April 7, 2022
The word ‘tertiary’ doesn’t usually bring happy thoughts—it literally describes things that are in third place, after second, definitely not in first. But in the multifamily universe, the tertiary market is getting pride of place in front of investors. This segment is already hotter than ever, and it shows no signs of sign of slowing down. It’s important to understand why.
Of course, not everyone defines this term the same way. In a loose sense, a tertiary market is outside the top 50 metros by population, or has less than 1 million in MSA population, or less than 400,000 in city population. But in this dynamic discipline, those boundaries are far from rigid; multiple data points such as employment, capitalization rates and various economic drivers can be equally relevant.
Here’s what we can all agree on: While a lot of investment is still pouring into secondary markets, the opportunities in even smaller cities and towns are proving ever more attractive. In one sign of boom times, Real Capital Analytics reports investment sales volume in tertiary markets spiked to $147.0 billion in the year just passed. These transactions account for less than 20% of overall sales volume, but that’s still a 56% jump over the $94.2 billion recorded in 2019.
There’s no single reason for such a major shift, but a few are easy to discern. First, many areas are gingerly returning to the new normal. That means the most familiar names that saw a dip during the worst of the pandemic—with unprecedented vacancy rates and falling rents—are returning to their exalted status. This has driven investors pursuing higher yields and stronger growth toward that second tier, but again, there are no easy pickings.
On a related note, the endless hype about urban flight did have some basis in reality. Some of the biggest cities did see a migration, and it’s clear that at least some work-from-home and flexible arrangements will become permanent. This will take its toll on many commercial-residential fixtures. But there are also more positive reasons for tertiary markets to gain prominence. Remember, the fundamental reasons for choosing a particular location remain the same: employment (particularly tech hubs), university campuses, metro markets nearby, and generally a higher standard of living.
In sum, these regions are gaining momentum because for the renter, they’re more affordable; for the investor, prices have not appreciated as much as they have in some of those larger and more familiar markets.
For example, focus on the jobs scenario. Ford Motor Co.’s is moving more heavily toward electric vehicles, and the company last year announced plans to spend $11 billion on new plants—to build cars, and the parts needed to build them. This includes two battery plants in Glendale, Kentucky, and both a battery plant and a truck assembly in Stanton, Tennessee. Multifamily investors take note: There will be some 11,000 new jobs in and around those two towns alone, and new housing arrangements will spring up to meet the need.
Samsung, the South Korea electronics conglomerate, should also interest multifamily investors. Just last fall, Samsung Austin Semiconductor, LLC chose Taylor, Texas as the site for its newest semiconductor plant. This town, which registered a population of just over 16,000 during the last census, will be the beneficiary of a $17 billion investment over the next few years. The enterprise will draw thousands of new residents—perhaps including spillover from nearby Austin—and new multifamily development to go with it.
At Offerd, we track these and other quieter transformations around the country. That’s what makes the market so promising, and so dynamic—it serves as the nexus for ongoing trends in the global economy, millennial preferences, technology access, lifestyle mobility and so much more. We predict that the multifamily sector, spanning all markets, will remain very hot for at least the next decade.
That doesn’t mean any random investment will pay off. We’re going to see increased competition across all property classes (A, B & C) and markets, and that will necessitate new approaches. But there are more opportunities becoming available every day, even (and perhaps especially) in smaller markets around the country. The right research supporting the right strategy will prove lucrative.