Finding Value: Secondary and Tertiary Markets

While the real estate market generally faced significant challenges during the recession, not all markets were equally affected by the downturn. In particular, investors saw primary real estate markets such as New York City, Los Angeles, San Francisco, Chicago, Boston, Dallas, and Washington, D.C. weather the financial crisis with their value intact.

Primary markets have provided an excellent safe haven for investors over the past decade, but the downside is that these markets now have little room for investors seeking a reasonable return on investment. In some cases, lenders and investors have turned away from primary markets due to expected returns below their minimum requirements and instead have turned their attention to the secondary and tertiary markets.

Although definitions differ, generally secondary and tertiary markets are metropolitan centers with fewer than six million inhabitants and less than $375 billion in GDP. They include cities such as Phoenix, Philadelphia, Denver, and Minneapolis, but they can also include geographies within the limits of primary markets that are considered less desirable by investors. These markets are currently offering lenders a higher return on investment in exchange for the greater perceived risk of investing in cities with less-robust demographics than the handful of cities in primary markets.

Tertiary markets in particular, have been slow to recover from the recession, with many cities just now seeing lending standards loosening and capital rates compressing. For value investors hunting for untapped markets in exchange for higher returns, tertiary markets represent some excellent opportunities.

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