Commercial real estate is filled with terms that can be confusing for investors. For example, many investors might be confused by the differences between primary and secondary markets and what they mean to investors of different types.
We will explain the primary and secondary markets and how those differences impact investors looking to invest in commercial real estate projects.
What Is The Primary Market?
In commercial real estate, the primary market is when investors buy into a project after a sponsor has made it available to investors.
Sponsors in commercial real estate are the people or companies responsible for identifying, qualifying, and financing projects from conception to completion of the project. They are also the property owners and are responsible for ongoing operations.
Commercial real estate investors who buy into the primary market usually have to commit to a holding period, which is the period of time that they have to hold onto the asset before they can sell it. Holding periods in commercial real estate deals are usually 5-7 years in length.
Having capital tied up for 5-7 years means that deals in the primary market often have inherent illiquidity. This illiquidity can turn off prospective investors, as well as deter current investors who are looking to invest in other projects.
What Is The Secondary Market?
The secondary market in commercial real estate occurs when investors buy out existing investors in an active project. It is called secondary because the primary transaction occurred when the initial investor made his investment with the sponsor.
Because of the illiquidity in primary market deals, the secondary market has grown significantly. Programs like the SecondRE’s Marketplace give real estate investors the ability to buy and sell fractions of investments in residential and commercial real estate properties with the permission of their sponsors.
In addition, sponsors have access to a pool of accredited investors and real estate investors looking to invest in commercial real estate projects.
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What Is The Difference Between The Primary and Secondary Markets?
The principal difference between the primary and secondary commercial real estate markets is when investors invest in the project.
The primary market is where investors put capital directly into new projects brought to the market by sponsors. There is often a holding period where the investor cannot sell the capital investment.
Secondary markets are where investors buy out current investors of the initial investment made initially with the sponsor.
Relation to Shares
The primary market is when new shares in commercial real estate deals are sold for the first time. The secondary market, with some exceptions, allows new investors to buy out the shares bought by an initial investor.
Security Sale Rate
A sponsor can only sell initial project shares on the primary market. After the initial sale, such shares cannot be easily sold on the secondary market due to holding periods and contractual obligations.
Price Fluctuation
Sponsors set the price on the initial offering for their projects based on the costs of the project. In the SecondRE marketplace the price for secondary transactions is set by the market through supply and demand.
Share Path
Shares in commercial real estate deals cannot be sold on the secondary market until after they have been sold on the primary market with the sponsor’s permission.
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Which Market Should You Invest In?
Which Market Should You Invest In?
Primary real estate investments will often fall outside everyday investors’ price range. Sponsors may also not release details of projects to the general public but instead focus on accredited and other more prominent investors.
Another thing to consider when looking at the primary market is the holding periods associated with those investments. With typical holding periods being 5 to 7 years, that’s a substantial amount of time that your capital will be illiquid, which can hamper your ability to make other investments.
Gaining access to secondary markets is much easier and does not come with the high initial investment and commitment of primary market deals.
Higher ROI
Both primary and secondary trading markets can offer high ROIs on your commercial real estate investments.
Investments made on the primary market are typically larger deal sizes with an eye on long-term profits thanks to the collection of rent and appreciation that may appeal to many commercial real estate investors.
However, the shorter hold periods in secondary markets, the number of deals available, and improved liquidity mean that many investors may find a higher ROI on their investments in the secondary markets.
There are also more properties available on the secondary market for investors to choose from, giving flexibility as markets fluctuate.
Better Access
Access to the primary markets is difficult and limited to large financial players and individual investors who answer certain criteria or hang in the right circles. This intensifies the competition for access to new commercial real estate projects.
Sponsors can also be extremely picky about who they even let invest in their projects, making it challenging for most investors.
The secondary marketplace gives everyday investors the ability to buy fractions of shares of properties that they’d like to invest inwith greater access to opportunities than in the primary market.
The secondary marketplace gives everyday investors the ability to buy fractions of shares of properties that they’d like to invest in with greater access to opportunities than in the primary market.
There are more properties available on the secondary market than on the primary market, which improves access for investing in those properties.
Are you ready to gain access to the SecondRE Marketplace? Click Here to Create an Account and Get Started Today!
The SecondRE Marketplace for the Secondary Market
Access to the primary commercial real estate market is difficult for everyday investors because sponsors put their deals together with a short list of potential investors.
The secondary market, where investors buy out the shares of the initial investors in a property, is an excellent way for investors to get into commercial real estate.
The secondary market offers a lower cost of entry and less prohibitive holding periods so investors can maintain their liquidity.
Investors can take advantage of some of the limitations of the primary market and gain access to the secondary market using platforms like SecondRE’s Marketplace, where they can buy and sell fractions of cash-generating commercial properties.
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