Owing to different market conditions, more and more investors are embracing commercial real estate’s secondary markets.
But what are the existing market conditions? And how are they influencing today’s investors to make the shift to these markets for expanding their commercial real estate portfolio?
Understanding the present market conditions
Commercial real estate has secondary markets that are characterized by:
- The potential for having stable national economic trends
- The improved risk-taking ability of buyers
- A yawning difference in yields across secondary and primary marketplaces
These factors are driving investors to set their sights on secondary markets for improving their returns.
Decoding real estate secondary markets
As the name suggests, these markets acquire the second spot in the hierarchy of making commercial realty investments.
But secondary markets bring in unique opportunities and risks.
The assumptions supporting the commercial real estate investment strategy in the coasts may not hold water for lenders who are operating in the areas with lower liquidity. That means one thing: secondary marketplaces may not be the most ideal business when done on a smaller scale.
The thing is that the difference between secondary and primary markets extends way beyond a simple tally of every area’s commercial real estate. And if someone is foraying into the world of such markets for the first time, they will not be able to make sense of different market participants, different properties, and links to the real economy.
Speaking of their issues, these markets present unique roadblocks related to property acquisitions, investors’ dispositions, and fund availability. (Generally, investors may face a tough time finding the right financing opportunities for initiating buying activities in secondary markets.)
Long-term prospects in secondary markets
Most investors are propelled toward these markets for commercial real estate.
Mostly, investors are motivated by a secondary market’s prospects for appreciation in the long run.
It is because some markets give high gains, provided that they meet some criteria.
For example, some markets may have a high concentration of skilled workers along with an exceptional track record of innovation. These markets rank at the top spot of the list of lucrative markets. Other than that, some supply-constrained markets can also provide high yields.
But just because a skilled workforce is driving long-term growth initiatives in any marketplace does not necessarily make it any less volatile. Ranging from the time of investment to asset selection, these marketplaces too have multiple factors that govern their liquidity models.
Like any other market, a secondary market will have its own unique risks as well. The investors who want to expand their portfolio by speculating in these markets have to factor in a variety of aspects.
First of all, they’ll have to consider the fact that the global economy is expanding and having an impact on the economies of different countries. Because of its synergic effects, the global economy is pushing itself away from financial crises at a steady pace.
On successfully analyzing these factors, investors must integrate their analyses into decoding how and when these external influencers will change a market’s performance patterns and risk-return tradeoffs.
Successfully analyzing the current economic landscape and its impact on secondary markets will drive policymakers, investors, and lenders in the right direction.