LOS ANGELES—Investors are finding higher yields in secondary markets, according to Alexa Mizrahi, senior loan officer at Lone Oak Fund, and her fellow panelists on the Rise of the Secondary City panel at CCIM Thrive in Downtown Los Angeles. “Investors are going to secondary markets for yield,” said Mizrahi, who also recently spoke about capital markets trends at RealShare Apartments. “There are more opportunistic and value-add transactions in those markets.” Moderated by Sandy Benak, CCIM, leasing manager at Granite Properties, the panel also included Bill Hoffman, chairman of the board and CFO at Trigild; Michael Anderson, CCIM, chairman of RealSource; Andrew White, CCIM, managing director of the western region at Gladstone Commercial; Gary Lee, CCIM, senior director, national office and industrial properties group at Marcus & Millichap.

The definition of a secondary city or market and a primary market is somewhat subjective. For example, Houston is not considered a primary market, but a secondary market. “If that it isn't a primary market, I don't know what is, because it is an important market,” said Hoffman on the panel, adding that he has “always seen more opportunities in secondary markets.” Anderson agreed that the definition is subjective, however, he made the point that there has to be some standard to follow. Some of the major secondary markets where he sees opportunities include Austin, Seattle, Charlotte and Charleston, while White added that his firm really likes Denver. Lone Oak Fund provides bridge loans throughout California, and here, Mizrahi explained that demand is higher in coastal markets, so they tend to look at the more inland markets as secondary cities. Generally, everyone agreed, however, that the crucial traits of a secondary market include proximity to the central business district and to public transit.

Another one of the reasons that higher yields are available in secondary markets is due to the absence of foreign investors. In primary markets, Chinese, investors, for example, are driving the prices way up on a lot of flagship properties. “These different players change the game,” he says. “I will never outbid a Chinese investor on a property like the Waldorf Astoria because they will never turn a profit at that price, but their money is safer in New York than it is in China.”

White went on to wager that these secondary markets would only become more popular as the millennial generation gets older, explaining that they will eventually want to be in a suburban neighborhood with a yard and space for their family. “In a few years there will be a shift back to the secondary markets just outside of the city,” he said. He added that although the millennial generation is driving a lot of the real estate trends, we shouldn't forget about Gen-X and Gen-Y, who also have a strong voice.