In real estate markets where multifamily prices are on the rise in big cities, some investors are looking to secondary and tertiary markets. In these smaller markets, prices are lower while returns are higher. Vice president at Colliers International in Atlanta, Will Mathews, explains how competition discourages smaller investors away from primary markets. “Primary markets are becoming more difficult to actively acquire because of the sheer flood of fresh capital, and investors are finding greater yield opportunities and less competition in secondary and tertiary markets.” Looking at Cap rates alone, it is clear to see why firms are buying into smaller markets.
Average cap rates are higher in secondary and tertiary markets, but are riskier than primary markets. According to Real Capital Analytics Incorporated, the national average cap rate for multifamily properties in March was 4.29% for primary markets like New York, 6.41% for secondary markets like Houston, and 7.09% for tertiary markets such as Buffalo, N.Y. While larger investors continue to seek out primary market investments, small investors are focusing more on these smaller markets. Even though large investors’ focus lies in primary markets, they are starting to diversify with some secondary and tertiary market investments.
When examining smaller markets, investors still look for the same basic characteristics: good location, great schools, easy access to retail, and strong employment opportunities. The risk in secondary and tertiary markets comes from liquidity. But some say that as long as investors know and are comfortable with the risk that comes with higher cap rates, these smaller markets are the right place to be.