Why Sabal Sees Big Opportunity in Secondary, Tertiary Markets

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The shortage of workforce and affordable housing has become a national crisis—not only an issue in major metros and primary markets. With limited supply and rising demand, national lender Sabal Capital Partners sees an opportunity to address the housing crisis in secondary and tertiary markets. As the economy continues to grow, demand will increase for this housing segment, and in a downturn, demand will increase as people seek a lower cost of living.

“There is a workforce housing shortage in every market in America. People think that this is a big city issue, but the reality is that this is an issue in secondary and tertiary markets just as much as it is a primary market,” Pat Jackson, president and CEO of Sabal Capital Partners, tells GlobeSt.com. “As the economy continues to grow, there has not been enough workforce housing coming into the marketplace. You see a lot of growth in class-A and A+ markets, but you don’t see any new supply in places where workers can live and raise a family. That has been exacerbated by a limited availability of starter homes and the difficulties to secure a loan as well as the number of people that would rather rent. It is putting a lot of pressure on workforce housing supply everywhere.”

While there is demand for workforce housing across the nation, Sabal likes the secondary and tertiary markets because they offer better cap rates and pricing than primary market. “We like secondary and tertiary markets because we haven’t seen cap rates come down the way that they have in primary markets like San Francisco and New York,” says Jackson. “That makes these markets a good investment in relative terms around a supply-constrained product with a lot of demand.”

Sabal is a national lender and is open to all opportunities in smaller markets, however, Jackson names Austin, Cleveland, Charlotte and Pittsburg as some of the markets that have the right fundamentals. “Those economies are growing in a diversified way, and city leaders realize that they can’t sustain that growth if they don’t solve the housing issue. It is becoming more and more of a front burner issue for these city governments,” he says.

Most borrowers seeking capital for these projects are playing in the small balance space with straightforward financing needs. “The source of capital is usually a combination of equity that the borrower has and primarily a first lien debt position,” says Jackson. “For mezzanine or preferred debt on top of that, typically in the small balance space, which is where the lion’s share of these transactions take place, it is often not highly structured.”