Yield-driven investors are expanding their list of target markets and acquiring more rental assets in secondary and tertiary cities. During the first quarter of 2015, more than $16 billion of multifamily product traded in secondary and tertiary markets, according to data firm Real Capital Analytics (RCA).

Spanning that same three-month period, $12.3 billion of multifamily transactions occurred in gateway metros — Los Angeles, San Francisco, New York City, Washington D.C., Boston and Chicago. Out of the five real estate sectors RCA tracks, only in the multifamily sector did secondary/tertiary markets out-perform the gateway markets.

Increased demand for secondary and tertiary product will equate to a rise in average sales prices. Recording breaking transactions, in terms of price per unit, will also occur in these markets.

RCA calculates that the average price per unit for a tertiary property rose 23 percent to more than $75,000-per-unit during the first quarter. A rise in sales prices will negatively affect cap rates; however, the average cap in a tertiary market currently stands at 6.9 percent. This figure is significantly higher than the average cap rate in primary and gateway cities – 5 percent or sub-5 percent.

Sales prices for newly built product in secondary markets will typically trade in the $150K/unit to $200K/unit range during the second half of 2015.

“The market is just hot right now, and new records and ceilings are breaking all the time,” said Patrick Jordan, a senior associate with Marcus & Millichap’s Memphis-based office.

Jordan recently closed a transaction in Little Rock, Arkansas, which set a new watermark for conventional deals in Arkansas. The property traded for $36M (nearly $140K/unit). He also reports setting new benchmarks in Greenville, South Carolina, — at $146K/unit — and Alabama — at $187.5K/unit.

Markets where new product will trade include Louisville, Kentucky; Cincinnati and Columbus, Ohio; Nashville; Orlando, Florida; Charleston, South Carolina; Raleigh and Charlotte, North carolina; Norfolk, Richmond and Virginia Beach, Virginia; Minneapolis; Portland; and Scottsdale, Arizona.

Marcus & Millichap’s Premium Yield Index recently pointed to Detroit as its top city for caps. The market has a five-year average cap rate that eclipses 9 percent. The next highest yielding cities were Cleveland, Pittsburgh and Indianapolis.

Email Erik Pisor.

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