How Secondary Markets for Commercial Office Space Are Improving

How Secondary Markets for Commercial Office Space Are Improving

On 03, May, 2018

Today’s market is dominated by one word: capital. There are many investors in the national market looking for places to park their capital, and commercial office space is one of the more promising repositories for said capital.

However, primary markets in major metro areas like New York City, Chicago, and Los Angeles are becoming oversaturated. Because of this, yields are decreasing in these areas, leaving investors seeking other areas to place their capital in search for higher yields.

That opens up a world of opportunity for secondary and tertiary markets to do well because of available space, lower vacancy rates, diversifying economies, and plenty of opportunity for growth.

The numbers bear out this trend: for the first three quarters of 2017, sales in primary major metro markets dropped by 16.5 percent to $50 billion, while sales in secondary markets rose by 8.3 percent to $38.6 billion.

Cap rates also are higher in these secondary markets than in the primary markets, giving investors better bang for their buck. This trend is even bringing back suburban multi-tenant office space, a market segment that has been out of favor for a while but may be reemerging.

One downside: it’s hard for institutional investors to scale up in smaller markets. For example, a buyer looking to purchase $50 million worth of space in one fell swoop may have a hard time doing that in a city the size of, say, Raleigh-Durham, North Carolina. That MSA is roughly on par with Birmingham in terms of population.

But, cities of that size are seeking to remedy that problem by revitalizing downtown areas and creating more commercial opportunities throughout the city. Birmingham, for example, has spent a lot of time and resources in the metro area lately, and the explosion of apartment and condo development in the city core in places like Lakeview, Southside, and Downtown Birmingham has created ample investment opportunity. Landmarks like the Thomas Jefferson Building are being renovated for commercial use and are attracting residents as well as business tenants.

Even tertiary markets are improving, markets like Huntsville, which has seen considerable growth over the past half-decade.

Experts anticipate that these trends will continue as long as the economy remains stable. It will take some years before secondary markets become saturated – if that even happens in the foreseeable future. Considering the growth rate of these markets, particularly in the Sun Belt, that could take quite a while to occur, creating even more opportunities for investors to invest their considerable capital.

The tax reform bill that was passed in December 2017 will also be a boon for commercial real estate space because it will place more capital in the hands of institutional investors, who could look to commercial real estate as an opportunity to find better, more stable yields than investing in a shaky and volatile stock market.

Alabama CCIM is the state chapter of CCIM, which provides resources for both commercial real estate agents and owners who need professional real estate help. Learn more about why a CCIM designation is recommended for agents and owners alike.

Go to Chapter News

Our Sponsors