward the Midwest, where there's more potential for growth.
• He told Business Insider that he sees trends supporting that view in both the office and residential markets.
• Freedman says investing in real estate for diversification is a smart strategic move, even though some of the best-known real estate markets in the US are becoming tougher places to get good returns.
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Sometimes people have to leave the big city to settle down someplace a little quieter. That's essentially what Eric Freedman - the chief investment officer for US Bank's $170 billion wealth management division - is doing with his investments.

Freedman says he's seeing smaller cities in the Midwest as some of the most appealing investment options in the real estate market, replacing the largest and wealthiest cities in the country.

He argues that Midwest cities are an attractive option because demand is climbing and prices are on the rise as they've successfully diversified their economies away from heavy industry or manufacturing. By comparison, major coastal cities don't have the same opportunities for growth and returns on investment.

Yet while there are a number of geographical areas he's avoiding, he says he's certain of the overall role real estate can play for the bank's clients.

"We do like core real estate as a part of a diversified portfolio," he told Business Insider in an exclusive interview. "Houses and commercial properties do have some inflation protection inherent in them."

In an exclusive interview with Business Insider, Freedman identified two long-lasting patterns in the real estate market that guide his investment decisions.

Office trends

Freedman said businesses are finding it more appealing to set up shop in smaller cities instead of gravitating to huge coastal cities like New York, Seattle, and San Francisco. He says Minneapolis is "very business friendly" while Pittsburgh has a "transformational" approach to attracting businesses.

The companies are being drawn by tax incentives as well as those lifestyle benefits. He adds that those larger cities often have infrastructure constraints that lead to problems like more traffic, which is less of a problem in a city of a few hundred thousand than in one of several million.

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"You're seeing companies that are looking for more improved and more balanced lifestyles for their employees, plus better affordability of buildings, of land, and places to expand," he said. "That's been a fairly consistent trend over the past three, four, five years especially."

That means businesses are forming there at a faster clip than they are in the largest metro areas. Freedman says there is also a supply problem, as the market for office real estate in big cities "tend to be very, very picked over." He also has concerns about investing in funds that focus too heavily on those places.

"There have been a lot of real estate funds that almost have to buy some of the quote-unquote 'big ugly deals," he added.

Residential trends

Freedman is tracking a simple phenomenon when looking at investments in the residential market: As the largest cities grow bigger and more expensive up, people move to smaller ones, where the pattern often repeats. So he's targeting "second and third tier" cities - loosely defined as places with fewer than a million people.

He says the most promising cities for residential real estate investment can be found in the Midwest, with examples includingColumbus and Cincinnati, Ohio; Indianapolis, Indiana; and Pittsburgh. Elsewhere he mentions Coeur d'Alene, Idaho and Raleigh-Durham, North Carolina as appealing spots.

Those are a good alternative to heavily-populated areas, especially on the West Coast.

"Multifamily as well as parts of the residential markets are seeing some levels of overbuild and overpricing" in cities like Seattle and San Francisco, Freedman says. "A lot of the Middle America states are benefiting from some of that."

In his view those patterns are likely to continue for years, and set up real estate in those markets for continued gains.