Less Can be More Doug Connell, Atlanta

In the southeastern United States there are arguably only two primary markets -- Atlanta and Miami-South Florida. Both have a metro population of more than 4 million people. Competition to acquire core and value-add properties in these markets is intense, and sharply rising prices and falling cap rates are the result, prompting the question: Are there better opportunities in the secondary and tertiary markets of this region — cities like Birmingham, Ala., Charleston, S.C., Charlotte, N.C., Columbia or Greenville, S.C., Jacksonville, Fla., Nashville, Tenn., Orlando, Fla., Raleigh, N.C., Richmond, Va., and Tampa. Fla.?

Institutional investors initially turned to the Phoenix market in search of higher returns as capitalization rates declined and prices increased in primary markets. Instead, they have discovered Phoenix is not the boom-to-bust retirement/resort based community they expected.

The answer is yes. The possible exception could be Orlando and Tampa, where competition is fierce). And here’s why:

• There is a higher probability of controlling the purchase, because there are fewer bidders;
• Pricing per square foot is much lower and discounts to replacement cost are much higher;
• A greater portion of overall returns comes from cash flow and is less dependent on having to achieve an aggressively high exit price, and
• Generally, these markets are less volatile than high-growth primary markets that are more susceptible to over investment and overbuilding.

Thoughtful underwriting based on thorough knowledge of the market is essential and, properly applied, can result in higher yields with an appropriate level of risk.