Everyone wants to build in New York, San Francisco, Los Angeles, and Boston. The allure is understandable. These core urban markets continue to deliver high yields and are seemingly immune to changing marketing conditions and the flood of new development. They’re solid long-term hold markets where many residents will generally opt to rent instead of buy due to the cost of housing.
But while many clamor to develop in these and other key coastal locales, primary cities certainly don’t present the only opportunities for sizable long- and short-term returns on development investments. Thriving but less-saturated cities are often overlooked despite their lucrative investment options. When rents eventually plateau in the coastal markets, secondary markets like these could become the goldmines of the industry.
Three secondary markets, especially, stand out in this sector, for characteristics that make each one distinct and potentially prime for development.
U.S. News & World Report ranked Denver as No. 2 on its 2017 Best Places to Live in the USA list, published in February. The city never felt the lingering effects of the recession in the same way a lot of other markets did, with its job market growing steadily since 2010. There’s not an Amazon, Facebook, Google or anything of similar magnitude driving employment in Denver, but the metro has an abundance of small entrepreneurial-type companies that have proven track records of financial strength and growth potential.
The Mile High City also offers a huge quality of life that matters to the millennial demographic that apartment operators are trying to attract. Denver is driving many fundamentals of the multifamily industry and is proving to be a desirable place to live.
Phoenix traditionally has been a market that can become overbuilt fairly quickly. But if you’re laser focused on specific neighborhoods in the city and its tertiary markets, an abundance of opportunities await.
The Central Corridor, for instance, morphed into a very dynamic locale after the Valley Metro light-rail system expanded in the neighborhood. And Arizona State University (ASU) is beginning to expand into downtown, an area that is starting to gentrify. Meanwhile, many of the office buildings that had been underutilized in Phoenix are being repurposed, and entertainment and dining options are continually growing.
Beyond the downtown area, Scottsdale has always been the hip address in town and boasts a solid job market. In addition, Tempe is the vibrant home to ASU, and State Farm recently relocated its headquarters there.
The Midwest has never been a place where developers have said, “Oh, this is where you have to be.” But Minneapolis has a solid employment base and has historically been strong and steady, which is always a good investment strategy.
Although there are many seasoned local developers in the market, you won’t have to compete with too many national developers in Minneapolis. Bloomington and Edina each feature submarkets ripe for a revival—blocks and neighborhoods that could transform from afterthought to social hub over the next few years.
More to Consider
When scouring these sometimes-overlooked markets—and others, such as Nashville, Tenn.; Charlotte, N.C.; and Portland, Ore.—be sure to fully evaluate their transit options, employment opportunities, and market tendencies before diving in. A one-size-fits-all approach typically is ineffective, because the market you consider also must demonstrate aspects that align with your development strategy. Denver, Minneapolis, and Phoenix, as noted above, all stand out for different reasons.
Many developers traditionally have wondered whether these overlooked markets can provide long-term returns similar to the core markets, or whether they’re relegated to being build-and-sell locations that facilitate the ability to invest in better places in the future.
At this point, the long-term returns appear promising, with nothing truly indicating a downturn. Clearly, we don’t have the benefit of consulting a crystal ball, but the apartment industry is eight years into this recovery cycle, and most developers have been more disciplined than some might think. Few estimated how big the millennial tidal wave was going to be, but it continues to be a pleasant surprise.
A downturn sometimes can result from factors beyond the multifamily industry, but progress has been slow and steady, and we haven’t seen anything truly distressing with the economy as of late.
Another benefit of developing in secondary and tertiary markets is geographic diversification. A well-rounded portfolio features communities that aren’t tied to one particular region or market type.
Undoubtedly, developers will continue to remain more focused on the coasts, which offer more potential renters and more substantial job opportunities. That tendency, however, continues to leave the door open for those willing to explore overlooked, but promising, under-the-radar markets.