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Oct. 4, 2012

The Outlook for Investing in Secondary and Tertiary Markets

By Jessica Fiur, News Editor

New York—Follow the job growth. That was the key takeaway during “Secondary and Tertiary Markets: Identifying, Finding and Investing in Commercial Real Estate Opportunities,” the recent Multi-Housing News and Commercial Property Executive webinar sponsored by Yardi and moderated by Executive Editor Keat Foong. Panelists, which included Gary Ralston, managing partner, Coldwell Banker Commercial Saunders Ralston Dantzler Realty LLC; John S. Sebree, vice president, national director, National Housing Group, Marcus & Millichap Real Estate; Albert M. Berriz, CEO, McKinley; and Ernie Katai, senior vice president, Berkadia, looked into commonly overlooked markets and provided insights for investors.

Gary Ralston

Focusing on the commercial property sector, Ralston said that investors are still concentrating on safe investments, and on an aggregate basis in secondary markets, the prices are still down. The annual population growth of the United States is almost 1 percent, so, according to Ralston, the goal of investors is to focus on states that are growing above that, such as Florida, Texas and Nevada. Additionally, investors and developers should pay attention to areas of employment growth, which he says has shifted to port-driven areas.

Other important tips that Ralston provided were to work with the best local professionals and to know the employment numbers and supply on a granular level.

“It’s a battle out there, and it’s fought with swords and not lasers, so get in close!” Ralston said.

On the multifamily side, Sebree also showed that the outlook for tertiary markets is appealing, especially in terms of employment.

“Tertiary markets tend to be more stable over time,” he said. “The change in [job growth] is dominated by tertiary markets.” However, in terms of employment, Sebree said that secondary markets tend to be more unstable.

John Sebree

Multifamily markets tend to follow employment rates, so according to Sebree, apartment vacancies correlate with employment rates.

He also suggested looking into these markets when it comes time to invest. According to Sebree, the markets with the lowest vacancies are New York (primary market); Portland, Ore. (secondary); and Salt Lake City (tertiary). The markets with the most positive movement in vacancies include Houston (primary); Charlotte, N.C. (secondary); and Columbus, Ohio (tertiary).

“Today is an incredibly good time to purchase,” Sebree said.

Berriz, who is involved in commercial and multifamily properties, provided a case study of the areas of the country his company focuses on. He echoed the other presenters in their assertions of looking to the areas of growing employment.

Albert Berriz

“Strategically, we’re very surgical,” he said. “We’re only looking in certain areas, and if you look in these areas, there’s terrific job growth.”

These areas, which Berriz said are commonly overlooked, include Cary, N.C.; Spartanburg, S.C.; and Gainesville, Fla.

“Most people don’t travel to these markets because they’re hard to get to,” Berriz said. “I urge the audience to think about [different] areas.”

Berriz also suggested some other secondary and tertiary markets with the most opportunity for investors. These include Houston, Atlanta and Las Vegas.

According the Berriz, investors should also be looking into Class-B and C multifamily properties, and the retail sector. However, do so cautiously.

“Be careful, because there are a lot of Class-C properties that can’t be turned around,” he said. “Not all assets are created alike.”

The final panelist, Katai, spoke about lenders and how they look at secondary and tertiary markets.

“Lenders define secondary and tertiary markets differently,” he said. “It’s still a bit of a wildcard how lenders will deal with it.”

Ernie Katai

According to Katai, lenders are primarily looking for jobs and economic growth and the financial strength of the borrower. They are also looking for quality assets that have a lower purchase price. Lenders are also finding a lot of desirability in college areas. Additionally, he suggested looking for different sources of financing, such as co-ops of small banks, instead of the usual large banks.

“There is no formula—everything is per the individual lender,” Katai said. It comes down to basic fundamental issues. You have to do your homework.”

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