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As traditional gateway markets — New York, San Francisco, Boston, and Los Angeles — grow ever more saturated, volatile, and expensive, institutional and opportunistic capital is increasingly turning its gaze outward. Secondary and tertiary markets offer fertile ground for yield, growth, and asymmetric returns — but they also demand a more rigorous playbook.
In this article, we’ll unpack the macro forces driving this shift, the criteria that separate winners from laggards, the key risks, and how investors can execute in these markets with discipline and upside.
The pandemic era catalyzed population dispersion, as residents and companies sought lower-cost, high-quality-of-life environments. This demographic realignment reinforced long-term trends already underway in the Sunbelt and Midwest — states such as Texas, Florida, Tennessee, and the Carolinas are now among the fastest-growing markets in the country.
Mid-sized metros like Omaha, Tulsa, and Madison have also benefited from inbound migration, affordable housing, and diversified job bases. As major metro cap rates and valuations soared, investors began reallocating capital toward smaller cities with meaningful room for appreciation.
Investors can deploy capital more efficiently in secondary markets where land, construction, and acquisition pricing are lower. The resulting margin buffer creates a natural hedge against volatility. Moreover, local governments are increasingly offering tax incentives, streamlined zoning approvals, and infrastructure investments designed to attract institutional capital.
Secondary markets are no longer disconnected outposts. Infrastructure upgrades — from broadband and transportation networks to logistics corridors — are linking tertiary nodes to regional and national economies. As connectivity improves, these markets are transforming from peripheral zones into engines of economic growth.
Not every secondary market is a diamond in the rough. Investors seeking durable alpha should filter opportunities through six key lenses:
Economic & Job Base Diversification. Look for markets anchored by health care, logistics, higher education, or light manufacturing. Economies dependent on a single employer or cyclical sector can be risky.
Population Growth & Migration. Net inward migration is critical, but sustained growth over multiple cycles matters more than short-term spikes. Target regions benefiting from steady demographic inflows and a diversified workforce.
Limited Supply Pipeline. Markets with constrained new development — due to land scarcity or regulatory limits — provide a built-in supply advantage, insulating values over time.
Amenity Base & Talent Attraction. Quality-of-life factors like schools, cultural assets, and recreational amenities sustain tenant demand across property types.
Capital & Liquidity Access. Even in secondary markets, ensure local lenders, investors, and institutional capital channels are active enough to provide refinancing and exit flexibility.
Exit Optionality. Seek markets with a track record of institutional trades or multiple exit paths, whether via recapitalization, REIT acquisition, or local operator sale.
The national CRE market has stabilized following two volatile years. Recent data show overall U.S. transaction volumes rising modestly year-over-year, with capital gravitating toward larger, higher-quality deals in growing metros.
While gateway markets remain liquid, secondary and Sunbelt metros are gaining traction in multifamily and industrial segments. Price per square foot in these regions has risen meaningfully, reflecting renewed confidence and competitive bidding among investors seeking yield.
Industrial and multifamily properties remain the performance leaders, driven by supply chain localization and continued housing demand. Office distress remains concentrated in primary CBDs, while suburban and tertiary office submarkets have been more stable. Retail, too, is experiencing a revival outside the gateways — suburban and regional centers are outperforming as experiential and necessity-based retail formats adapt to new consumer patterns.
Investors willing to take early positions near infrastructure or job catalysts can capture significant value creation. However, timing and local knowledge are essential.
Many underutilized office or light industrial assets in smaller metros present conversion opportunities — to multifamily, medical, or logistics use. The cost curve is typically more favorable than in primary markets, and municipalities are often supportive of adaptive reuse.
For institutional investors, structuring deals with modest leverage and flexible exit options can deliver core-plus risk-adjusted returns, even in smaller markets.
Execution risk in tertiary markets can be mitigated through partnerships with established local operators who understand municipal processes, tenant dynamics, and contractor ecosystems.
Public-private partnerships, tax increment financing, and job creation credits can enhance project feasibility and mitigate downside. Many municipalities are eager to collaborate with developers that contribute to long-term economic vitality.
Adopt a phased entry approach: pilot one or two projects, then expand exposure across a diversified set of metros. This incremental scaling allows investors to refine strategy and risk management frameworks.
Thin leasing markets and limited tenant diversity can amplify volatility. Rigorous underwriting and stress testing cash flows against occupancy and rate fluctuations are essential.
Secondary markets often have fewer institutional buyers, resulting in longer sale timelines. Investors should budget for longer hold periods and maintain reserve flexibility.
Local economies can hinge on one or two dominant employers or institutions. Diversify tenant rosters and avoid excessive concentration risk.
Municipal changes in zoning or tax policy can alter project economics. A thorough understanding of local governance and legislative trends is critical.
Secondary markets are more exposed to valuation compression when rates rise. Build conservative exit assumptions and avoid overreliance on appreciation-driven returns.
Consider a mid-sized Florida metro where a former Class B office complex is being converted into a mixed-use multifamily and retail development. Acquisition pricing was 40% below replacement cost, and zoning incentives reduced soft costs by nearly 15%. The project achieved lease-up six months ahead of schedule, delivering stabilized cash flow at an 8% unlevered yield — performance that would be difficult to replicate in a gateway market under current conditions.
Such examples illustrate how disciplined underwriting and local engagement can translate into outsized performance in smaller markets.
The reallocation of capital toward secondary and tertiary markets marks a structural evolution, not a cyclical fad. For firms like F2H Capital, the opportunity lies in disciplined underwriting, partnership-driven execution, and flexibility in structuring. These markets reward investors who can bridge institutional capital with local insight — blending analytical rigor with entrepreneurial agility.
As the 2025 cycle unfolds, expect the most resilient portfolios to be those balanced across primary stability and secondary growth — portfolios that recognize that the next wave of commercial real estate alpha will not be found in the skyline, but in the overlooked corridors where growth is just beginning.
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