Primary, Secondary, and Tertiary Properties – What Are They?
When looking into commercial real estate investments, you’ll often see the market descriptors primary, secondary, and tertiary. These are often used to describe the value or quality of different CRE classes based on location type. Since location is a major factor in the value of any real estate investment, knowing these terms and what they mean today can help you look a little deeper at properties you may not have considered valuable before.
Examples of triple net (NNN) lease primary, secondary, and tertiary locations.
- A primary NNN location would typically be on a busy road, on the main thoroughfare, near other consumer staples, in a growing community.
- A secondary NNN location would usually be within walking distance of the busy road with a few other essential shops nearby, maybe a block or two away from the main road.
- A tertiary area is typically considered to be on the outskirts of a major city or in a rural area. Tertiary could also be near a more remote industrial park, sports arena, or campus.
As with anything in life, there are exceptions to hard-and-fast rules, and that is no different for these CRE location types. For example, local shopping districts can be considered primary, secondary, or tertiary depending on how active the market is and how much money is being spent there. Additionally, unlike the majority of gross lease properties, many NNN tenants operate in rural communities, and though labeled “tertiary,” these communities are often the prime location for those brands, i.e., Dollar General, McDonald’s.
Why Might Investors Choose Secondary or Tertiary Markets?
Primary NNN properties are typically chosen first by investors. They are attractive to new and savvy investors and those leaving less reliable investment vehicles for the long-term income stability, the low- or no-maintenance aspect, and the comparable return on investment. This creates primary-market competition, driving supply and demand, forcing prices up and cap rates down. As a result of this price-driving competition, many investors choose to invest in a secondary or tertiary location.
Secondary and tertiary markets often have less competition and lower sale prices, making certain NNN properties easier to obtain, especially for the first-time investor. Higher cap rates can also be a huge plus when considering these markets. Investment-grade corporations that operate with NNN leases in secondary and tertiary markets know their customers and tend to thrive in these locations, making them a smart choice for any NNN investor.
Moreover, the last two years have encouraged CRE investors who would not normally buy triple nets to purchase these reliable properties, many in markets they would not have previously considered. Owning a combination of city, suburban, rural, and tertiary NNN investments can diversify your investment portfolio with the security of different asset types, classes, and locations.
Different asset classes and locations within net lease investments – retail, fast food, health care, pharmacies, and industrial, in city, suburban, and rural locations – offer predictability not found in many other investments and less market-fluctuation risk.
Labeling Markets Isn’t a True Indicator of a Good or Bad Investment
As urban sprawl continues and the suburbs grow rapidly, the lines between what is considered primary, secondary, and tertiary have become blurred. When traditional economic drivers like population growth, economic growth, investment activity, and sales volume are strong, so too will be cap rates and market stability.
As you can see, labeling markets “primary,” “secondary,” or “tertiary” will not solely separate a good investment from a poor investment. When purchasing a NNN lease property, for example, the location in relation to the brand’s target consumer and accessibility to those consumers is more important. Yes, all investors want the Walgreens on the 1/2 acre corner lot in the middle of a main retail thoroughfare but it is not necessary for a strong, income-producing investment. A rural Dollar General or a suburban DaVita can be just as lucrative, or even more so, due to a potentially higher cap rate and achievement of a higher return.
To Wrap it Up – Use Data & Economic Drivers Over “Primary, Secondary, or Tertiary” as Defining Factors When Buying Commercial Real Estate
All in all, defining which commercial real estate market is primary, secondary, or tertiary is less important than it used to be when the lines between city, suburban, and rural were clear and types of real estate had definitive characteristics. Therefore, when looking for your next commercial real estate or NNN lease investment, rather than searching by these terms, use market data and economic drivers to choose properties you feel meet your financial objectives, then:
- Evaluate the creditworthiness of the tenant.
- Assess the financials of the corporation and individual location.
- Examine the lease in detail.
- Determine whether the location is the “prime” location for the brand’s target consumer.
The outcome of this investigation will give you a much better idea of whether an investment meets your goals and is a safe option rather than going by location nomenclature. Chances are, outlying markets will surprise you with healthy yields and long-term reliability.
If you are interested in learning more or would like to discuss your NNN lease investment options, Westwood Net Lease Advisors’ consultations and buyer representation are free. Contact us today for a no-obligation conversation. 314-997-5227