Commercial real estate (CRE) investors often assess geographic markets based on population size, density, and growth rates. These factors help categorize markets into primary, secondary, and tertiary groups, which allows investors to quickly understand the characteristics of each market. This article focuses on tertiary markets—smaller cities that offer unique opportunities and challenges for commercial real estate investments.

By the end of this post, commercial real estate investors will have a clear understanding of what tertiary markets are, why they can be appealing for investment, and the risks involved. You’ll also have the information you need to decide if investing in these smaller markets is a good fit for your portfolio.

What Are Tertiary Markets?

Tertiary markets are smaller cities or metro areas that lack the population density and public infrastructure of larger primary or secondary markets. These markets tend to grow at a slower pace, often relying on local businesses and industries rather than attracting national or international companies.

While there isn’t a strict definition of a tertiary market, several characteristics are commonly associated with these areas:

• Lower Cost of Living: Housing prices, taxes, and goods/services tend to be more affordable compared to major metropolitan areas.
• Steady, Slow Growth: Job and population growth in these markets generally mirror the national average, and expansion often happens gradually.
• Limited Public Infrastructure: Smaller cities often don’t have the extensive public transportation systems, cultural amenities, or recreational spaces seen in larger markets.
• Population Size: Tertiary markets typically have populations under 1 million residents, though there are exceptions.

Why Invest in Tertiary Markets?

Although tertiary markets come with their own set of challenges, there are several reasons why investors might consider them for commercial real estate investments.

• Less Competition: Large institutional investors tend to focus on primary and secondary markets, leaving tertiary markets with less competition. This can provide investors with an opportunity to secure good deals at attractive prices.
• Better Value: Due to lower prices per square foot and softer valuation metrics, tertiary markets often offer better value for investors. Property prices are typically more affordable, allowing for higher potential returns on investment.
• Stability in Volatile Times: Smaller markets often experience less volatility than primary markets. For example, while large cities can be heavily impacted by economic downturns or shifts in investor sentiment, tertiary markets may be more insulated, especially if they rely on stable industries or employers, like distribution centers.

Challenges of Investing in Tertiary Markets

Despite the potential benefits, there are several drawbacks to keep in mind when considering investments in tertiary markets.

• Lower Liquidity: With fewer investors in these smaller markets, it can be more difficult to buy and sell properties. This lack of liquidity means investors may have to wait longer to find a buyer or may need to adjust the price to attract one.
• Limited Resources: Finding reliable property management teams and contractors can be challenging in smaller cities. If an investor is not familiar with the market, managing the property can become time-consuming or require help from third parties.
• Less Robust Infrastructure: Tertiary markets generally lack the extensive transportation, healthcare, and public services that larger cities offer, which can affect both the quality of life for residents and the long-term appreciation potential of commercial properties.

How to Succeed in Tertiary Markets

To be successful in investing in tertiary markets, it is important to conduct thorough due diligence. Understanding the local economy, key employers, and market dynamics will help ensure a sound investment decision. For example, cities like Omaha, Nebraska, or Memphis, Tennessee, have strong local economies and a variety of commercial opportunities, making them potentially good places to invest.

Additionally, building a local network of brokers, lenders, and property managers is essential. Many regional lenders may not be familiar with other markets, so investors need to cultivate relationships with individuals and institutions that can help them navigate the local real estate landscape.

Examples of Tertiary Markets

To better understand what tertiary markets look like in practice, here are two examples:

• Memphis, Tennessee: A city with a population of approximately 650,000, Memphis has a low cost of living, with median home prices well below the national average. The local economy is supported by industries such as transportation, distribution, and healthcare, with large employers like FedEx. Although the city lacks the public transportation infrastructure of a larger city, it still offers investors opportunities, especially in industrial and retail sectors.
• Omaha, Nebraska: With a population of around 480,000, Omaha offers a cost of living lower than many urban areas. The city has seen steady employment growth, particularly in sectors like finance, insurance, and tech. Like Memphis, Omaha lacks the public transit infrastructure of a larger metro area but offers solid commercial real estate potential due to its growing economy.

Investing in Tertiary Markets Through Private Equity

For individual investors, managing properties in tertiary markets can be time-consuming and difficult without local knowledge. Many investors choose to partner with private equity sponsors who specialize in these markets. By working with experienced sponsors, investors can access deals in these markets without the need to personally handle property management or deal with complex local regulations.

A private equity sponsor can help ensure that investments are well-managed, and provide access to a network of property managers, contractors, and lenders that can make the investment process more efficient. This allows investors to diversify their portfolios without the day-to-day management headaches of owning property directly.

Conclusion

Tertiary markets offer unique opportunities for commercial real estate investors, with advantages such as less competition, better value, and less volatility. However, these markets also come with challenges like lower liquidity and fewer resources. By understanding the characteristics and risks of tertiary markets and leveraging local expertise, investors can make informed decisions that help achieve strong returns.