Secondary Shift

In search for yield, product availability, better market performance and/or other factors, capital is moving to smaller markets.

Last year’s dollar acquisitions volume held up better in the secondary and tertiary markets than primary markets. Total investment for assets in the nine Tier I metros (the six “gateway” markets plus Seattle, San Diego and Miami/South Florida) fell 17% year-over-year.

The Tier II metros collectively experienced a much smaller drop of -5.2%. Also, Tier II’s investment market share almost caught up to that of Tier I metros. For Tier III metros, investment rose 3.7% in 2017. Tier III’s market share also reflected a gain over last year.

The movement of capital to Tier II and Tier III markets will likely continue in 2018 (but one should also recognize that many Tier II markets are still very large markets). The gateway and other Tier I markets will remain very attractive for investment with Los Angeles and Seattle likely heading this list.

Investment by Metro Tier Groupings


Yet for a large share of investors, the potential for higher returns outside Tier I markets will remain enticing, and we expect Tier II an Tier III market shares to rise again in 2018.

New York, Los Angeles, and DFW top metros

New York metropolitan area led the U.S. in total 2017 multifamily acquisitions with $12.2 billion or $8.1% of the total. While impressive, New York’s share has fallen from previous years (12% in 2016).

Southern California (Los Angeles, Orange County, Inland Empire) and Dallas/Ft. Worth ranked second and third (as they also did in 2016). Investment in Atlanta was also particularly active at $7.5 billion or 5% market share.

The top four metros combined represented more than one quarter of all U.S. multifamily acquisitions in 2017. Half of the volume was represented by only 11 metros.

U.S. Metros Ranked by Investment 2017

Philadelphia leads YoY change

Among the 20 metros with at least $2 billion of acquisitions, seven metros had increased volumes: Orlando (32.9%), San Antonio (31.8%), Baltimore (25.8%), Washington, D.C. (12.6%), Chicago (9.6%), Boston (4.5%) and Las Vegas (1.1%). Among all markets, Philadelphia had the largest gain with 2017 more than double its 2016 level.

Among the metros with $2+ billion total investment, New York had the largest y-o-y decline (-39%) followed by Miami/South Florida (-23.9%), San Francisco Bay Area (-23.4%) and Austin (-17.2%).

For all U.S. multifamily investment, 2017 was down 6.9% from the prior year. Without New York, the y-o-y change was only -2.3%.Note, that changes in buying volumes are not only governed by market performance and investor sentiment, but also by product availability and by large portfolio purchases which can skew y-o-y changes in both directions.

Dallas/Ft. Worth leads for unit count

Dallas/Ft. Worth led the nation for total units acquired in 2017 with 90,300 units (8.1% of U.S. total), followed by Atlanta with 70,300 units. Of the top 10 metros by unit count, six were Tier II metros, providing additional evidence of the importance of Tier II markets for multifamily investment.

Of all multifamily units bought, 21% were in Tier I metros compared to 23% in 2016. The market share for Tier II markets also fell, but is still largest among the three tier groupings at 36%. Market share grew in the “other” category which represents mostly smaller tertiary markets.

San Francisco has highest sales price

In 2017, seven markets had sales price per unit averages over $200,000: San Francisco ($332,700), Boston ($262,200), San Diego ($259,700), Seattle ($241,700), Los Angeles/So. Calif. ($240,800), New York ($231,800) and Denver ($212,900). Portland, Miami/South Florida and Washington, D.C. were also very close to $200,000.

Kansas City experienced the largest rise in average sales price in 2017 (37.5%), followed by Sacramento (36.0%), Orlando (24.4%), Philadelphia (23.8%), Detroit (23.8%), Tampa (22.5%) and Seattle (20.0%). All of the markets with gains over 20%, except Seattle, were Tier II or Tier III metros. (Note that the sales price changes reflect changes in asset mix of assets acquired as well as value changes).

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.