Secondary, Tertiary Cities Stay In Foreign Investor Favor

Secondary and tertiary cities are poised to be foreign investor favorites over the next decade in the aftermath of the COVID-19 pandemic, as changing consumer preferences continue to influence how capital is deployed. 

A recent investor survey by AFIRE notes that Austin, Atlanta, Boston, and Dallas rank among the top US cities for planned investment this year, while the first three are also the top for planned global investment in 2022.  Six out of 10 respondents say they plan to increase their investments in tertiary locations over the next few years, while seven in 10 plan to increase their presence in secondary cities.

Those changes are being driven in large part by what AFIRE calls “permanently altered cultural attitudes” toward live-work preferences.

The survey, which was underwritten by CBRE and Holland Partner Group, also indicates that investors will be increasingly focused on multifamily, life science, and industrial assets. A whopping 90% of survey respondents plan to increase investment in multifamily over the next three to five years, followed by life sciences (77%) and industrial (75%). 

Overall investor sentiment is also positive, with 75% of respondents saying they expect their volume of activity and revenue growth to tick up over the course of this year.  Cap rates remain at near-historic lows for most asset classes, though inflation may begin to bring financing costs up as pressures mount.

“The potential cap rate, as supported by market fundamentals, may be as low as it can go,” said Xander Snyder, senior commercial economist at First American. “However, since the actual cap rate remains above the potential cap rate, the actual cap rate could still go even lower as CRE investors compete with each other for the income streams that commercial real estate provides.”