Perception vs. Reality


Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

August 2017

Evaluating common assumptions associated with secondary markets

Over time, the evolution of real estate mar­ kets can create a disconnect between long-held beliefs and the current market reality. Sometimes these changes result in short-term anomalies, but they also can trigger secular shifts capable of altering the trajectory of a marker or sector. With respect to investing in secondary markets, an in-depth analysis of several widely accepted notions can validate common assumptions while simultaneously challenging outdated expectations.

Market delineation

If 10 real estate investors were asked to create a list of secondary markets, it could easily result in 11 different answers. Joking aside, investors generally agree on definitions regarding the four common market categories (i .e., gateway, primary, secondary and tertiary). Gate­way and primary markets share some of the same characteristics — a substantial employment base that generates tenant demand that typically matches or exceeds available supply, while sup­porting higher market rents and occupancy rates. Researchers sometimes include gateway markets as a subset of primary markets, but it is impor­tant to recognize the distinction, given these cities have stronger investment attributes (e.g., transaction volumes, property inventories and capital flows). Although investment characteris­tics in secondary markets are not as robust, par­ticularly regarding barriers to entry and property inventories, some of these cities can rival major markets at different points in the cycle with respect to demand drivers, such as population growth, demographic factors and employment conditions. Tertiary cities can be either suburban or urban markets, and often have minimal con­straints on new supply, a relatively small popula­tion and an inconsistent demand for real estate space; however, select opportunities can emerge at different points in the cycle . Consensus among investors often ends at this point, because market participants tend to have disparate opinions with respect to classifying individual cities.