If you are considering a commercial real estate investment or expanding your existing property portfolio, watch for opportunities in secondary markets. These are markets in the suburbs, and urban-rural transition. Key reasons to keep secondary markets in your radar are:
- They generally offer higher cap rates than primary markets. Cap rate is the annual net income divided by the acquisition costs. Prices are generally lower, and rents are often only slightly lower in secondary markets than primary. Therefore, the relative returns ratios.
- The urbanization of suburbs and ex-burbs is bringing more amenities to these areas. Amenities could include development projects, recreation, entertainment options, and transit. These amenities are bringing the benefits of urban living or working, but at lower costs.
Like all potential rewarding investments, you have risks to consider as well. If cashflow is the objective, investors should consider the risks and probabilities of tenant turnover or vacancy rates. Other factors to consider are employment and building trends in the area of interest. Also, what county and town master plans have in store for the general area. There are zoning ordinances which describe allowed uses of the property, and investors should be educated on the process and timeframe for special use permits if expected uses do not comply with the zoning ordinance or other local covenants.
The investor should strongly consider hiring an experienced commercial real estate professional to help with financial investment, market, political, legal, and local economic analyses. A qualified commercial real estate professional can be an excellent partner, consultant, and advisor to mitigate risks, positively influence returns, and also help with the negotiations.
Ed Martin, CPRES, MBA