Secondary Markets: The New Frontier in Multifamily Investments

The Shift to Secondary Markets

In recent years, we’ve witnessed a significant shift in multifamily investment patterns. While primary markets have traditionally been the focus, secondary markets are now taking center stage. This trend has been accelerated by changing demographics, work patterns, and the search for yield in a competitive landscape.

Why Secondary Markets?

1. Strong Population Growth: Secondary markets are experiencing robust population growth. According to the U.S. Census Bureau cities like Boise, Idaho, and Raleigh, North Carolina, have seen population increases of over 10% between 2010 and 2020.
2. Job Market Expansion: Many secondary markets are benefiting from job market diversification. The Bureau of Labor Statistics reports that employment in non-metropolitan areas grew by 4.8% in 2023, outpacing the national average of 3.9%.
3. Affordability: Secondary markets often offer more affordable living options. The National Association of Realtors found that the median home price in secondary markets was 30% lower than in primary markets in 2023.
4. Higher Yields: Cap rates in secondary markets tend to be higher. CBRE’s 2024 U.S. Real Estate Market Outlook indicates that average multifamily cap rates in secondary markets were 50-75 basis points higher than in gateway cities.

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Top Performing Secondary Markets

While previous data from CoStar's 2024 Multifamily Report showed strong performance in certain secondary markets, more recent data paints a different picture. According to Apartment List's October 2024 National Rent Report:

• Boise, Idaho: -2.1% year-over-year rent decline
• Raleigh, North Carolina: 0.8% year-over-year rent growth
• Salt Lake City, Utah: -1.7% year-over-year rent decline
• Austin, Texas: -4.7% year-over-year rent decline
• Nashville, Tennessee: -0.9% year-over-year rent decline

This updated data highlights the importance of considering recent trends and market-specific factors when evaluating investment opportunities.

These markets, while experiencing some recent challenges, still demonstrate long-term potential due to factors such as job growth, increasing populations, and relatively affordable housing options compared to primary markets.

For instance:

• Raleigh-Durham: According to the Bureau of Labor Statistics, the area saw a 3.2% increase in non-farm employment from September 2023 to September 2024.
• Nashville: The Nashville Area Chamber of Commerce reports that the region added over 30,000 jobs in 2024, indicating continued economic growth.
• Austin: Despite recent rent declines, the Austin Chamber of Commerce notes that the city added 28,800 jobs in the 12 months ending September 2024, showcasing its economic resilience.

The Multifamily Advantage in Secondary Markets

1. Consistent Demand: The shift towards renting continues to fuel demand in secondary markets. With over 36% of U.S. households now renting, these markets offer a steady stream of potential tenants.
2. Stable Income: Occupancy rates in many secondary markets remain strong, often above 95%, providing a reliable income stream for investors.
3. Appreciation Potential: Secondary markets often offer greater potential for appreciation due to their growth trajectories and relative affordability.
4. Cost Efficiency: Operating costs in secondary markets are typically lower than in primary markets, potentially leading to higher net operating income

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Challenges and Considerations

While secondary markets offer numerous advantages, it’s important to consider potential challenges:

1. Economic Diversity: Some secondary markets may be reliant on a limited number of industries, making them more vulnerable to economic shifts.
2. Infrastructure Development: Rapidly growing secondary markets may face challenges in keeping pace with infrastructure needs.
3. Increased Competition: As more investors recognize the potential of secondary markets, competition for prime assets may intensify.

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Carbon’s Approach to Secondary Markets

At Carbon, we’re strategically positioning ourselves to capitalize on these trends:

1. Targeted Market Selection: We focus on secondary markets with strong economic fundamentals, diverse job markets, and positive demographic trends.
2. Value-Add Opportunities: We identify properties in these markets that offer value-add potential through strategic renovations and improved management. This approach allows us to enhance property value and tenant satisfaction, and by extension, investor returns.
3. Community Focus: We aim to contribute positively to the communities we invest in, aligning our success with the growth of these emerging markets. This includes supporting local initiatives and ensuring our properties meet the needs of the local workforce.

Data-Driven Decision Making: We leverage advanced analytics and market research to identify emerging trends and opportunities in secondary markets before they become mainstream.

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Looking Ahead

As we navigate this shift towards secondary markets, we remain committed to providing our investors with strong, risk-adjusted returns. The opportunities in these markets align well with our focus on workforce housing and value-add strategies.

We’re excited about the potential these markets hold and are continuously analyzing data to identify the most promising opportunities for our investors. As the multifamily landscape evolves, we believe that secondary markets will play an increasingly important role in successful investment strategies.