With investment activity picking up in the United States and primary markets becoming more competitive, I thought I would touch on the advantages of acquiring shopping center investments in secondary or even tertiary markets. For the seasoned investor/broker this may be elementary but I believe it is important to cover the topic.
Primary, secondary, tertiary, etc. markets with regards to real estate are based on population. Retailers are demographics driven, they want to be in a location that maximizes their ability to reach as many customers as possible. In primary markets retailers may have many different locations that fit this need based on the vast population. For instance, Starbucks has 129 different locations in New York City ( primary), in Knoxville,TN (tertiary) Starbucks has 7 locations. I use Starbucks because it is nationally known and they have locations in just about every market. I use this example to show a retailers growth based on population, this knowledge should be used to gain a proper perspective in secondary and tertiary markets. Because of the smaller population in secondary and tertiary markets, it is easier to identify the areas where retailers want to be.
Competition: Smaller markets have fewer competing centers. Fewer competing centers mean fewer options for current and future tenants. Whether you are looking for an "A""B" or "C" quality shopping center, you know that the demographics within the market will only support certain retailers as well as certain number of locations for those retailers.
Clear definition of trade area: I Touched on this towards the end of my opening paragraph but in smaller markets it is clear where the thriving retail areas are. As a shopping center investor it is important to know or have an idea of the growth pattern of the market. Will the potential shopping enter that is being considered be relevant in 5,10, or 15 years with the proper maintenance and updating? As stated earlier retailers need to be where people are, will you be able to keep your tenants when there lease is up based on the location of the shopping center?
Economic factors: here is where it can be both good and bad for the smaller markets. Secondary and tertiary markets have fewer options when it comes to economic drivers. Businesses that provide the jobs within a certain market need to be closely evaluated in order to determine if the investment will be able to weather hard economic times. If the market has just a few major employers, do your homework! How are the major employers effected by the national or world economy? Is the major employer a large University, Hospital, or government agency which are still in demand in a bad economy. On the other hand, is the major employer of a manufacturing nature, that ultimately depends on a good economy to maintain high production thus maintaining high employee retention.
Lower price psf: Secondary and tertiary markets typically have a lower price per square foot than comparable properties within primary markets. That is not to say that you won't see a ridiculous number come from a sale in a smaller market every now and then. But the cost of development, land value, and lease rates are typically lower in smaller markets which leads to lower price per square foot sales.
Risk: the risk for investing in smaller markets is higher. Since retailers are driven by demographics, then the demographics for smaller markets may not support some of the larger national tenants. Because of this you have a limited amount of retailers within the smaller markets to fill vacancy. Also quite often in smaller markets, you find that smaller retailers tend to follow larger national tenants that have a history of drawing in the amount of consumers needed to be successful. There are a lot of shopping center investors who will only invest in grocery anchored centers in smaller markets to ensure the major tenant cash flow, maintaining value of asset, and constant consumer traffic which attracts smaller retailers.
I believe that if a buyer is looking to make a shopping center investment in a smaller market, do your homework. Smaller markets can be challenging, but if a buyer takes the time to really get to know the market, through research or a knowledgeable broker, they can make an extremely educated decision which will ensure the highest return on investment. Also by understanding the make up of the market it can also save a buyer from making a bad investment.
