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Why Secondary and Tertiary Markets Present a Compelling Multifamily Investment Opportunity

The affordable and workforce housing shortage isn’t limited to primary markets.

Cities like Los Angeles, San Francisco and New York City are often top of mind when thinking about our nation’s affordable housing crisis. But the affordable and workforce housing shortage isn’t limited to the country’s primary markets. Secondary and tertiary markets such as Austin, Texas, Charleston, S.C., and Raleigh, N.C. are also experiencing a significant need for more supply as residents struggle to find an affordable place to live. These supply-constrained markets are spread throughout the country and represent unprecedented demand for more affordable multifamily units, presenting a prime opportunity for multifamily owners and buyers to help fill this gap while capitalizing on a promising investment opportunity.

Affordable supply

The statistics surrounding affordable housing in our country are staggering. The U.S. has a shortage of more than 7 million affordable homes for the country’s 11 million lowest income families, and only 37 affordable homes exist for every 100 extremely low-income households. Since 1990, the private market has lost more than 2.5 million low-cost rental units and rent increases have outpaced income growth. In short, it is an extremely supply-constrained product with significant demand, creating ample opportunity for multifamily investors to help meet this need while benefiting their own bottom line.

Rising construction and labor costs contribute to the lack of supply, as does the fact that most multifamily housing built in the last 10 years is class-A. When you look at the cost to build new multifamily product, higher rents are necessary to make the project profitable unless a tax credit or subsidy is in place. With a lack of new supply inevitable under these circumstances, it becomes imperative that financing for existing affordable product is available. These existing properties are experiencing high demand and offer strong ROI opportunities for their owners.

Why secondary/tertiary?

There isn’t an industry standard definition, but we consider 100,000 to 500,000 MSA to be a secondary market and 25,000 to 100,000 MSA to be a tertiary market. The best performing multifamily markets in 2019, as measured by year-over-year rent growth, include Midland-Odessa, Texas; Pensacola, Fla.; Las Vegas; Phoenix and Wilmington, N.C.—all secondary and tertiary markets with particularly strong employment and job growth. In turn, housing demand is burgeoning in these markets, offering strong ROI for investors. As more companies move operations out of costly primary markets, and as workers are forced to flee primary markets due to astronomical rent costs, these high-growth secondary and tertiary markets will experience an even greater demand for workforce housing in the coming years.

And there certainly isn’t a shortage of these markets. There are hundreds of markets nationwide experiencing demand for financing existing multifamily properties. Smaller markets typically feature smaller properties, which require small balance loans. When it comes to capital, most of these apartment communities have straightforward financing needs, often using a combination of borrower equity and a first-lien debt position. Small balance loans under $20 million are common for the finance or refinance of these assets.


While multifamily investment in secondary and tertiary markets has many upsides, buyers and owners should consider potential risk and conduct proper due diligence, as with any investment opportunity.

While vacancy rates average approximately 4.1 percent in primary markets, secondary markets average 4.5 percent and tertiary markets average 5.2 percent, according to Marcus & Millichap’s 2019 Multifamily Investment Forecast. This isn’t a large spread, but it demonstrates the greater risk of tenant turnover in less populated markets—a risk potentially amplified during downturns. All of these vacancy rates sit at record lows, however, making multifamily a particularly compelling investment opportunity. 

With this risk, however, come stronger cashflows. Cap rates average 150 to 200 basis points higher in secondary and tertiary markets than in primary markets. When the market inevitably dips, this housing type will only continue to grow as people seek an affordable place to live.

Additionally, renting is becoming increasingly popular over homeownership, making all types of multifamily product attractive for investors. Homeownership rates for those under 35 fell from 43 percent in 2007 to 37 percent in 2018, and all indications show that the younger generations will continue to rent rather than purchase homes in the near term for a variety of reasons. From costly student loan payments to frequent job changes to difficulty securing a loan in this tightened lending environment, multifamily continues to be more practical for many in their 20s and 30s. The baby boomer generation is increasingly preferring to rent as well. A 2017 report from the National Multifamily Housing Council and National Apartment Association shows that those aged 55 and over account for more than 30 percent of renter households. Together, these dynamics offer significant protection for multifamily owners in a downturn compared to other product types.

While a real estate holding of any kind requires careful consideration, secondary and tertiary markets should increasingly be on the radar of owners and buyers as the need for more workforce and affordable supply continues to grow and cap rates outpace primary markets.

Pat Jackson serves as CEO of Sabal Capital Partners, LLC, a single-source lender specializing in the small balance transaction space. He can be contacted at [email protected].

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