To start off, let’s take a moment to understand what a Gateway market is. Gateway markets are locations, typically a city or metropolitan statistical area (MSA), that are considered top-tier markets for real estate investment and ownership. You may wonder what makes an area “top-tier,” and the answer stems from the intersection of several factors, including population growth, economic health, local infrastructure, and cultural prominence. Areas such as New York City, Los Angeles, and Chicago are great examples of gateway markets, as they provide stability to real estate investors in the market while still experiencing growth. However, it is important to understand that the stability of these markets can attract an above-average number of competitors to enter said markets, which often results in high competition for real estate investors and operators alike. This competition can compress the margins of real estate professionals, reducing the upside of these markets, even for assets considered prime real estate. In addition to this increased competition, there can also be a higher degree of government regulations in these areas, given the complexity of the local economy and the large population sizes they regulate. Given these limiting factors, Gateway Markets often align with real estate companies’ core or core plus strategies in which they will utilize investments in Gateway Markets as the stability within their portfolio while they seek higher, but riskier, returns in secondary or tertiary markets. At this point, you might have a few questions about the terminology and key concepts discussed so far, so I’ll take a moment to explain them further.
What is a Metropolitan Statistical Area (MSA), and how does it relate to Gateway Markets?
A Metropolitan Statistical Area is defined by the US Office of Management and Budget as a geographic entity encompassing a city of at least 50,000 people (or an urbanized population of 100,000 or more) and surrounding counties that are economically and socially integrated with that city. While not all MSAs are Gateway Markets, all Gateway Markets are MSAs or a majority part of an MSA.
What does core/core-plus strategy mean, and how does it relate to prime real estate, prime markets, and the best locations to invest in real estate?
Within real estate, there are varying levels of risk associated with each asset within any market. These levels of risk are generally understood to fall within four main categories: Core, Core Plus, Value-Add, and Opportunistic. Each category is considered to have a higher risk profile than the last, and with this increased risk typically comes the potential for a higher upside on the deal. This relates to Gateway Markets through the level of risk-to-reward ratio for assets within these markets. Given their established nature, there is typically less untapped upside for assets within these markets, but in turn, they can generally see higher stability and less risk in executing one’s business plan.
As an example, Ignite Funding typically looks to work with developers whose deals are located within the value-add strategy category. This allows experienced developers who understand the execution necessary to leverage their knowledge and expertise to generate outside returns that can incorporate the costs of debt into their expenses. This allows for Ignite’s Investors to generate interest income while still leaving enough meat on the bone for the developers and their employees to profit and continue business operations.
Conclusion
In summary, Gateway Markets offer a compelling option for individuals and corporations seeking stable real estate investments with moderate returns. These markets are typically well-established and economically robust, making them attractive for lower-risk strategies. While often labeled as prime due to their infrastructure and stability, Gateway Markets may not always represent the best opportunities for maximizing returns. For investors focused on growth and higher upside potential, secondary or tertiary markets may provide more favorable conditions. However, Gateway Markets remain an essential part of a balanced portfolio, serving as the foundation of stability while allowing room for more opportunistic investments elsewhere.
