By: Shawn Moura, Ph.D., Director of Research, NAIOP
Institutional commercial real estate investors and large development firms usually focus on the largest commercial real estate markets, though many are also active in mid-sized markets. Often referred to as “primary” and “secondary” markets, these roughly correspond to the 50 largest metropolitan areas in the U.S. By comparison, smaller “tertiary” markets attract less institutional investment and subsequently less attention from researchers, analysts and trade publications. New office and industrial buildings that serve these markets also tend to be smaller on average than those in larger markets, since local demand supports fewer multistory office buildings and large distribution centers. However, while they may not be at the center of the action, tertiary markets are home to about half the U.S. population and represent a significant share of the commercial real estate market.
Real estate development and ownership in smaller markets differs from development and ownership in larger markets in ways that tend to deter large regional or national developers and favor local developers. This research brief draws from a survey of NAIOP members and interviews with developers in tertiary markets such as Western Michigan and Southwest Missouri to examine these differences and their implications for developers and investors. The survey revealed that the broader community of developers and building owners prefer large projects in primary markets over small building development in tertiary markets for a variety of reasons. Conversely, developers who are active in tertiary markets identified several advantages to smaller-scale development in these markets. These divergent perspectives reflect differences between the two groups in their business strategy, scope of operations and familiarity with smaller markets. Large development firms may have good reasons to avoid smaller markets, but that does not mean they do not present opportunities for local developers and investors. To the contrary, local developers frequently cite the absence of larger competitors as one of the advantages of doing business in smaller markets.