Smaller Markets Present Advantages for Local Developers and Investors: NAIOP Research Brief Examines Dynamics Underpinning Development in Tertiary Markets
A new research brief published by the NAIOP Research Foundation reveals the reasons that tertiary markets favor local developers and why smaller industrial markets are attracting more interest from institutional investors.
While many commercial real estate developers prefer larger markets because they support larger buildings that are easier to sell upon completion, smaller projects in tertiary markets do present several advantages, including quicker project timelines, higher yields and less competition from other developers.
The brief draws from an August 2021 survey of 193 NAIOP members across the U.S. and Canada, and interviews with developers who are active in tertiary markets. The survey and interviews revealed differences in the developers, investors and tenants that are active in larger and smaller markets, and why many are drawn to the potential of smaller markets.
According to the brief, “How the Other Half Builds: Small-Scale Development in Tertiary Markets,” a frequently cited rule of thumb for identifying tertiary markets is that they have fewer than 2 million people. But on a macro level, tertiary markets are home to about half the U.S. population and represent a significant share of the commercial real estate market. These places require different strategies than those usually followed by developers in larger markets but offer advantages for developers willing to take the time to familiarize themselves with local market dynamics and make long-term investments in growing communities.
The biggest deals in the largest markets usually attract the most attention in our industry, but NAIOP members who are active in smaller markets find real and growing advantages,” said Thomas Bisacquino, NAIOP president and CEO. “Higher labor costs, longer development timelines and scarce land in the largest markets are starting to make industrial deals in smaller markets more attractive.”
Among the findings covered in the research brief:
- Large national tenants have expanded their industrial footprints in many smaller markets, alongside the broader expansion of e-commerce distribution.
- The expansion of Amazon’s distribution network has brought large distribution centers, and Amazon’s preferred development teams, to several smaller markets.
- Cap rate compression in the largest markets appears to be leading some large investors to look further afield for industrial properties in higher yielding markets.
- Industrial real estate investment trusts (REITs) and investors that have traditionally focused on office properties have become increasingly active in smaller industrial markets.
- Respondents noted two significant advantages to developing smaller buildings in tertiary markets: shorter development approvals timelines as well as shorter acquisition, site preparation and construction schedules.
Download the full research brief, “How the Other Half Builds: Small-Scale Development in Tertiary Markets,” authored by Shawn Moura, Ph.D., Director of Research, NAIOP, at naiop.org.
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About NAIOP: NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial, retail and mixed-use real estate. NAIOP comprises 20,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit naiop.org.
About the NAIOP Research Foundation: The NAIOP Research Foundation was established in 2000 as a 501(c)(3) organization to support the work of individuals and organizations engaged in real estate development, investment and operations. The Foundation’s core purpose is to provide information about how real properties, impact and benefit communities throughout North America. For more information, visit naiop.org/researchfoundation.