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Investors Look to Secondary Real Estate Markets

Byron Carlock of PwC shares why investors are looking beyond primary real estate markets.

Real Estate in Austin Photo Credit: Shutterstock/Roschetzky Photography

After analyzing trends in 78 leading North American markets, experts at PricewaterhouseCoopers (PwC) and Urban Land Institute revealed the top 10 real estate markets to keep an eye on in 2018. While the United States’ six primary markets—New York City, Boston, D.C., Miami, Los Angeles, and San Francisco—have long held considerable appeal for those considering a move, they were edged out of the top spots by secondary markets like Seattle, Austin, and Salt Lake City. Driven by the desire to find a better standard of living and less-expensive rent, individuals are increasingly settling down in secondary markets.

And investors are starting to follow suit. One investor surveyed for the report noted, “Traditional gateway markets have gotten so competitive that we are looking at adjacent submarkets and the top secondary markets.” Only one primary market (Los Angeles) made the top 10 in this year’s study, while secondary markets and markets adjacent to primary or gateway markets proved more popular.

According to Byron Carlock, PwC’s U.S. real estate practice leader, interest in secondary markets skyrocketed from 2002 to 2007 due to the rise in debt and equity capital that flowed into the market. After the global financial crisis, it returned to the relative safety of primary markets. But it seems the tides are slowly shifting again. “Interest in secondary markets has been gradually increasing since 2012,” Carlock notes.

Investor interest in secondary markets is fueled by higher expected return, growth potential, and often necessity. “Domestic investors, priced out of the primary markets, have begun to look for investment opportunities in secondary markets,” Carlock says. “The higher expected return is often driven by the lower investment amount due to less competition for assets in secondary markets. The growth potential is attributed to the faster economic growth that characterizes the top secondary markets. The belief is that the asset will experience higher income growth as long as the amount of new supply delivered to the market remains under control.”

Foreign capital continues to favor the six primary markets—but Carlock believes this will change over time as secondary markets continue to become more attractive. “Secondary markets will simply continue to elevate their status in the capital markets, each with different reasons. The appeal of Texas and Tennessee as business-friendly states from a taxation perspective and the desirable quality of life in places like Denver, Nashville, and Charleston are reflected by migration inland to these locations,” Carlock says. “Similarly, those cities that offer ‘quality of life’ metrics will continue to be elevated as city leadership focuses on attributes that make the city attractive for the future—educated workforce, vibrant cultural community, transit, international airport, and security.”

Of course, it remains to be seen whether the trend will continue. “Secondary market investment is only proven credible in the capital markets when liquidity is available amidst a downturn—that will be the test,” Carlock says.

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