Friday, October 24, 2014

Chasing Yield into Tertiary Markets


by Spencer Marona, Managing Director

On a daily basis, I struggle to find a news publication that is not reporting on a commercial property sale, let alone a record price if the asset was in a core market. With low interest rates and foreign capital pouring into this country, apartment owners often have their choice of buyers in which to sell their properties, and for record breaking prices. Many of these owners are unable to reinvest their proceeds into the same market and still generate the same amount of cash flow, as well as higher return on their investments.

As a result, the search for investment opportunities expands geographically in what we call "chasing yield." Tertiary markets such as Corvallis and Eugene, OR benefit from this rippling effect.

Another market experiencing significant interest from outside investors and institutions is Spokane, WA. Part of this is due to the proactive commitment of the city to work with local and out-of-market institutions that want to grow their businesses. One example of these efforts include the city council's consideration of a proposal from The University of Washington to lease the former Spokane Visitor Information Center at Main Avenue and Brown Street-one of the hottest sections of downtown Spokane; in the heart of Cougar country. More can be read about this in a recently published article in the Spokane Review.

In addition, Spokane County has seen evidence of job growth as well as drop in unemployment rate. In July, Washington Trust purchased the Ridpath Annex to accommodate future workforce growth. The city's Comprehensive Plan, 'Vision 2020', is in full gear with a number of projects online, including 'Target Investment Plan' and 'Shaping Spokane'.

At some point, interest rates will increase and foreign capital will stop pouring into our economy at its current rate. Record prices will plateau and opportunities will be missed. There is no better time than now for multifamily investors to consider the returns that can be achieved in secondary and tertiary markets.

In the July edition of Multifamily Executive, the article "Multifamily's Top Secondary Markets" identifies Portland, OR as one of the top secondary markets in which to invest in. According to one of the insiders, Ryan Severino, an economist for New York–based market research firm Reis, Portland was his choice for hottest secondary market.

"Based on Reis projections, Portland is expected to have the highest effective-revenue growth of any non-gateway market," Severino said in the article.

"Moreover, not only are [Portland's] fundamentals projected to perform well, but the presence of the technology sector bodes well for the metro area...Technology is clearly one of the drivers of the U.S. economy, and in October Intel announced that it was planning a $3 billion capital investment for a massive expansion of its facilities in the metro area.

Additionally, local industries are expected to drive demand in the housing market as the city's largest companies grow. Global conglomerate Nike, which is based in Portland, is expected to expand, with a $125 million capital investment."

Many investors hold back on investing in tertiary markets due to the fear of the unknown. Do your homework, but most importantly hire a broker with experience in selling apartments in these markets. However, be cautious of hiring a broker who has a track record of dealing with only local buyers. In order to achieve the highest price and best terms with the most qualified buyer, exposure to the right buyer pool often means exposing the property to out-of-market investors. You can read more about best practices for investing in tertiary markets in a recently published MFE article.

Is it time to chase yield and capitalize on the current state of the market? Is your broker or their firm actively representing investors and owners in tertiary and core markets with a team of experts behind them?

HFO's team has a combined experience in commercial real estate of 145 years. Contact us to help create a plan for 2015 with your investment goals and visit us our website to see a list of recent closings and current listings.