Multifamily Investors Venture Beyond Gateway Markets
WHERE TO FIND NEW OPPORTUNITIES
by Joe Fairless
H istorically, most multifamily investors preferred to invest in gateway markets. Colloquially known as the “Sexy Six,” these markets include Los Angeles, San Francisco, and Seattle on the West Coast and New York, Boston, and Washington D.C. on the East Coast. For decades, institutional investors (REITs, pension funds, and endowments) refused to consider secondary and tertiary markets. In fact, it’s a well-worn joke in the multifamily industry that if a city didn’t have a professional football, basketball, and baseball team then mega funds like Blackstone and institutional investors had no interest. By and large, most national multifamily investors felt the same as the big players. Even regional players shied away from smaller markets. But attitudes about non-gateway markets have shifted significantly. Today, multifamily investors – regardless of size or scale – are not only willing to consider buying in secondary and tertiary markets, but they’re eager to do so. It’s not only U.S. investors that are expanding their horizons. Foreign investors are also eager to deploy capital into non-gateway markets, even if they’ve never heard of Little Rock or Colorado Springs. WEIGHING THE RISK Multifamily investors’ past preference for gateway markets wasn’t rooted in big city snobbery or superiority. Instead, it grew from very real concerns regarding exit strategies. The sentiment was that secondary and tertiary markets were inherently riskier because of the limited pool of investors interested in buying there. Many investors feared that when it came time to dispose of an asset, they would not only face challenges finding a buyer, but experience pricing pressure and depressed returns due to the limited demand. The bias against secondary and tertiary markets was a vicious cycle that took a pandemic to break.
Prior to the COVID-19 pandemic, Americans were stuck in one place – almost literally. In 2019, fewer Americans changed residence than in any year since 1947, when the Census Bureau first began collecting annual migration statistics. Between March 2019 and March 2020, the percentage was 9.3 percent – a post-World War II low. The pandemic jumpstarted residential mobility. Many people abandoned large urban metros to get away from the virus. For others, work-from-home mandates made it possible for them to live where they wanted instead of where they worked. From April 2020 to April 2021, 16 percent of full-time workers relocated, according to RealPage. GATEWAY MARKETS LOSE RESIDENTS Many Sunbelt markets have emerged as in-migration magnets, primarily due to their affordability and quality of life. People fled the inflated rental rates in gateway cities and made their way to less expensive areas. The Sexy Six markets experienced notable population declines in 2020 and into 2021, according to U.S. Census Bureau data and RealPage. New York suffered the most dramatic annual net population decline, losing more than 108,000 residents in 2020, a total population decrease of 0.6 percent. This marks the fourth consecutive year of population loss for New York. On the other side of the country, Los Angeles mirrored New York’s out-migration. More than 128,000 residents left Los Angeles in 2020. In fact, California’s biggest markets – Los Angeles, San Francisco, and San Jose – collectively lost hundreds of thousands of residents. These markets also happen to be among the most expensive apartment markets in the nation, with rents of $2,200 to $2,800 as of April 2021, according to RealPage.
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