Cap Rates Widen between Primary, Secondary and Tertiary Markets

Many of today’s buyers are leaning toward primary markets with growing fundamentals and strong, dependable economics. While national commercial real estate transaction volume has dropped over 50% compared to this time last year, there is a flight to quality driving the market today. This movement to quality real estate based on strong fundamentals has reversed the trend where investors have been equally attracted to secondary and tertiary markets. At the peak of the market, cap rates of tertiary-market properties were not dissimilar to some primary and secondary market properties. Today, there is a return and expectation to cap rate spread between primary, secondary and tertiary markets. Without question, buyers and lenders see more risk in smaller markets. Secondary and tertiary markets will continue to experience a slow down until sellers realize they won’t be able to achieve prices similar to properties in stronger markets.

Source: Harbor Stone Advisors Commercial Group