Yield: The Appeal of Multifamily in Tertiary Markets

Though the multifamily sector is doing well in Texas’ four major metros, there can be more yield, and lower cap rates to be found in the secondary and tertiary markets of the Lone Star State. A panel of experts, moderated by SVN’s Jonathan Krebbs, shared their thoughts about smaller Texas markets and apartments at the recent Connect Texas Multifamily conference, which took place in Dallas.

In the session entitled “Around the Edges: Tertiary Markets,” Al Silva with Marcus & Millichap pointed out that some investors might not find the yield they want in the Dallas-Fort Worth area. So, “they go into other markets with similar characteristics, with a higher cap rate and yield,” he commented. The favored markets, at this point, seem to be Waco and Corpus Christi in Texas, and Tulsa, OK.

Speaking of Corpus Christi, Shravan Parsi with NAPA Ventures said his company likes that city because the “fundamentals that hold key in the major markets apply to the secondary and tertiary markets,” he noted. Corpus Christi’s port, he continued, is expanding, as is the medical center. “There are private equity groups familiar with that market,” he said. “But it’s not on the radars of the larger ones.”

What is even more interesting about the smaller markets is the equity that is available. “There is ample equity out there,” observed ARA Newmark’s Matt Wideman. “It really comes down to the sponsor, but when all things line up, there are deals to be made.”

And, speaking of underwriting, the speakers agreed that property tax assessments tend to be not as high in the smaller markets, as they are in larger cities. “We can give you case studies of deals sold five years ago, that haven’t been assessed at their purchase prices,” Wideman said. “They just aren’t as ambitious at pushing taxes.”

If there is one downside to owning and operating in the secondary and tertiary markets, it’s finding the talent to manage apartment complexes. Hugh Cobb of Alpha-Barnes Real Estate Services noted that, for example, in Mexia, TX, which has 3% unemployment, finding qualified apartment employees is a challenge. “What we’ve done to attract personnel in these markets is ask employees what attracted them there,” he said. “We also ask them how we can perform better.” Training is also important, he added, as is increasing benefits and paying competitive salaries.

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