There has been speculation about overheating in the multifamily sector for quite some time now, seeing that the apartment sector’s dominance of the industry hasn’t waned. Naturally, people are waiting to see how long a good thing can possibly last.
What’s happened is that investors are having trouble finding things to buy at reasonable cap rates in hot areas of major markets. So now they’re looking at secondary markets and tertiary areas to get higher yields.
Buyers are now even interested in class B suburban assets in Midwestern suburbs. GlobeSt.com recently reported that a 425-unit asset in a suburb of Columbus, Ohio, recently fetched $42.5 million.
Some say that there is even less interest in primary multifamily markets because rent growth isn’t on par with what could be obtained in other locales. According to a KPMG survey of commercial real estate executives released last year 25 percent of respondents were looking at class A assets in primary markets, down from 48 percent in 2013. The survey also pointed out that there is increased interest in assets in the Southeast and Midwest.
This article by Realstone Capital Executive Joel Sanders explains some of the attractions to secondary commercial real estate markets. Many of them are in state capitols or areas with regional medical centers with strong workforces, yet developers aren’t as keen to build projects, so there is pent-up demand in these locales.
Sanders does caution, though, that it is important to have an understanding of a secondary market before making inroads. He also suggests having a local partner if a firm doesn’t have familiarity with the area.
What are your thoughts about buying apartments in secondary and tertiary markets? Is this a good idea or is it too soon?
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