Historically, most multifamily investors preferred to invest in gateway markets. Colloquially known as the “Sexy Six,” these markets include Los Angeles, San Francisco, and Seattle on the West Coast and New York, Boston, and Washington D.C. on the East Coast.

For decades, institutional investors (REITs, pension funds, and endowments) refused to consider secondary and tertiary markets. In fact, it’s a well-worn joke in the multifamily industry that if a city didn’t have a professional football, basketball, and baseball team then mega funds like Blackstone and institutional investors had no interest.

By and large, most national multifamily investors felt the same as the big players. Even regional players shied away from smaller markets.

But attitudes about non-gateway markets have shifted significantly. Today, multifamily investors – regardless of size or scale – are not only willing to consider buying in secondary and tertiary markets, but they’re eager to do so.

It’s not only U.S. investors that are expanding their horizons. Foreign investors are also eager to deploy capital into non-gateway markets, even if they’ve never heard of Little Rock or Colorado Springs.

Weighing the risk

Multifamily investors’ past preference for gateway markets wasn’t rooted in big city snobbery or superiority. Instead, it grew from very real concerns regarding exit strategies. The sentiment was that secondary and tertiary markets were inherently riskier because of the limited pool of investors interested in buying there.

Many investors feared that when it came time to dispose of an asset, they would not only face challenges finding a buyer, but experience pricing pressure and depressed returns due to the limited demand. The bias against secondary and tertiary markets was a vicious cycle that took a pandemic to break.

Prior to the COVID-19 pandemic, Americans were stuck in one place – almost literally. In 2019, fewer Americans changed residence than in any year since 1947, when the Census Bureau first began collecting annual migration statistics. Between March 2019 and March 2020, the percentage was 9.3 percent – a post-World War II low.

The pandemic jumpstarted residential mobility. Many people abandoned large urban metros to get away from the virus. For others, work-from-home mandates made it possible for them to live where they wanted instead of where they worked.

From April 2020 to April 2021, 16 percent of full-time workers relocated, according to RealPage.

Gateway markets lose residents

Many Sunbelt markets have emerged as in-migration magnets, primarily due to their affordability and quality of life. People fled the inflated rental rates in gateway cities and made their way to less expensive areas.

The Sexy Six markets experienced notable population declines in 2020 and into 2021, according to U.S. Census Bureau data and RealPage. New York suffered the most dramatic annual net population decline, losing more than 108,000 residents in 2020, a total population decrease of 0.6 percent. This marks the fourth consecutive year of population loss for New York.

On the other side of the country, Los Angeles mirrored New York’s out-migration. More than 128,000 residents left Los Angeles in 2020.

In fact, California’s biggest markets – Los Angeles, San Francisco, and San Jose – collectively lost hundreds of thousands of residents. These markets also happen to be among the most expensive apartment markets in the nation, with rents of $2,200 to $2,800 as of April 2021, according to RealPage.

Fear of missing out on growth

With more companies relocating from high-cost states and more Americans saying “See ya” to massive metro areas, multifamily investors are following them.

The AFIRE International Investor Survey, which surveys nearly 200 organizations from 24 countries with roughly $3 trillion assets under management (AUM), found that more than six in 10 respondents expect to increase their investment in tertiary cities in the next three to five years. That number rises to eight in 10 for investment in secondary cities.

In 30 years of AFIRE surveys, no tertiary city has ever placed in the top three. But this year, Austin took the number-one position, heralding a noteworthy shift in strategy toward secondary and tertiary markets.

Historically, when investors ventured beyond gateway markets, they did so because they were hunting for yield and thought they could find better pricing in secondary and tertiary markets. (It’s worth noting that as of the third quarter 2021, the average price per unit in the six major metros was $297,618 versus $201,125 per unit in non-major metros.)

Today, investors are motivated to deploy capital in secondary and tertiary markets because they’re afraid that if they don’t invest in these markets, they’ll miss out on the next decade of income growth and price appreciation.

Last year, Austin saw its resident base increase by nearly 67,200 people, or three percent, according to RealPage. This was the strongest percentage growth rate reported among markets with one million or more residents nationwide. During the same period, three smaller markets experienced faster growth than Austin: The Villages, Fla., St. George, Utah, and Myrtle Beach, S.C. recorded rates between 3.4 – 3.9 percent. The total population of those cities is roughly 100,000 to 300,000 residents.

Apartment occupancy is tight almost everywhere, according to RealPage. With recent demand so strong, occupancy is 200 basis points to 290 basis points above normal in Austin, Charlotte, Nashville, Raleigh/Durham, Salt Lake City and San Antonio.

Record-breaking deal volume

This year will likely end with record deal volume in the multifamily sector, according to Real Capital Analytics 3Q2021 U.S. Apartments Capital Trends report. For the first three quarters, deal volume totaled $178.5 billion, which would be a near-record level of activity for a full year.

In fact, the $78.7 billion in deal volume for Q3 2021 was higher than the average annual totals from 2008 to 2011, according to Real Capital Analytics. Only in 2018, had apartment deal volume passed the $50-billion mark in a third quarter.

Compared to the same period last year, deal volume was up 192 percent and pricing was up 16.3 percent, according to Real Capital Analytics. The firm attributes the price increase to two main factors: 1) buyers became more optimistic about the economic outlook and were willing to pay more for properties and 2) sellers were also more optimistic and asked for higher sales prices.

Non-major markets accounted for $63.2 billion in deal volume during the third quarter, an increase of 209 percent, according to Real Capital Analytics. The total numbers of properties that changed hands in these markets increased 97 percent to 2,038.

Of the top 25 markets for apartment investment, all but four experienced record high levels of activity through the first three quarters of 2021. According to Real Capital Analytics, Los Angeles, Chicago, NYC Boroughs, and Washington D.C./Virginia suburbs share a common trait: they usually support urban office hubs.

For the first time ever, Manhattan did not make the list of the top 25 apartment markets. The island’s ranking has been steadily declining since 2017 due to rent control regulations among other things.

In contrast, several secondary and tertiary markets rank in Real Capital Analytics’ top 25 markets for apartment investment:

  • #6 Denver – 100% YOY change
  • #7 Austin – 146% YOY change
  • #9 Raleigh-Durham – 134% YOY change
  • #10 Orlando – 105% YOY change
  • #11 Tampa – 103% YOY change
  • #12 Charlotte – 101% YOY change
  • #15 San Antonio – 131% YOY change
  • #20 Nashville – 121% YOY change

All markets listed above experienced record YTD total deal volume, according to Real Capital Analytics. And, Raleigh/Durham achieved its highest-ever ranking.


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