Know Your Markets: Primary, Secondary, & Tertiary
When looking into acquiring a property, it is key to understand the type of market that you are investing in. Real estate properties are broken down into three types of markets. Those three are primary, secondary, and tertiary. By knowing what type of market you are investing in will help indicate the potential pricing, returns, and growth opportunities. Within the industry there is a grey area around the definition of each market. What you will find is that these markets are based on the population size. If you were to base it purely on that criteria then you would have large, robust cities not qualifying as a primary market. Therefore, it is important to look at a matrix, made up of more than simply population to determine whether the city you are looking at is a primary, secondary, or tertiary market. The additional criteria worth evaluating would be job growth, employers, economic diversity, cap rates, and investment activity. Below we will run through each type of market and what differs between them. Primary Markets Primary markets are the largest markets in the U.S. It is a heavily populated, robust metro, typically with 5 million plus people. Often times these markets will be the most expensive to buy in which means there is a chance for compressed cap rates. Cities that would be considered as a primary market would be New York, Chicago, or Los Angeles. As previously mentioned, a city cannot solely be deemed a primary market based on the population size otherwise Chicago or Los Angeles would not qualify. What allows them to be considered a primary market is that they both have incredibly robust, diverse economies with strong job growth. There is solid investment activity which allows for these markets to continually scale. This is a great example for why investors must look at the full picture to determine what market they are investing in. Secondary Markets A secondary market is a metro that typically has a population size between 1 million to 5 million people. These markets will follow closely to primary markets being robust, economically diverse areas. There may be slightly less amenities in these markets, but the major difference here will be the size and cost of living. Investors tend to enjoy these markets because, unlike primary markets, pricing is much more reasonable and cap rates are usually higher. This is advantageous across the board because the affordability is recognized by both the investors and tenants. As this article is being written, the U.S is in the midst of Covid-19, and many employers have gone to remote work. One of the trends we have seen, due to remote work, is that people are moving out of the primary markets and into the secondary and tertiary markets due to affordability. These second and third tier markets are far more attractive which is spurring population growth in these areas. This is another reason why investors must analyze all elements of a market in order to not miss out on what could be an outstanding opportunity. Tertiary Markets A tertiary market is a metro that typically has a population of 1 million people or less. Along with the smaller population, we see a less robust market with far fewer amenities. Job growth and investment activity is usually on the lower side which explains why these markets are the most affordable with some of the highest cap rates. Some of these tertiary markets may not make sense to invest in since there isn’t enough growth and investment in that specific city. However, there are tertiary markets that are seeing new development and companies relocating to, which would bring in a flood of new people and investment activity. These can be amazing markets to focus on because the pricing has not yet adjusted, and investors can find incredible deals. Conclusion No matter what market you are interested in, always perform proper due diligence on it. Look at all elements of the matrix to make sure that you know exactly what type of market you and your investors will be investing in. Knowing all these details will allow you to understand the true value of the property and the area. This may make or break your deal so make sure to do your homework.