The Azucena Take: Capital Migration to Tertiary Markets
Investment real estate is a venture that requires one to have a sense of nuance. If you follow the trends without digging into the numbers or factors, you're guaranteed to lose money. National averages give a good idea of what the market is like but data on your market is more helpful.
Take for example the recent jump in population and capital flowing into tertiary markets. One may not notice it when looking at national trends. It's only when looking at each metro individually that you will see the influx going into tertiary markets.
Defining Markets?
Before going into this, it helps to understand what we mean by primary, secondary, and tertiary markets regarding real estate.
Primary Markets are established cities that serve as a center of commerce and culture. They are primarily gateways cities with a large population and high GDP.
Secondary Markets are metro areas with a high population and solid market. While lacking the high GDP and prestige of a primary market, they are still a desired market for tourists and investors.
Tertiary Markets are metro areas that are defined as having a population of fewer than 1 million people. They are often defined by their low cost of living and having the potential to grow into a Secondary Market overtime.
The Rise of Tertiary Markets
Before 2005, primary markets accounted for 60% of all investment real estate sales while tertiary markets accounted for less than 20%. Around 2005 those numbers started to change as capital started migrating into the tertiary markets. Tertiary markets overtook primary markets by 2018 and now account for 47.9% of investment real estate sales.
So what caused this shift into the tertiary markets? The low cost of living in tertiary markets has made them appealing to people and capital.
Young professionals have been moving from primary markets into tertiary markets. This was an ongoing trend that speed up because of the pandemic. The cost of living was reasonable, especially if they have a job that allows them to work from home.
Investors looking to start or grow their portfolio have also tapped into this market. Tertiary markets low barrier and cost of entry are appealing when compared to the primary and secondary markets. This is due to the affordability of property along with the lack of heavy competition from institutions. At the same time, these investments offer a higher yield compared to those in primary markets.
What it Means for Investors?
The takeaway should not be to avoid investing in major cities or invest everything in a tertiary market. While it's easy to be tempted to dump capital in these markets, one needs to research the metros to see the possibility of future growth. This is why it helps to work with an expert who understands the markets to guide you in building your portfolio.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap