Looking at tertiary markets: The Hottest Secondary Markets for Multifamily Investment
New York; Boston; Washington, D.C.; the Bay Area; Southern California; and Seattle. They’re called the “sexy six,” and they led the multifamily industry out of the recession. Investor interest in those core markets has been intense since mid-2009, leading to rabid bidding wars and ever-higher price tags.
But in some ways, the sexy six may have run their collective course. Capitalization rates have gone so low in those areas reaching and, in some case, outpacing their pre-recession peaks that a growing list of investors is searching for yield in less-celebrated cities.
The trickle-down of capital is well under way markets like Denver, Portland, Dallas, and Houston have captured increasing inflows of investment over the past 18 months. In fact, Denver saw a 170 percent increase in apartment transaction volume last year, while Portland’s deal volume climbed 61 percent. And Dallas and Houston saw increases of 41 percent and 27 percent, respectively, last year, according to New York based market research firm Real Capital Analytics (RCA).
Austin saw the most dramatic improvement last year in apartment values. The capital city led the nation last year in price appreciation, with a 42 percent rise in price per unit over the year before, reaching nearly $107,000. Cap rates fell about 160 basis points (bps) in Austin last year and are now averaging about 5.8 percent???putting it on par with markets like Los Angeles and San Diego according to RCA.
Raleigh-Durham has popped up on a lot of radars over the past year, thanks to a concentration of technology-focused jobs and a young, well-educated workforce. Last year, the market saw a 21 percent appreciation in pricing, reaching $99,589 per unit, and cap rates compressed about 60 bps year over year, according to RCA.
The trickle-down of capital is only starting to be felt in secondary markets, and it will take awhile before the trend reaches down further, to tertiary markets. (I.E. – Sarasota, Bradenton, etc) Apartment cap rates in tertiary markets have remained between 7.50 percent and 7.75 percent for almost two years, according to RCA.
Markets That Saw the Most Cap-Rate Compression Last Year
2010 2011 Difference
1. Detroit 10.8 7.8 -3
2. Hartford 8.2 6.6 -1.6
3. Palm Beach 6.9 5.3 -1.6
4. Austin 7.4 5.8 -1.6
5. Inland Empire 7.5 6 -1.5
6. Kansas City 9.3 8 -1.3
7. Minneapolis 7.9 6.8 -1.1
8. Nashville 7.9 6.8 -1.1
9. Cincinnati 10 9 -1
10. Cleveland 8.4 7.4 -1
Secondary Markets With Most Improved Pricing in 2011
2011 Avg. $/Unit Change vs. 2010
Austin $106,735 42%
Raleigh $99,589 21%
Nashville $77,262 18%
Palm Beach $182,871 18%
Columbus $39,363 16%
Source: Real Capital Analytics
Posted by Sean Dreznin on Sep 18, 2013