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.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Connect Now is tomorrow! Join top producers as we discuss how to position your business for success in 2021.Reserve Your Spot×