In the last four years, the pandemic triggered significant migration from major urban centers to secondary and tertiary markets. Interest rates escalated alongside the soaring asking prices for single-family homes, dampening the appeal of homeownership while amplifying rental demand nationwide. As rental demand surged, these burgeoning cities experienced unprecedented growth. This article discusses how savvy investors are shifting their focus away from major markets and redirecting their attention to the benefits of investing in secondary and tertiary markets for their 2024 investments.
Secondary Market
The definition of a secondary market varies among investors. Some view it as encompassing areas with 500,000 to 1 million residents, while others extend it to regions with 2-5 million. Alternatively, some investors define secondary markets based on growth trends, categorizing areas experiencing above-average population growth as falling into this category.
While the varying perspectives regarding secondary markets are relatively minor, all three viewpoints typically share common considerations. These include economic drivers such as investment activity, economic strength like population growth, employment growth and income growth, occupancy rates, and market stability. By examining these factors comprehensively, investors can gain a holistic understanding of the market landscape and make informed decisions.
Tertiary Market
Similar to the secondary market, the tertiary market reflects traits of population expansion and robust economic drivers in an up-and-coming economy. However, the key distinction is a tertiary market is typically more spread out and has a smaller population. A tertiary market is often defined as having fewer than 1 million residents. These markets offer unique investment opportunities in areas poised for growth and development.
10 Benefits of Investing in Secondary & Tertiary Markets
Affordability
Investing in smaller secondary and tertiary real estate markets offers a clear advantage: affordability. Primary markets like NYC and LA attract considerable international interest, driving up prices and making entry challenging.
By tapping into these markets during their initial stages of growth, sponsors can capitalize on more affordable acquisitions due to a lack of competition.
Reduced Competition
In primary markets, competition is fierce as deep-pocketed private equity funds and family offices vie for properties, driving prices up and lowering investment cap rates. In emerging markets, many major players adopt a cautious approach, preferring to wait and observe to mitigate their risk exposure. This presents seasoned sponsors with the chance to pioneer the area before larger players enter the scene.
Enhanced Value
Secondary and tertiary markets, with reduced competition, often provide greater financial accessibility. Ultimately, enabling investors to achieve higher returns as these markets gain popularity.
Increased Returns
Alongside affordability, the typically higher investment cap rates in secondary and tertiary markets contribute to the potential for generating higher returns on investments.
Lower Volatility
Secondary and tertiary markets experiencing robust growth patterns tend to exhibit lower volatility during economic downturns, making them attractive investments. This offers investors reduced risk with a similar upside expected in major markets.
Appreciation Potential
With lower living costs and limited real estate supply, secondary and tertiary markets hold considerable potential for appreciation, offering strong growth potential. This is one of the most valuable advantages of capturing these opportunities at the onset of the market’s popularity.
Value-Add Prospects
Primary markets’ saturation often limits opportunities for value-add projects, while growing markets present numerous avenues for value enhancement and growth initiatives. As new supply enters, driving up rent prices, older properties can renovate and cater to a more budget-conscious demographic while raising rent and increasing NOI.
Organic Rent Growth
Organic growth opportunities are constrained in primary markets due to over-saturation. In smaller markets, the influx of new supply drives up prices. This allows existing Core or Core Plus assets to narrow the gap in rent prices. This is further compounded by increased demand as these markets expand, organically enhancing rent potential.
Early Entry Advantage
For those defining markets based on growth, early entry into emerging markets provides a significant advantage, enabling investors to capitalize on rising real estate values before they peak.
Broadening Market Perspectives
Secondary and tertiary markets are often shielded from risks by leveraging insights and trends from surrounding major markets. This foresight allows investors to react more effectively to market shifts. In contrast, major markets face higher risks due to the lack of a larger market to predict shifts in real estate trends.
Up and Coming Secondary & Tertiary Markets 2024
Viking Capital has set its sights on two promising markets for our latest acquisitions.
Dawsonville, Georgia
The first is Dawsonville, GA, located just an hour outside downtown Atlanta in the expanding GA-400 Northern Corridor. This city is among Georgia’s fastest-growing submarkets, situated along the path of progress from Atlanta to Alpharetta. Dawsonville is witnessing dynamic growth and economic prosperity. Driven by Fortune 500 giants like Google, Microsoft, and JP Morgan, creating a robust job market and heightened demand for multifamily properties.
Our recent acquisition, Dawson Forest, constructed in 1998, presents investors with a compelling opportunity, offering the potential for average premiums of $250 or more. Dawson Forest stands out as a more affordable option with only five multifamily properties currently in the market and four being newer Class-A properties. Dawson County is ranked as the third fastest-growing county in the US, indicating remarkable growth potential. With such growth underway, it’s only a matter of time before family offices and major real estate firms uncover this hidden gem.
New Braunfels, Texas
The second incredible market is where our newest investment opportunity is found, in New Braunfels, Texas. Positioned within the Texas Innovation Corridor along Interstate 35, this rapidly expanding city is nestled between the bustling metropolises of Austin and San Antonio. Emerging as a thriving Metroplex with a combined population of 5 million, this city is booming with growth from all directions.
Our current investment property is Villas at Sundance, a beautiful Class-A, 252-unit, first-generation multifamily asset built in 2012. It presents investors with an ideal opportunity to add an incredible cash-flowing asset acquired at an attractive basis to their portfolio. Villas at Sundance is located in the heart of New Braunfels, the “Third Fastest Growing City in the Country,” with a population growth of nearly 40% in five years. Villas at Sundance benefit from robust tenant demand, driven by the rapid population growth of New Braunfels. This ensures stable cash flow and reduced risk of long-term vacancies. This secondary market is thriving and is already on many savvy investors’ radars, as these two major hubs continue to grow and thrive.
The Smart Choice
The growing popularity and over-saturation in major markets such as Dallas, Atlanta, and Houston are leading to prosperity in nearby smaller markets. In recent years, secondary markets like Austin, Denver, and Nashville have seen significant growth. While tertiary markets such as Colorado Springs, San Antonio, and Portland are now attracting investor attention. As an integral part of our acquisition process, our team diligently monitors nationwide growth and progress to pinpoint the most promising markets for new investment opportunities.
Our advice to investors: Stay ahead of the curve by identifying growth in areas along the path of progress that others have yet to tap into.
To learn about our incredible investment opportunity, Villas at Sundance, click here: https://go.vikingcapllc.com/optin-ads-cold1707231185837
