Custom Capital on Why Secondary Markets Can Offer Better Basis Than Large Metros

Jason Milton remembers the moment a deal almost talked him out of itself. Custom Capital had a couple of gas stations under contract in Kansas, in towns whose names he’d never heard before. An unfamiliar name on a purchase contract triggers a specific kind of doubt. If a place is unfamiliar enough that a firm with acquisitions running in dozens of markets hasn’t come across it, something about the deal must be off. Milton’s own read on that instinct, once the underwriting came back, was that it’s usually backwards.

“Never Heard of It” Isn’t a Diagnosis

The bias runs the other direction from what it feels like in the moment. An investor comparing a Houston property to one in a town they’ve never heard of tends to treat name recognition as a proxy for safety, when the two have little to do with each other. A market’s fame is a function of population size and media coverage, not of whether a specific tenant on a specific lease is going to pay rent on time for the next fifteen years.

Custom Capital tested that instinct rather than just asserting it. The firm runs educational webinars, and on one of them a credit analyst was brought on who had underwritten more than $2 billion in gas stations for one of the country’s largest real estate investment trusts, the kind of institution whose fund does nothing but gas stations and turns down most of what crosses its desk. The Kansas deals were handed to that analyst, with a request to underwrite them as if the REIT itself were buying. His answer, in front of the room, was yes.

A $2 Billion Verdict: Yes

The reasoning the analyst gave tracks with what’s now showing up broadly in 2026 cap rate data. According to benchmarks compiled by CommercialCalc, primary markets like New York, Los Angeles, and Chicago typically price 100 to 200 basis points below secondary markets, and tertiary markets can trade 150 to 300 basis points above primary pricing altogether. The same benchmarks describe secondary markets as offering a more favorable balance of basis and competition than gateway pricing currently allows, a case built on lower competition for deals and lower basis, not a compromise made in exchange for lower quality.

That’s close to the case the analyst made for Custom Capital’s Kansas stations. Lower competition among buyers. Lower replacement cost. An operator who’d run the store profitably for two decades, with no reason tied to the town’s size that any of that would change. Buyers chasing brand-name markets pay a meaningful premium for comparable assets, and the location does nothing different for the lease’s cash flow. The premium is large, and the location does nothing different for the lease’s cash flow.

Institutional capital’s broader shift toward secondary and tertiary markets isn’t a 2026 anomaly. It reflects the same math playing out at scale. Where primary-market pricing stays compressed and buyer competition stays intense, capital that used to concentrate exclusively in gateway cities has been finding better basis and less competition by moving down the market-size ladder, provided the underlying tenant and lease still clear the same bar a primary-market deal would have to clear.

The Skyline Doesn’t Sign the Lease

Underneath the pricing argument sits a more basic point about what actually backs a net lease income. A single-tenant property under a long-term lease with a corporate guarantee may produce rent according to what’s written in that lease, not according to the size of the market it sits in. If the tenant is a national operator paying on a 15-year term, the rent roll isn’t renegotiated by the market’s population. Resale liquidity and re-leasing ease are affected by market size, but the income an investor is actually underwriting while the lease is in force isn’t touched by it.

That’s the part of the bias worth naming directly: distrust of an unfamiliar market is really a proxy for distrust of the tenant and the lease, misapplied to the wrong variable. A weak tenant on a short lease is a real risk in any market, including a famous one. A strong, long-term tenant on a well-drafted lease carries that same strength whether the property sits in Dallas or in a Kansas town most investors have never had reason to look up.

The Footnote That Became the Headline

Daniel Miller, who works alongside Milton at Custom Capital, has pushed back on treating this as a secondary point in the firm’s strategy at all. Where Milton first framed the Sunbelt focus as the headline and the secondary-market opportunity as a footnote, Miller argues the emphasis belongs the other way around: the firm’s Sunbelt exposure looks like what plenty of other buyers already do, while the real edge shows up specifically in the secondary and tertiary markets, where better credit tenants can still be bought at cap rates that gateway pricing no longer offers.

None of this argues for buying blind in an unfamiliar town. It argues for underwriting the tenant and the lease with the same rigor regardless of whether the market name is one an investor already recognizes, and for treating that recognition, when it contributes to a pricing premium, as a cost to be questioned rather than a comfort to be paid for.

This article is for general informational and educational purposes only and should not be construed as tax, legal, investment, or financial advice. Custom Capital does not act as a fiduciary, broker-dealer, or investment adviser. Certain information contained herein is based on third-party sources believed to be reasonable at the time of preparation; Custom Capital has not independently verified all such information. Commercial real estate is illiquid and may require a long-term holding period; there may be no secondary market. Any description of a specific property or transaction is historical and illustrative only. Commercial real estate investments involve risk, including possible loss of principal, and any outcomes or figures mentioned are illustrative only and not guaranteed. Readers should consult their own financial, tax, and legal advisors before making any investment decision.