Yield-Seeking Investors Venture Into Riskier Secondary CRE Markets – But Will They Stay Out There?

by | Jul 25, 2013

The New Question May Be Whether Rising Popularity of Second-Tier Markets Among Investors Is Sustainable As Interest Rates, Borrowing Costs Begin to Rise Again

July 17, 2013
The sale of a small shopping center in Salinas, CA, more than 100 miles south of San Francisco but a world apart from the cosmopolitan Bay Area market, would hardly rank as a bellwether transaction for the U.S. or even the Northern California real estate market.

HFF managing director Nicholas Bicardo, who headed the team representing the seller in the sale of the 93,796-square-foot Boronda Plaza, private REIT Donahue Schriber, described the transaction this way, however: “An excellent opportunity for the buyer to acquire a dominant grocery-anchored retail center located in a secondary market in Northern California at a very attractive yield comparatively to primary markets.”

“Given where spreads are on [capitalization] rates between primary and secondary markets, we are seeing a tremendous amount of capital migrate to similar markets like Salinas in search of higher yields,” Bicardo said.

Many investment analysts have reached the same conclusion. With the economy continuing to strengthen in fits and starts, more opportunistic investors – in many cases priced out of the top coastal markets like San Francisco, New York City and Washington, D.C. — are seeking higher yields in secondary markets where job growth and business conditions have accelerated during the economic recovery.

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