Waterton looks for multifamily rental markets that offer relative affordability compared with the alternatives—such as for-sale housing—not only in that city, but in other markets nearby. As part of this process, Martin takes into account everything from demographic trends to the age of a city's existing housing stock to the firm's ability to add value through strategic renovations. He explains, “We also consider to what extent we're able to meet pent-up demand in terms of pricing, services and amenities, and the desired lifestyle as more people are drawn to the flexibility of renting.”

According to Smietana, the secondary markets HSA is pursuing all have a few common elements: a good transportation system, business-friendly environment, skilled employment base and a less saturated development market. Yet as with all opportunities for update, there comes a potential downside.

There are clear risks and challenges in venturing beyond the core. As his firm has tested the secondary market waters, Martin has discovered many of them have fewer barriers to entry in terms of land availability, land acquisition and development costs, zoning and entitlements and other potentially deal-breaking factors.

“That makes them more susceptible to incremental competition,” Martin says. “And because they tend to be less dense than core markets, secondary and tertiary markets sometimes offer a greater variety of housing options, including single-family homes, condos and townhomes that could pose a threat to apartment demand over the long term.”

What's more, he says, the economies of these smaller cities can be less diversified, with fewer industries or higher-paying jobs than what you might see in a primary market. The result: institutional investor interest is sometimes lower due to the inherent risks associated with these markets. For some players, the higher returns offered by a particular market simply aren't enough to offset the potential challenges.

“A critical part of the underwriting process for a secondary-market asset is to make sure there is enough business activity in that market in order to attract credit-rated tenants,” Dmitry Gordeev, managing principal at Fairbridge, tells GlobeSt.com. “Another key factor for attracting high-credit tenants is to acquire assets that are best in class. At the same time, the asset needs to be bought at below replacement cost. Finding an asset that meets all of these criteria can be challenging.”

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

ATLANTA—Space occupants are finding wins in the non-primary markets. By pursuing deals in cities like Indianapolis and Nashville, Bob Smietana, HSA Commercial's vice chairman and CEO, tells GlobeSt.com, “users have an opportunity to secure newly constructed space not only at a lower rate, but in many cases, in states where it's more affordable to do business.”

According to the Urban Land Institute and PricewaterhouseCoopers, many in the business feel that time is on the suburbs' side. In the firms' “2016 Emerging Trends in Real Estate Report,” analysts point out that the major argument is that “the deferral of marriage and family formation by Millennials, and the related preference for downtown living in denser, more active 'mating markets,' is just that—deferral. Eventually, the logic goes, generation Y will follow the baby boomers' path and head to the suburbs in the child-rearing years. That may very well be, and numbers are on the side of that argument as well.

And according to Real Capital Analytics, secondary and tertiary markets have become especially attractive to multifamily investors due to their relative yields. With rising rents and occupancies pushing up values in core markets, Phillip Martin, vice president of research at Waterton, there has seen a greater number and variety of investors—including those that did not previously have a presence in secondary and tertiary markets—seek out higher returns in these cities, leading to heightened competition.

“We remain focused on primary markets, but do selectively invest in secondary markets in close proximity to larger metros within the same region,” Martin tells GlobeSt.com. “Many of these smaller markets have experienced strong job growth, oftentimes bolstered by pro-business initiatives on the city and/or state level, as well as infrastructure improvements such as expanded highway networks and public transportation systems that improve accessibility.”

Waterton looks for multifamily rental markets that offer relative affordability compared with the alternatives—such as for-sale housing—not only in that city, but in other markets nearby. As part of this process, Martin takes into account everything from demographic trends to the age of a city's existing housing stock to the firm's ability to add value through strategic renovations. He explains, “We also consider to what extent we're able to meet pent-up demand in terms of pricing, services and amenities, and the desired lifestyle as more people are drawn to the flexibility of renting.”

According to Smietana, the secondary markets HSA is pursuing all have a few common elements: a good transportation system, business-friendly environment, skilled employment base and a less saturated development market. Yet as with all opportunities for update, there comes a potential downside.

There are clear risks and challenges in venturing beyond the core. As his firm has tested the secondary market waters, Martin has discovered many of them have fewer barriers to entry in terms of land availability, land acquisition and development costs, zoning and entitlements and other potentially deal-breaking factors.

“That makes them more susceptible to incremental competition,” Martin says. “And because they tend to be less dense than core markets, secondary and tertiary markets sometimes offer a greater variety of housing options, including single-family homes, condos and townhomes that could pose a threat to apartment demand over the long term.”

What's more, he says, the economies of these smaller cities can be less diversified, with fewer industries or higher-paying jobs than what you might see in a primary market. The result: institutional investor interest is sometimes lower due to the inherent risks associated with these markets. For some players, the higher returns offered by a particular market simply aren't enough to offset the potential challenges.

“A critical part of the underwriting process for a secondary-market asset is to make sure there is enough business activity in that market in order to attract credit-rated tenants,” Dmitry Gordeev, managing principal at Fairbridge, tells GlobeSt.com. “Another key factor for attracting high-credit tenants is to acquire assets that are best in class. At the same time, the asset needs to be bought at below replacement cost. Finding an asset that meets all of these criteria can be challenging.”

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.