Real estate markets can typically be divided into three markets: primary, secondary, and tertiary (emerging). Primary markets, sometimes referred to as gateway markets, are those in large metropolitan areas, such as New York, Chicago, and Los Angeles. While these markets may be what typically comes to mind when discussing real estate investing, secondary and emerging tertiary markets provide their own unique opportunities and benefits you won’t find in larger, more densely populated areas. Understanding secondary and emerging tertiary markets can provide valuable insights you can use when making decisions about real estate investments, including investing in REITs.
Secondary Markets
There is not one clear definition for the size of a secondary market, but typically an area outside of a city center with a population of over 1 million can fall into this category. These smaller markets can provide an excellent alternative to investing in highly competitive primary markets, particularly as households continue to move from densely populated city centers with more expensive costs of living. For example, the Las Vegas metro area has seen a significant population boost from people looking to leave Los Angeles for more affordable housing. The increase in demand for housing leads to an increase in rents, providing a desirable opportunity for investment in the area. Phoenix and Tucson are just two of the secondary markets that saw significant increases in rents during the 3rd quarter of 2021, with 12-month effective rent growths of around 20 percent or more. The gateway markets of Washington D.C. and San Francisco, by comparison, experienced negative growth in the same time period. However, as these secondary markets continue to grow, investors may find that their true opportunities lie in tertiary markets.
Tertiary (or Emerging) Markets
An emerging tertiary market is typically one with a population of less than 1 million people, though this varies depending on the area and the proximity of the nearest major metropolitan statistical area (MSA). “Emerging markets” is also a term you will often see used to define these markets. These areas can be looked at as those with opportunities for growth in both development and investment revenue. Some examples of emerging tertiary markets include Huntsville, Alabama, Spokane, Washington, and Knoxville, Tennessee, all of which boasted 97 percent rental occupancy rates in Q1 of 2022. Demand for housing in these areas means more chances for adding new apartment complexes or other types of multifamily dwellings. Satellite communities and exurban areas are typically considered emerging markets, but smaller cities with few or no surrounding suburban settings may also fall into this category.
Emerging tertiary markets provide benefits for those seeking housing as well as for those looking to invest in real estate. They also often have more affordable housing options for individuals and families looking to move out of gateway cities, and the flexibility of remote work has led to more people looking to move to less populated areas.
Tertiary Versus Secondary Markets
A study published in 2019 showed the five strongest markets for multifamily rent growth were secondary and emerging tertiary markets. While this was reported before the pandemic, three of these areas, Pensacola, Phoenix, and Las Vegas, remain among the most desirable destinations for renters. So how do emerging tertiary and secondary markets compare for investors?
Secondary markets have seen competition for available housing increase during the pandemic, with workers in gateway cities looking to move to more affordable areas while still being able to work remotely. This may mean fewer investment opportunities as these markets begin to expand. Increasingly, tertiary markets are more attractive to investors looking for a better ROI. Some areas, such as Huntsville, have emerged as tech hubs, creating a unique location for both individuals looking to move away from big cities and investors looking for more profitable real estate investments. With emerging markets, the supply of property available for investment is greater. By comparison, secondary markets may soon see a number of investors with nowhere to put their capital.
Tertiary Markets and REITs
Emerging tertiary markets provide unique advantages for REITs, including DiversyFund. There are typically more options for investment with lower purchase prices and opportunities to grow equity in existing properties. A REIT implementing value-add improvements can realize increases in rents, which may also yield higher dividends in return. With less competition than found in primary and secondary markets, emerging markets offer more choices for expanding a REIT’s holdings. All of these factors, when taken together, make emerging markets ideal for REIT investing. Of course, REITs from industries other than residential housing may also look to move into emerging markets. As populations shift away from gateway cities, so too do the opportunities for growth in the healthcare, retail, hospitality, commercial, and other related real estate sectors. Simply stated, emerging tertiary markets give REITs a host of options to boost their holdings, and this makes it easier for individuals to take advantage of potentially lucrative real estate investments without purchasing a whole property on their own.
DiversyFund’s Focus
As DiversyFund’s co-founder, Craig Cecilio, writes, “DiversyFund is focusing on emerging markets in response to workforce migration to a work-from-home environment.” As more people leave larger cities (found in California, the northeast, and other states), we’ve directed our market research to B to C value-add multifamily properties in cities with rising population rates. These cities are located in North and South Carolina, Texas, Florida, and across the U.S. Combining population growth with rising average incomes, it is reasonable to expect real estate prices to also rise in these areas.
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Craig Cecilio is the co-founder and CEO of DiversyFund and is utilizing his wealth of real estate and investing knowledge to break down the barriers to investing in institutional-quality real estate for everyone.