Secondary Commercial Real Estate Markets Back in Good Favor with Equity

By: Hook Harmeling

The CRE market cycle has entered the stage where equity providers can no longer get the high returns they are seeking in primary markets. Most equity providers are now welcoming the opportunity to look at secondary market deals. Before you go off and buy an empty retail center in Tyler, Texas, be warned that equity investors are still very selective.

Even so, what’s driving equity investors to secondary markets are: 1) higher returns, and 2) a resurgence of debt providers.

secondary commercial real estate marketsQuestion: What do Fayetteville, Arkansas; Oklahoma City, Oklahoma; Albuquerque, New Mexico; Bryon/College Station, Texas; and Connersville, Indiana, all have in common?

Answer: These are all markets where Metropolitan Capital Advisors has closed either a loan or an equity investment in the past six months. This would have been a much harder a feat to accomplish had it been in the recession-years of 2010 or 2011 as capital providers were most hesitant to take risk. Now, lenders are stepping up, and this has driven the renewed interest in secondary markets.

Good quality assets are still the name of the game. For that matter, good quality cash-flowing assets will get the most attention. As usual, Multifamily and Retail will get the first shot, but the other asset classes will eventually get their shot.

Real Estate Investors have been using a new term…“Value-Add Lite.” This basically means that if there is a fairly well occupied property that has some upside through light renovation, it will be considered. In very select cases, you may even see some equity willing to look at heavily pre-leased development projects. For example, one of our Clients recently secured 90% Loan-to-Cost financing from a national bank and a mezzanine provider to renovate a grocery-anchored shopping center in Utah. The center is getting a brand new façade while the Sponsor navigates his way through renewing under-market leases in the 96% occupied property.

Defining what a secondary market is can be tricky. A well-known institutional investor once called Dallas a secondary market; maybe so when compared to New York City or Los Angeles. In Texas and most of the Southwest U.S. for that matter, we generally look at towns with 50,000 people or better, a good employment base, and, most importantly, steady growth. One-economic-driven towns need not apply, but those with a number of industries supporting the long-term growth will certainly be considered.

Like any real estate transaction that draws investors, the basic fundamentals need to be there, which also include sponsors and operators that have the experience to execute the business plan. If those aspects are present, you can feel confident that equity will give your deal a hard look.

Metropolitan Capital Advisors has the experience, knowledge base, and capital relationships to assist you with your CRE pursuits in secondary markets. Contact any one of the Metropolitan Capital Advisors Senior Directors to further discuss your acquisition or development objectives.

Posted on by Scott Lynn in Commercial Real Estate Finance 1 Comment