Secondary markets grew fast for CRE investors

Charlotte, N.C., has been one of the fastest growing secondary markets for CRE investors.

As investors have started to swarm secondary markets, leaving high-priced cities for less expensive options, lenders have followed suit, according to Dan Fasulo, Real Capital Analytics' managing director. Fasulo told Globe St. that lenders were forced to move to those regions as core-market pricing ballooned too high.

"There are five to 10 gateway markets: Boston, New York, DC, L.A., San Francisco, Seattle, maybe Chicago for retail and multifamily and maybe Houston," Fasulo said. "So, you have this massive wave of capital in 2013 that slows from primary to secondary locations: Texas, Denver, Florida, Phoenix, the Carolinas."

For Fasulo, it was no surprise to see those secondary markets post the biggest upswing in values over the past year.

"The smartest money was out probably at the end of last year," Fasulo said. "There was some selective picking going on as early as late 2011, early 2012. But that kind of wave movement really started just about 12 months ago."

Fasulo, whose company provides comprehensive data on commercial real estate investments, believes it was all about finding markets that were still in recovery mode from the burst of the housing bubble several years ago.

"Geographically, over the past two to three years of the real estate recovery, we've seen values and activity levels in the major markets basically approach 2006 and 2007 highs once again," Fasulo said. "In the top submarkets of the primary markets, you could argue that values have surpassed 2006-2007 highs."

Values being recovered
Since 2011, a large portion of the real estate value lost in the aftermath of the housing collapse has now been recovered. Certain markets, many of which are in California, have surged so rapidly, some experts believed a new bubble was forming.

"Some markets have gotten way too pricy for a vast number of institutional investors who need a certain rate of return on their investment," Fasulo said. "Yields have gotten too low, so this has encouraged investors to basically expand the number of markets that they're targeting."

According to Peter Muoio, Auction.com's chief economist, hotel, industrial and office space has been popular in recent times. 

"Apartments were the favorite sector, along with core markets," Muoio told Real Estate Forum. "2012 was a transition year, since investors gained more investing confidence as the year progressed. Investors were still investing in core markets, pushing cap rates down, and investors started to look for more yield, with CRE as a major play, amid ongoing quantitative easing.

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