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Making First-Rate Investments in Secondary Markets

Smaller markets may yield bigger returns

While commercial real estate in major metropolitan areas remains in high demand and continues to command top rates, supply is limited and competition is fierce for the spots that do become available. Many investors are therefore turning their attention (and dollars) to secondary and tertiary markets. And with good reason—transaction volume in these markets soared from $2 billion in 2000 to $45 billion by the close of 2017.

Markets: A brief overview

Market definitions are fluid and can depend on the specific needs of a developer or investor, but there are general guidelines that can help professionals navigate the landscape. Population, job growth, capitalization rate analysis, occupancy rates, and the volume of sales and investment in a community are some of the traditional indicators in a market classification. Nontraditional indicators such as a region’s professional sports franchises or the number of direct flights may also come into play.

Out of the more than 50 metropolitan statistical areas (MSAs) with populations over one million and the 30 MSAs over two million, five to seven of them—New York, San Francisco, Boston, Los Angeles, and Washington, D.C., with Chicago and Seattle sometimes thrown in—are considered core markets. The “secondary” level includes places like Denver, Phoenix, and San Diego, with “third-tier” tertiary markets like Las Vegas, Pittsburgh, and Salt Lake City rounding out the list. Characteristics of this last category include a population of under one million, a mix of traditional and alternative economic indicators, and controlled but consistent job growth.

Why secondary and tertiary markets?

There are many reasons to consider investing in these smaller markets that will have an impact on both your budget and long-term prosperity:

  • There’s less opportunity in major markets. Many developers find themselves all but priced out of New York, Los Angeles, Chicago, Boston, San Francisco, and Washington, D.C. In tertiary markets such as Orlando and Austin, prices (and costs of living) are lower due to less competition—and populations are growing.
  • Eighteen is the new 24. While the “big six” mentioned above are valued as 24-hour cities, 18-hour cities like Denver, Nashville, and Portland are growing in popularity with renters and owners across generations.
  • E-commerce is a huge economic engine. The continued rise of digital retailers has pushed industrial production into secondary and rural areas, spawning healthy economic growth.
  • They are more stable during a downturn. And therefore, more appealing late in the investment cycle.
  • It’s easy to overlook them. Many investors are boxed in by traditional schools of thought and may miss the opportunities inherent in these markets.

Before you build …

While it can be tempting to jump into secondary or tertiary markets with both feet, it’s important to do your homework and make sure each region is a good fit for your investment needs.

Economics at a glance don’t tell the whole story. It’s important to look at a market’s individual traits and put them side-by-side with national trends. There are also factors outside of traditional drivers that can have a big impact on a region’s fortunes. Denver without cannabis or Orlando without Disney are far different investments than naked numbers may show on paper.

Finally, a dose of reality is always helpful. The growth of these markets can’t last forever and in the event of another economic downturn, be prepared to pivot should the local economy take a dip.

Invest early, be patient

In the words of hockey legend Wayne Gretsky, “skate to where the puck is going, not where it has been.” Early investors in secondary and tertiary markets may find a great opportunity where others haven’t yet ventured. Morris Southeast Group is proud to serve South Florida—one of the nation’s most vibrant and exciting secondary markets—and hope you will consider partnering with us. For a free consultation on property management services or commercial real estate investment, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Are Multistory Warehouses on South Florida’s Horizon?

A new concept may provide a solution to the need for warehouse space. But it has its own challenges

For several years now, we’ve all heard how e-commerce is changing the retail landscape. As consumers continue to click to shop, there is a greater expectation for rapid delivery. For e-retailers, that means establishing local distribution centers, most likely using vacant warehouse space or newly built facilities close to urban centers and airports.

At the moment, in locations like Miami-Dade where population is dense and available space is sparse, that formula seems to be working. But e-commerce shows no sign of slowing down and more distribution space will be needed. And the solution may involve looking upward.

Is it time for the warehouse of the past to go?

Today’s warehouse usually comes in one size: sprawling. Very often, these structures took advantage of open land on the outskirts of populated areas. They were designed to be cavernous structures, a holding place for goods stacked to the height of the high ceiling, able to manage forklift maneuvering and trailer deliveries.

In places like Miami and other densely populated urban markets, the outskirts have disappeared. This lack of buildable land has increased its value, which in turn has led to rent increases in buildings that already exist.

New tenants are shopping for space

At the same time, the tenant base has changed. In the past, most tenants would be content with 20,000 to 30,000 square feet of warehouse space but with a changing marketplace, many tenants are now seeking ten times that amount. And some experts predict there are about 10 years of available square feet remaining.

While a decade may seem like a long way off, the impact of Miami’s unique predicament is already being felt. Rising rents are encouraging potential tenants to shop for better deals, and many of these can be found north of Miami-Dade. Both Broward and Palm Beach counties tend to have lower rents and more space available, and both are close enough to Miami-Dade to still be able to provide efficient and rapid delivery.

The multistory warehouse: a potential solution with challenges

Miami is seen as a potential market for the multistory warehouse, and although it does seem to solve a problem, it also runs into a few challenges that are uniquely American. Typically, multistory warehouses are located in dense areas. As a result, their design often involves tighter turns on ramps and in aisles, as well as loading and unloading areas on each of the floors.

At first glance, this doesn’t seem like much of an issue—until one considers the size and length of the typical American tractor trailer, a mainstay of the nation’s delivery of goods. In Asian and European cities, this wasn’t too much of an issue since they already use smaller trucks that are easily maneuverable in tight city streets and on warehouse ramps.

In America, big trucks could bring urban traffic to a standstill which could delay the movement of goods, which could then eat into profits. While smaller trucks and vans could solve the issue, developers and potential tenants may see compact vehicles that transport less product as inefficient, too risky, and too expensive.

Why it’s important to consider a multistory future

Generally speaking, multistory warehouses are a new concept. As a result, initial rents would be higher, and the tenant would need to feel especially secure that the investment would be worth the return. That being said, can the Miami-Dade market afford not to look at warehousing solutions for the future? At Morris Southeast Group, we have always felt it’s important to look ahead in order to meet the CRE challenges and changes that are sure to come, from multistory warehouses to using  virtual reality to prepping for climate change. To learn more about property investment opportunities and our other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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