Investment in commercial office real estate in tertiary markets

By Scott Ian MacIntosh, Senior Economist, Commercial/Investment Real Estate 

Of the top 25 Metropolitan Statistical Areas (MSAs), when ranked in terms of job growth change in 2007, only one primary market appeared on the list, and that was Salt Lake City. The other 24 markets are classified as secondary, or tertiary, depending on total population. Salt Lake City ranks 11th on the list of the top 25 markets with a high percentage increase in the number of non-farm employees.

Nationally, secondary and tertiary markets are outpacing the primary markets in terms of percentage job growth, but the Southeast region has experienced a significant portion of regional office transaction volume. One would expect that as secondary and tertiary markets expand, and the number of employees increase, that there would also be an increasing demand for office space for lease or for investment purposes.

Seven of the top 25 MSAs with a high percentage change in non-farm payrolls in 2007 are located in the Southeast. The table below outlines historic investment volume in office properties in tertiary markets by region. For example, of the $16.8 billion worth of office properties that traded hands in the Southeast last year, $3.3 billion worth of those properties were located in tertiary markets.

The values above represent only office buildings that are $5.0 million or more in value. The question is, are these tertiary markets with increasing payroll numbers the same markets experiencing increasing office transaction volume? Alternatively could it be the case that it is the tertiary markets within easy commute of primary markets, like Atlanta, Miami and Charlotte are the ones seeing increased investor interest, but not as dramatic an increase in payroll numbers?

In any event, tertiary markets in the Southeast seem to be favored by office invertors. Further research needs to be completed to see where and why tertiary markets in this region are so much in demand, and by whom.

Source: Real Capital Analytics