It’s no secret that many people have returned to city centers in the previous decade. A few cities come to mind include Austin, Denver, Dallas, and Phoenix. It has also been a driving force in the evolution of the commercial real estate sector over the past decade.
So, what about secondary and tertiary markets? What is their place in the dynamic housing market of today? Many people in the commercial real estate business planning on making a purchase or sale have had to halt and reevaluate their plans in light of recent demographic changes, technological developments, and investment prospects in secondary and tertiary markets.
Demographic Changes
The Millennial generation is the largest in American history and has driven much of the demand to live, work, and play in significant downtown cores. The idea is that because of their age, they will appreciate city life and everything that it has to offer, from the hottest new restaurants and bars to exciting cultural events. But what will happen as that group ages and more and more couples start families? According to a recent CityLab piece, people move when their lives—and therefore their needs—change,” meaning that the current urban boom won’t last forever.
Millennials and other generations are drawn to smaller markets for various reasons, including lower living costs, a wider variety of affordable homes, and better school districts. People are relocating to the suburbs due to job availability and the attractiveness of the smaller, suburban town centers.
According to recent research titled “Demographic Strategies for Real Estate,” which discusses the dramatic changes to the American landscape over the next decade, Eighty percent of projected household growth is expected to take place in the suburbs. Even though the predicted development rate for rural areas is substantially lower, technological advancements may eventually lead to better prospects there.
Technological Developments
Many people and companies now have the option to operate from less crowded areas because of the proliferation of high-speed internet and other forms of communication. Once upon a time, the decline of small-town America was blamed on the availability of cutting-edge technologies in major urban hubs. Conversely, advances in technology have had the opposite effect. It is now possible to reach people in rural places with the click of a mouse.
Possibilities in Retail and Investment
When we take a step back and look at the big picture, we see that tertiary markets are appealing to investors and merchants due to population growth and technological progress. Investors and merchants looking to bypass extremely competitive leading marketplaces can find good deals in these secondary markets. While many stores focus on cities with populations of 50,000 or more, smaller villages have some of the most significant earning prospects. There is minor rivalry in these markets, and more land is available for expansion and renovation.
Reduced levels of rivalry indicate that potential investors will face fewer challenges when entering the market. Compared to primary markets, secondary market prices are kept artificially low to attract a broader range of investors. Properties in secondary and even tertiary markets should have even better returns. According to PwC and the Urban Land Institute’s 2017 “Emerging Trends in Real Estate” report, respondents are particularly interested in markets with high cash-on-cash returns. Increasing rental rates and cheaper initial investment makes this much more straightforward in these areas.
If the economy keeps improving, tertiary markets will become increasingly important to the real estate industry as developments spring up in previously undeveloped areas of the country. The need for new stores will increase with population shifts and the development of smaller marketplaces. Given this and the higher returns that may be made in these niche sectors, it seems likely that they will represent a growing share of overall investment activity over the next few years.
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