Growth in ’17: Coming to a Tertiary Market Near You
Over the past decade, as our economy has picked up steam, we’ve witnessed the big city make its long awaited comeback. Cities such as Austin, Denver, Dallas, Phoenix, and our own Raleigh have been prime examples. Capturing headlines daily, large commercial real estate projects are popping up everywhere. A new week, a new twenty story tower somewhere in downtown or mid-town Raleigh.
These trends and investments are no doubt exciting and uplifting news for all. Therefore, it’s no surprise they’ve held a firm grip on commercial real estate news headlines over the last several years. However, as these primary markets have continued to get all of the love and affection, what’s going on in our smaller, tertiary markets?
Where do they fit into the changing real estate landscape? Demographic shifts, technology advances, retail, and investment opportunities in tertiary markets have forced many in the industry, that are looking at buying or selling commercial real estate, to pause and reexamine their strategies.
Millennials, the largest generation in American history, have fueled much of the demand in major downtown cores. The theory is that they dig many of the amenities of urban living, such as foodie spots, breweries, nightlife, and cultural events. But what happens as this generation ages and many couples begin to start families?
The urban boom won’t last forever. History shows us that people relocate when their lives and their needs change. Cost of living, housing availability and size, and school districts are major factors in drawing millennials, and many others to these smaller markets. Additionally, smaller, suburban town centers and continued employment opportunities are drawing people to these outlying areas.
A recent Urban Land Institute study titled “Demographic Strategies for Real Estate” predicts that nearly 80 percent of household growth will occur in the suburbs in the future. And while the projected number for rural growth comes in much lower, technological innovation may provide greater opportunities for those areas long-term.
In addition to the many amenities offered by primary markets, they also offer the ability to live in close proximity to work. However, technology looks to be changing that. The expansion of high-speed internet and other telecommunication provides the freedom to many consumers and businesses to operate from smaller, less dense communities. People once predicted the end of small-town America because of technology advances that were only accessible in large city centers. However, the evolution of technology has done just the opposite. It allows those in smaller markets to be just as connected as they otherwise would be in any primary market.
Retail and Investment Opportunities
As we look at the big picture, the population increases and technological advances make tertiary markets much more attractive to investors and retailers. These markets offer value opportunities for investors and retailers that want to avoid highly saturated primary markets. Certain retailers may look at towns of 150,000 people or more, yet the highest yield opportunities might exist in towns of less than 50,000. These markets offer benefits such as more available land, lower development and redevelopment costs, and generally less competition.
For investors, such as smaller entrepreneurial developers, less competition generally means lower barriers to entry in tertiary markets. Prices are generally held lower than primary markets, which opens the field to a wide range of investor types.. As PwC and the Urban Land Institute pointed out in their recent “Emerging Trends in Real Estate 2017 Report”, most respondents, unsurprisingly, appreciate markets that can generate attractive cash-on-cash returns. This is much easier to accomplish in tertiary markets due to rising rental rates and the lower investment requirements.
As the economy continues its recovery, we’ll likely see tertiary markets play a more vital role in the real estate game. As populations shift and smaller markets grow, demand for retail expansion will follow suit. With that in mind, and the potential for high yields, we’ll likely see these smaller markets account for a significant portion of the investment sales in the coming years.
Kima Commercial’s team of knowledgeable real estate professionals have a presence the triangle’s many attractive tertiary markets. If you’re a business, investor, or retailer looking for expert advice related to these hot areas please contact us today.