New Research Brief | How the Other Half Builds: Small-Scale Development in Tertiary Markets
January 11, 2022
A new NAIOP Research Foundation research brief by Shawn Moura, Ph.D., research director, NAIOP, provides owners, investors and developers with insights into the risks and opportunities associated with developing, owning and operating small buildings in tertiary markets.
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- Building size usually reflects local demand for commercial space, with larger buildings concentrated in larger markets. Developers and investors that focus on economies of scale tend to avoid smaller projects, and consequently tend to favor larger markets.
- Higher yields and fewer potential buyers favor longer holding periods in smaller markets. Higher exit risk may discourage developers with shorter time horizons from entering a tertiary market.
- Due to limited market research and fewer commercial real estate transactions in smaller markets, local developers have an informational advantage over nonlocal developers, allowing them to better evaluate a project’s risks and return.
- Developers in smaller markets can mitigate risk by limiting the volume of speculative projects they undertake and by developing strong relationships with local contractors, designers and prospective occupiers.
- Although local and regional businesses continue to represent a larger share of occupiers in smaller markets than in larger markets, national firms have recently expanded their presence in smaller industrial markets alongside broader growth in e-commerce distribution.