Something You Didn’t Know (Maybe)
- Dec 04, 2013
Yield-hungry investors are betting on secondary markets as prices keep rising in primary markets. You probably knew that already since it is old news.
But what is a secondary market, anyway? As Supreme Court Justice Potter Stewart’s definition of obscenity, you probably think, “I know it when I see it.” Real Capital Analytics identifies six “major” markets: San Francisco, Los Angeles, Chicago, Washington, D.C., New York and Boston. My boss argues that Chicago should be replaced by Houston or Seattle, but there you go. One person’s primary market is another person’s secondary market.
Let me suggest definitions based on metro area population with primary markets greater than 2.5 million, secondary markets 1.2 to 2.5 million, and tertiary markets below 1.2 million. Among the 74 markets I analyzed, this gives us a pretty even split of 25 primary markets, 26 secondary markets and 23 tertiary markets. Feel free to disagree. This is America, after all.
The more important question is which primary, secondary and tertiary markets are outperforming? There are plenty of ways to quantify performance. For this article, I considered how fast the local labor market has grown from the recessionary trough to the latest reading (October). I like this because it shows which markets have the growth momentum, and it yields some surprises.
- Top five primary markets: Houston, San Francisco, Dallas-Fort Worth, Tampa Bay and Denver
- Top five secondary markets: Nashville, Austin, San Jose, Charlotte and Oklahoma City
- Top five tertiary markets: Grand Rapids, Mich., Bakersfield, Calif., Charleston, S.C., Salt Lake City and Greenville, S.C.
I found these rankings surprising in several ways. Tampa Bay, which tends to fall off the radar screen, has outperformed several attention-grabbing markets including Denver, Seattle, Boston and Miami. In the same vein, Austin basks in the national spotlight, but Nashville has done even better. Charlotte struggled early due to its heavy banking presence, but it is back in the growth mode. Most of the tertiary markets came as a surprise. Who, besides their local chambers of commerce, knew Grand Rapids and Bakersfield were recovering that quickly? Thirteen of the 15 markets have recovered all of the jobs lost to the Great Recession and are setting new growth peaks every month, far better than the U.S., which, after 4 ½ years in recovery mode, is still just 83 percent of the way back to its prior peak. The two markets still digging out from the recession are Tampa Bay and Greenville, where the downturns were steeper than the other 13 markets on the list.
Job growth is just one piece of the puzzle. Investors need to consider supply and demand fundamentals, market comps and an array of other indicators. I would argue that even slow-growth markets such as St. Louis, Milwaukee and Albuquerque present opportunities for well-informed (often local) buyers who eat, sleep and breathe the market and know every nuance of demand and supply. Even in the bottom-ranking markets on any list like this, there are investors making money because they bought the right product at the right time for the right price.