GOOD CAP RATE HUNTING: INVESTMENT RETURNS REMAIN STRONG IN TERTIARY MARKETS AWAY FROM POPULATION CEN
As the economy continues to rebound, great property deals are getting harder to find. Brokers and investors have ventured out from primary markets into secondary and so‐called “gateway” regions to find better prices and higher rates of return. But CAP rate compression has already struck areas like Seattle, Austin and Charlotte. Fortunately, rates of return remain strong in tertiary areas like Boise, Ogden and Reno in the West and Little Rock, Asheville and Charleston East of the Mississippi. Historically, investors and lenders alike have been wary of smaller markets because they can be the first to shed jobs in a downturn and the last to add jobs when the updraft returns‐‐both expect a premium to compensate for risks associated with less diversified micro economies, fewer large employers, smaller tenant pools, and murkier exit strategies. Smart brokers and investors diffuse these risks by: • Purchasing high quality properties • Researching population inflow trends • Seeking locations that leverage stable “economic engines” like medical centers, government offices and campuses (like military bases or national labs), airports, transit hubs and higher education facilities • Buying in‐step with new residential development • Betting on the staying power of credit‐worthy tenants • Understanding other economic drivers like energy costs, commute times, quality of life, quality of schools, low crime rates, and proximity to major markets. The real benefit of investing in tertiary markets is “velocity of capital” that occurs with another one to three percentage points in the CAP rate—investor returns obviously compound at a faster rate. Consider this: Our nation’s pioneers faced higher risks than their relatives that stayed in their comfortable homes in established neighborhoods, but many reaped substantial financial rewards and reveled in the adventure and satisfaction of overcoming potential issues along the way.
