If you ask a room of real estate investors about their feelings toward tertiary markets, you’re guaranteed to spark debate. The allure of major markets often overshadows the potential of tertiary markets stemming from the associated risk of employer and staffing uncertainties, limited scale and liquidity and market volatility. While these risks are valid, supported by the more conservative investors, they can be mitigated through strategies like the sale leaseback, which not only unlocks higher yields but also provides protection against downside risks. It’s important to note that despite the risks, tertiary markets present opportunities for patient investors to reap the rewards of long-term appreciation.
Unlocking Higher Yields Through Untapped Markets
If you're reading this, you might already be familiar with the sale leaseback strategy, but if not, here's a simplified explanation: an investor purchases the real estate and then leases it back to the seller, who becomes the tenant.
By employing the sale leaseback strategy in tertiary markets, investors can potentially achieve higher yields while simultaneously tapping into underdeveloped markets and diversifying their real estate portfolio. Tertiary markets often offer lower property prices and less competition, enabling investors to secure attractive purchase prices and enjoy improved yields that frequently exceed those found in major markets.
A Sale Leaseback Protects Against Downside Risks
While tertiary markets might be relatively underdeveloped, it's important to recognize that numerous high-quality credit tenants have made significant investments in their mission-critical facilities within these markets. Sellers who opt for the sale leaseback strategy are typically deeply committed to their facilities, having made substantial investments or leveraging other advantageous factors. Many of our clients are private equity owners of these businesses who have invested millions of dollars into their sites, demonstrating a long-term commitment while seeking an attractive way to monetize the real estate to reinvest into the operating company. The sale leaseback creates a mutually beneficial scenario, allowing sellers to generate returns that further optimize their business operations, while investors benefit from long-term lease commitments and reliable income streams. This dynamic helps to uphold the property's value and provides a level of security that sets it apart from other real estate investments.
Growth and Appreciation Potential of Tertiary Markets
Tertiary markets possess remarkable growth potential. As urban areas expand and populations grow, these seemingly overlooked markets of today have the potential to transform into thriving developed markets of tomorrow. By strategically investing in tertiary real estate through a sale leaseback, investors can position themselves to benefit from long-term appreciation and capitalize on the upward trajectory of these markets. Additionally, the security provided by a long-term lease from a credit-worthy tenant ensures a stable and consistent income stream, mitigating the typical risks associated with shorter-term leases or market fluctuations.
Consider the case of Savannah, GA. Just two decades ago, this tranquil coastal town would have likely been disregarded by most investors not familiar with the local area. However, today, Savannah boasts an impressive GDP of over $22 billion, marking a remarkable growth of nearly 50% in the past 10 years alone. In contrast, the nationwide GDP growth during the same period stood at a modest 19%. It is evident that early investors who recognized the potential in this market have reaped substantial rewards for their foresight and strategic investments.
Conclusion:
While tertiary markets may be overlooked, the advantages of investing in these areas, especially with a sale leaseback, cannot be ignored. By leveraging the benefits of a sale leaseback, investors can participate in the growth trajectory of tertiary markets, capitalizing on their transformation into developed markets over the long term.
With that, it is critical to conduct thorough due diligence and ensure you are partnering with a reputable tenant. The Ascension team represents these tenants, bringing quality deals across national and international markets. I encourage you to contact our team anytime – we’d love to learn about your criteria and find you the perfect match.