A dramatic shift has occurred in the multifamily market: Investors have finally begun buying apartment properties and multifamily complexes on a large scale in smaller cities and towns. While offers for properties in the secondary and tertiary markets have been increasing steadily for some time, it’s only recently that there has been a significant jump.
According to the data firm Real Capital Analytics (RCA), in the first quarter of 2015, investors purchased $16.2 billion in apartment markets located in secondary and tertiary markets nationwide. During the same period, $12.3 billion was purchased in the six major metropolitan areas (Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, DC). RCA further stated that, among the five major property types that the company analyzes, it was only in the apartment sector that markets outperformed the six major metropolitan regions.
It’s not difficult to see why this movement toward secondary markets is happening. In core markets, prices have become so high and returns so low that investors are increasingly pursuing yield into secondary markets. Commercial real estate investment firm Marcus & Millichap measures a difference of 240 basis points between the average cap rates to be found in primary and secondary markets. The firm further finds that, on average, the apartment markets that provide the highest yields for apartments are secondary markets.
