For those new to financial investing or needing a refresher, understanding the diverse landscape of real estate investments is essential. With all investing, your hard-earned money is at stake, and a misstep can lead to financial devastation. Therefore, investing time and doing your homework to comprehend the intricacies of the real estate world is a worthwhile endeavor before committing any of your funds.
If you have looked into real estate investing, you might have encountered the term “tertiary markets” and felt perplexed about its exact meaning. This confusion is understandable, given that, broadly speaking, definitions can vary and occasionally even contradict one another.
There is an age-old categorization of markets into primary, secondary, and tertiary groups. This framework provides a useful way to understand the diverse characteristics of different geographic areas. In this article, we will delve into the specifics of tertiary markets, unraveling what defines them, exploring the motivations behind investing in these markets, and shedding light on potential downsides that investors should be aware of.
What are Tertiary Markets? Size, Growth, and Infrastructure
Real estate experts employ various criteria to classify markets, but there are no standardized definitions across the industry. One prevalent definition delineates a primary market as a region having over 5 million people, a secondary market that has from 2 to 5 million people, and a tertiary market encompassing areas with fewer than 2 million residents. However, these definitions can be subjective, as seen in the case of Austin, a vibrant real estate market that some might consider a tertiary market. In contrast, others view it as a gateway market akin to Seattle.
But despite these variations in definition, in practical terms, a tertiary market refers to smaller metro areas with lower population densities and less developed public infrastructure than their primary and secondary counterparts. While local economic fluctuations influence investments in these markets, savvy investors well-versed in the intricacies of tertiary markets stand to reap substantial returns.
Characteristics of Tertiary Markets
- Lower Cost of Living: Tertiary markets typically boast lower housing prices, reduced local taxes, and more affordable goods and services than primary and secondary markets. The cost advantages can attract new residents, fostering economic growth that can eventually elevate a tertiary market to secondary status.
- Slow but Steady Growth: With job and population growth aligning closely with national averages, tertiary markets rely on the organic expansion of local businesses rather than the rapid influx experienced by major cities. This slow but steady growth can present opportunities for investors with a keen understanding of market dynamics.
- Limited Public Infrastructure and Amenities: While tertiary markets possess some level of public infrastructure, they lack the extensive amenities found in major cities, such as widespread public transportation networks.
- Smaller Population: Tertiary markets, typically hosting fewer than 1 million residents, cater to the local community and neighboring small towns. This contrasts with primary markets like New York or Los Angeles, which stand among the most populous cities globally and tend to cater to visitors as well as locals.
Due Diligence in Tertiary Markets
Investors considering tertiary markets must prioritize due diligence, leveraging their knowledge of local real estate dynamics, cap rates, and occupancy rates. Understanding the driving forces behind a local economy is paramount before investing a tertiary market. Here are two pro tips for investors considering an investment in tertiary markets:
- To minimize risk and maximize returns, teaming up with investors familiar with various markets is advisable. Working collectively allows for pinpointing markets with high potential returns while reducing risk exposure. In the dynamic landscape of commercial real estate, a collaborative approach among savvy investors is key to making well-informed and strategic investment decisions.
- Building a network of local brokers, lenders, and property managers is equally crucial. Regional commercial real estate lenders, in particular, may require a distinct approach, as familiarity in one market does not guarantee seamless financing in a tertiary market.
Why Real Estate Investors Favor Tertiary Markets
- Less Competition: Tertiary markets offer a haven for investors seeking to avoid the intense competition prevalent in primary and secondary markets. The absence of significant institutional money allows those specializing in tertiary markets to stand out, potentially yielding higher returns.
- Better Value: Capital-intensive nature notwithstanding, tertiary markets often provide more favorable investment metrics. Properties in these markets often trade at lower sale prices per square foot than their primary counterparts, presenting investors with enhanced value propositions and finding a wider market for buyers.
- Less Volatility: During economic downturns, tertiary markets tend to exhibit greater resilience compared to their larger counterparts. The presence of dominant employers or specific property types, such as Amazon’s distribution hubs, can insulate these markets from severe swings. Unlike primary markets, where institutional capital exerts significant influence, tertiary markets are less prone to large-scale disruptions during challenging times.
Tertiary markets, with their unique characteristics and potential advantages, beckon investors willing to navigate the complexities for potentially lucrative returns. As with any investment, meticulous due diligence and a comprehensive understanding of the local landscape are the cornerstones of success in tertiary real estate markets.
At Cornerstone Commercial Investments, we specialize in the nuances of tertiary markets, knowing when to make strategic moves and when to exercise caution. Connect with us today or visit our website for comprehensive insights into making financial investment decisions that are the best for you.