Second to None

By Ralph Rader

If all the interest in secondary cities has made you nervous, I get it. Secondary cities were darlings during the early 2000s real estate boom and we all know how that ended. Many still have scars to show for it. So any trepidation is understandable, even warranted, but as many post-recession real estate investors have discovered, secondary cities continue to offer tremendous opportunities and there are compelling reasons to believe that there will be a happy ending this time around.

The driving force behind secondary cities is population growth and job growth. Secondary cities like Austin, Salt Lake City, Raleigh, Nashville and MCA’s very own DFW and Denver have continued to draw businesses and new residents to their respective locales for the better part of a decade now. A common characteristic of these cities are low costs of living combined with a vibrant business and culturally rich community. Think of it as a way for people to work and play at a great value. On average, according to a report released by PwC and the Urban Land Institute, the cost of doing business in secondary markets is 16% lower than in primary markets. Real estate costs are 38% lower in secondary markets, energy costs are 22% lower, and labor costs are 14% lower than in primary markets. Additionally, many of these cities are in tax-friendly states, a benefit that was bolstered by the new tax laws passed earlier this year. All of this adds up to more living space, more discretionary income in an environment that is increasingly similar to their primary market counterparts.

The discipline displayed by both investors and the capital markets further differentiates the popularity of secondary cities in this cycle. The attention these markets are receiving is similar to the investor activity between 2005 and 2007, but the PwC/ULI report stresses investors are being much more deliberate in their approach to secondary markets than in previous cycles. The result has been more research, more diligence, and less overbuilding. The on-going risk management has substantially increased the staying power of these hot markets.

Do not mistake this to mean there’s a crack in the foundation of the traditional 24-hour, Gateway Cities. They are home to countless trophy assets that are designed and built by the best in the world. From an economic perspective, Gateway Cities has historically been a (relatively) safe investment due to seemingly everlasting demand. The only bad news is that, not only is the secret out, it’s been out for decades. Plus, as the US economy has continued to make strides since the recession, domestic money managers and foreign investors have saturated these markets with capital investment and development so you are quite literally competing with the entire world. It’s tough to get a seat at the table, much less win real estate investment opportunities.

Whether you are in Dallas or NYC, investing in a suburban garden apartment or 50-story office in the central business district, you can quickly find yourself in trouble when you’re not buying at the right price with the right capital. But don’t let déjà vu from early 2000s keep you from being a part of the potential still simmering in many secondary cities. Just be sure to equip yourself with plenty of information, remain disciplined, and surround yourself with the right team.

The author, Ralph Rader, is a Senior Director in the Dallas office of Metropolitan Capital Advisors. Ralph can be reached at rrader@metcapital.com or at 972.267.0600.