Should you be investing in secondary markets? - Part 2

Part two continued from the September 24th, 2013 New York City Financial Digest edition of the New York Real Estate Journal. If a cap rate expansion of 200 bps takes around five years (rather slowly) then 10% per year NOI growth is needed in the gateway market and 5% per year in the secondary and tertiary market to keep values the same. While the growth needed in both markets is aggressive simply to keep the underlying asset value the same, the secondary and tertiary is clearly much less drastic. At Mascia Development, we have focused on secondary and tertiary markets for the last three years as a defensive strategy to protect our downside risk in an expanding cap rate environment and also to take advantage of the much higher current returns offered there. We saw significant price declines in most secondary and tertiary markets and did not see the same cap rate compression as in core markets. With long-term low interest fixed rate debt and improving fundamentals we see significantly more upside in secondary and tertiary markets with a much greater downside risk protection. In the past 12 months we have seen increasing competition in these secondary and tertiary markets and expect this to increase as others come to the same conclusions. Mark Mascia, LEED-AP is president & CEO of Mascia Development, LLC, New York, N.Y.