PORTSMOUTH, VA-Investors’ interest in secondary market opportunities continues to grow with buildings in major markets still trading at very low cap rates. Not even rising interest rates has deterred activity.

“Investors are selling their core holdings in New York and Boston, looking for opportunistic investment acquisitions in secondary markets,” Andrew Little, principal with John B. Levy & Co., a real estate investment-banking firm headquartered in Richmond, tells Globest.com.

Little uses a client’s recent refinancing of a 30-year-old building in Portsmouth to illustrate the trend. Pepperwood Townhouse Apartments–consisting of 141 units in 22 buildings–was refinanced for $9.4 million at a fixed rate that was below 6%. The 10-year loan has interest-only payments for the first five years.

“It’s a very aggressive loan on a property that has been around for more than 30 years,” Little says. The sponsor was able to arrange these terms, he adds “because it is a solid secondary market.”

The sponsor, which Little describes as a large group affiliated with HGI that is based in Norfolk, is planning to make $750 million of acquisitions this year–mostly in secondary markets. “They are finding opportunities in these cities–not in Washington, DC or New York.”

One market close to the Washington, DC area that Little believes will attract new investment is Hampton Roads in Norfolk. “It will be the recipient of major institutional funds,” he says.

The Portsmouth refinancing also points to a resurgence of activity in the multifamily market, Little adds, due in part to rising inflation and interest rates. “Because of this there is a pool of first-time home buyers that are getting priced out of the market,” he says.

Multifamily properties in secondary markets, in particular, stand to benefit from this and other industry trends. “In the major markets, I think there have been several purchases over the past couple of years that defied logic from a cap rate standpoint,” Little says.

Little expects a period of readjustment especially as condo conversions start to slow. Nonetheless, cap rates in major markets “have brought more and more buyers to the realization they will have to look in secondary markets for investment opportunities.”

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