Primary, Secondary, And Tertiary Markets – What Are They?
Primary, secondary and tertiary commercial property are all property terms used to describe the value or quality of different classes of commercial investment property.
Since location has always been crucial when purchasing commercial real estate investment properties, these terms are important when deciding which investment to actually buy.
Here are some examples:
- The primary location would be a shop on a high-end street or the main part of a shopping center.
- A secondary shop would be one within walking distance of the high-end street.
- A tertiary area would be one which is on the outskirts of major cities.
There are also some other markets, such as local shopping districts, which could be considered as primary, secondary or tertiary depending on how active the market is and how much money is being spent there.
Interestingly, primary, secondary and tertiary areas for some shops may not necessarily be categorized the same as other key market areas.
What Makes An Office Primary, Secondary Or Tertiary From A Location Standpoint?
Tenants looking for offices look at more general things, such as whether the area is good for the type of people they need to work within the offices or whether the type of skilled workers is available in the area. For example, downtown is often for offices regarding banking (or suburbs) and for computer-skilled people.
There are location-specific factors that can make an office location Primary.
- Being close to rail links or metro stations so that your staff can arrive in the morning on time,
- The area has a good road system (again so the staff can come in), and
- Having basic things such as good data/communication services can make the location into a primary location.
The quality of the office; whether it has the latest specifications for offices is also a major factor in whether or not the location is a primary office location.
Secondary and Tertiary
Secondary and tertiary office markets tend to be in an older style office which some companies might not use (since the appearance of office says a lot about them as a company).
The secondary market aims toward smaller companies or companies which already have a headquarters elsewhere. Both primary and secondary market tend to have specific office-built buildings, whereas the tertiary market tends not only to be in a less desirable area, but also to be in a converted building.
Cap rates for purchasing will differ with the three distinct areas and are usually lower when in primary compared to tertiary markets.
Why Might Investors Choose Secondary Or Tertiary Markets?
Primary office properties are often chosen by investors over industrial and retail. With their safe investment environment, they are attractive to foreign as well as domestic investors (thus building competition in primary markets). As a result of all this price-driving competition, many investors might choose to invest in a substitute market (secondary or tertiary).
As interest, competition, and demand in primary markets grow, the costs become greater and investors are likely to aim for other markets. Primary office markets have average sale prices which are twice as much the secondary or tertiary.
Secondary and tertiary markets have lower competition/sale prices, and this is what can make them a good choice for investors. Higher returns can also be a huge plus when considering these markets (obtained by the increased occupancy and rental rates).
Lastly, today’s economy is pushing investors to invest in markets that they would previously not even consider. Suburban office buildings are also considered as part of an investment portfolio since prices in central building districts are continually rising.
All in all, defining which market is a primary, secondary or tertiary seems to be a random choice. Furthermore, some people look on primary markets as the best and most desirable market option. Others prefer secondary markets since their focus is more on the income of the property.
Another way of determining the nature of the market is the foreign capital.
If foreign investors put aside a lot of money to establish value and protect their wealth, then the market might be considered as primary.
The traditional point of view argues that primary markets are among top 5 metro areas in the USA (New York, L.A, Washington D.C, San Francisco, and Chicago)
Additionally, a market can move from tertiary to secondary if flights from major cities are available 24/7. But the choice is up to investors; they decide which market they like to would invest.
We hope that this article provides useful information. If you are considering investing in a commercial real estate, please do not hesitate to give us a call.Tags: commercial investment properties, Commercial Property, commercial real estate, commercial real estate investors, primary property, secondary property, tertiary property