Tertiary markets

Big Deals in Small Markets

By Rich Rosfelder |

As prices climb ever higher in primary markets, commercial real estate investors are making their way to non-core markets in search of better returns. While second-tier cities such as Austin, Texas, and Pittsburgh predictably dominate, even small towns such as La Crosse, Wis., are generating interest. Casey Weiss, CCIM, principal with Access Commercial Real Estate in La Crosse, discussed his market’s appeal with Commercial Investment Real Estate.

CIRE : What types of investors are active in your market?

Weiss: I mainly see two types: bargain hunters and single-tenant net-leased buyers.Most of the local buyers are bargain hunters, and they oftentimes have expectations that are beyond what the market can provide.Smaller markets have not suffered as much as many larger metros, but the bargain hunters apply the doom and gloom from national headlines to their property search.They often miss out on good opportunities because their expectations are not in line with the local market.

The net-leased buyers are usually from out of town and larger metros.These are well-funded buyers looking for higher returns in the smaller markets.Smaller markets are also appealing to them because they are easy to learn.For example, most of these markets have only one or two primary retail areas, making it easy to evaluate property location, access, and visibility.

In addition to the bargain hunters and net-leased buyers, we see owner-users and 1031 buyers.The owner-users typically are those businesses that are beginning to see economic improvement. They are growing and either need more space or want to take advantage of favorable pricing and upgrade their facilities. The 1031 buyers are usually in search of higher-quality properties that offer stability and good cash flow.

CIRE : What factors are attracting them to your market?

Weiss: Higher returns, as well as barriers to entry created by the smaller trade area.For example, I have a Petco investment property for sale.My market also has a PetSmart property.Both can survive, but it’s safe to assume no other large pet retailer will join the market because the demand is fully supplied.These types of trends are much easier to forecast in smaller markets.

CIRE : What property sectors are seeing the most interest?

Weiss: Net-leased properties are the most active. These are mostly retail, but industrial buildings fully leased to a regional or national tenant are also attracting attention. Strip centers are generating interest as well, but only fully stabilized centers in great locations.

CIRE : How are transactions being financed?

Weiss: Full-recourse financing from community banks and credit unions were typically used for the deals I’ve done in the past two years.These banks are heavily regulated, but not to the degree of the larger regional and national banks.

I’ve also heard that some of the rural community banks are being more aggressive in their lending because they are flush with cash from farmers who have had success with rising crop prices.Credit unions are becoming a more common option for businesses and investors as well.

CIRE : What non-real estate asset types are competing for investor dollars?

Weiss: It seems that investors with the capability to buy real estate are taking some chances on small businesses.I’ve seen investment in trucking companies, frac-sand mining operations, and other “angel investor” opportunities.Stocks and mutual funds continue to have their typical presence as well.

CIRE : Is it too early for most buyers in your market?

Weiss: I believe that if buyers are not looking now, they are too late.The problem in smaller markets is a lack of supply of good deals.Prices are low and may go slightly lower, but it is not worth waiting for a perfect opportunity when you can pursue a “close-to” perfect one in a smaller market.It is important to buy based on solid fundamentals, not simply a bargain price. The cheapest availabilities struggled from the beginning of the recession and will continue to struggle well after it.

For more on investments in non-core markets, read “Small(er) Markets, Big Opportunities” in the March/April 2012 issue of CIRE.