Targeting Secondary and Tertiary Markets

Targeting secondary and tertiary markets has indeed become a popular strategy, especially for firms looking to achieve higher yields and diversify their portfolios. Based on the most helpful WSO content, here are some key insights and considerations:

1. Runway in Secondary and Tertiary Markets

• Higher Yields: Secondary and tertiary markets often offer properties at a lower basis with stronger cash flow potential, making them attractive for value-add strategies.
• Tighter Runway: As more firms pivot to these markets, competition increases, which could lead to a compression in yields and a "pop" in pricing. This is especially true if the influx of capital outpaces the availability of quality assets.
• Sustainability: The runway for these markets depends on the ability to maintain demand and avoid oversaturation. If too many players enter, the pricing advantage may erode, reducing the appeal of these markets.

2. Impact on Primary Markets

• Potential Spillover: As pricing in secondary and tertiary markets tightens, some investors may return to primary markets, especially if the risk-adjusted returns start to align more closely.
• Stabilization of Primary Markets: Primary markets could benefit from renewed interest, particularly for core assets, as investors seek stability and liquidity. This could lead to a rebalancing of capital flows between market tiers.

3. Broader Considerations

• Asset Class Dynamics: While retail properties in secondary and tertiary markets may show strong cash flow, other asset classes like industrial or multifamily could behave differently. For example, industrial properties in these markets often benefit from e-commerce growth, while multifamily assets depend on population and job growth trends.
• Exit Strategy: The ability to aggregate assets in these markets and sell them as a portfolio to larger players (e.g., Blackstone, TPG) has proven successful for some firms. However, this strategy requires careful portfolio construction to avoid overexposure to non-primary markets.

4. Key Risks

• Economic Sensitivity: Secondary and tertiary markets are often more sensitive to economic downturns, as they may lack the resilience of primary markets.
• Liquidity Challenges: Exiting investments in these markets can be more challenging, especially during periods of market stress.

In summary, while secondary and tertiary markets offer compelling opportunities, the runway may be limited as competition increases. Primary markets could see a resurgence if pricing dynamics shift. Firms should carefully balance their portfolios to capture value while managing risks associated with these markets.

Sources: What are the major overlooked markets currently?, Pitchbook: PE Secondaries to Boom in 2023, A Discussion on Interest Rates/Macro Fundamentals (Long OP)