In Search of Higher Yield, Investors Branch Out

Broadstone Ranch is a boutique class-A asset built in 2011 in College Station, TX.

HOUSTON—In the search for higher yield, investors have branched further outside of gateway/major MSAs of Houston, Dallas, San Antonio and Austin. Secondary markets with strong activity include the Rio Grande area (McAllen/Edinburg/Mission), El Paso and Corpus Christi/Kingsville. Tertiary markets with strong activity include Beaumont/Port Arthur, College Station, Waco, Longview, Odessa/Midland, Coastal Bend area (Victoria) and Lufkin.

Cap rate spreads over core market assets have tightened but many secondary/tertiary deals are trading at a 50-100 basis point difference from primary markets. While secondary or tertiary cities where one or two dominant industries can significantly influence occupancies and financing can be difficult to obtain, most Texas submarkets have well-diversified economic drivers. 

This type of diversification, lower supply and availability of debt financing via agencies, CMBS and bank loans has spiked investor demand. According to ARA Newmark, there are more local and regional buyers than institutional in the market at present. Private buyers are snapping up class-B and C assets for value-add plays. Institutional buyers are eyeing class-A acquisitions and new construction.