Market Intelligence: Investment Approaches for Primary, Secondary and Tertiary Markets

Navigating shopping center investing starts with understanding the different types of real estate markets: primary, secondary, and tertiary.

Each market type offers unique dynamics shaped by population, economic activity, and infrastructure. Knowing the differences is critical for investors to align investment strategies with financial goals.

As a new investor determining where to start with your investments, understanding the strengths and weaknesses of different markets will help you make informed decisions.

Let’s explore what defines these markets and how they impact opportunities in shopping center investing.

Primary Markets: The Powerhouse of Real Estate 

Primary markets are the biggest and most economically robust cities in the country. Think of areas like New York City, Los Angeles, or Chicago. These markets are characterized by dense populations, significant job growth, and a concentration of Fortune 500 companies. They tend to have the highest property values and rents.

Strengths of Primary Markets: 

• High Demand: primary markets attract a steady influx of tenants, from major retail chains to smaller businesses looking to capitalize on heavy foot traffic. 
• Resilience: these markets are typically less volatile and can weather economic downturns better than smaller markets 
• Prestige Tenants: shopping centers in primary markets often feature nationally recognized anchor tenants like Target or Whole Foods, which can drive consistent revenue.

Weaknesses of Primary Markets: 

• High Costs: property prices and operating costs are significantly higher, making entry more difficult for smaller investors. 
• Competition: With many players vying for prime retail spaces, the market can feel over-saturated and difficult to navigate. 
• Lower Yields: While stable, the returns on investment may be smaller due to the high acquisition costs. 

Primary markets are ideal for risk-averse investors seeking stable, long-term gains. If you secure a prime location with high-performing anchor tenants, the investment will likely remain profitable, albeit with slimmer profit margins.

Secondary Markets: The Balanced Contenders

Secondary markets are mid-sized metropolitan areas like Austin, Charlotte, or Denver. These cities are often growing quickly, with increasing job opportunities, an expanding population, and a more affordable cost of living compared to primary markets.

Strengths of Secondary Markets: 

• Growth Potential: as emerging hubs, secondary markets often experience rapid retail expansion, providing ample opportunities for shopping center investments. 
• Lower Costs: real estate prices and operating costs are more manageable than in primary markets, enabling higher initial returns. 
• Diversification: secondary markets allow investors to diversify geographically without the intense competition of primary markets. 

Weaknesses of Secondary Markets: 

• Market Volatility: while promising, secondary markets are more susceptible to economic downturns, particularly if their growth slows. 
• Tenant Risk: Smaller or regional retailers may dominate shopping centers, which could lead to higher vacancy risks if those businesses fail. 

Secondary markets are where investors are most capable of balancing risk and reward. They are ideal for investors looking for growth opportunities without the financial barriers of primary markets. However, careful tenant vetting and local market analysis are key to ensuring success.

Tertiary Markets: The Underdogs with Potential 

Tertiary markets are smaller cities or towns, often with populations under 250,000. Examples include Huntsville, Alabama, and Fargo, North Dakota. These markets generally lack their larger counterparts' density and economic activity but can offer niche opportunities.

Strengths of Tertiary Markets: 

• Affordability: low property prices and operating costs make tertiary markets highly accessible for new or budget-conscious investors.
• High Yield Potential: lower acquisition costs can lead to high capitalization rates and greater cash flow. 
• Underserved Demand: many tertiary markets have limited retail options, creating opportunities for shopping centers to fill gaps. 

Weaknesses of Tertiary Markets: 

• Limited Tenant Pool: smaller populations mean fewer national retailers and a higher reliance on local businesses. 
• Economic Risk: tertiary markets are more vulnerable to economic fluctuations and may lack the resilience of larger markets. 
• Exit Challenges: properties in tertiary markets may take longer to sell, limiting liquidity for investors. 

Investing in tertiary markets can yield robust returns for investors willing to take on more risk. Success often hinges on finding locations with stable local economies or untapped retail demand.

Which Market is Best For Shopping Center Investing?

Choosing the correct market for shopping center investments is a vital decision that depends on one's financial goals, risk tolerance, and investment strategy. 

Primary Markets: For Stability and Prestige 

If stability and security are your top priorities, primary markets may be the best choice. These markets provide consistent tenant demand and lower vacancy risks, making them ideal for risk-averse investors. With a dense population and robust economic infrastructure, shopping centers in primary markets often attract national retailers as anchor tenants.

For instance, securing a lease with a brand like Whole Foods or Apple can guarantee steady foot traffic and a reliable income stream.

However, entering a primary market comes with its hurdles. The high acquisition costs and competition for prime locations mean investors need significant capital upfront. Additionally, the premium paid for these properties often results in lower cap rates, meaning the return on investment might be lower than in other markets.

Who Primary Market Investing is Best For: 

• Institutional investors or high-net-worth individuals who can handle high entry costs.
• Those prioritizing long-term appreciation and portfolio stability over high cash flow. 

Secondary Markets: A Balanced Approach 

Secondary markets balance risk and reward, offering a sweet spot for many investors. These markets are experiencing growth in population and job opportunities, making them attractive to tenants and investors. Shopping centers in secondary markets often feature a mix of national chains and regional retailers, providing a diversified tenant base.

Real estate affordability in these areas allows for higher initial returns than primary markets. However, secondary markets still require careful evaluation, as some may not sustain their growth trajectories over the long term.

Who Secondary Market Investing is Best For: 

• Investors seeking growth opportunities without the high barriers to entry found in primary markets.
• Those looking to diversify their portfolio geographically or use emerging retail hubs. 

Tertiary Markets: For High-Yield Risk-Takers

Tertiary markets offer outstanding opportunities for investors aiming to maximize yields on a modest budget. These markets often feature underdeveloped retail landscapes, which creates opportunities to address unmet demand.

For instance, a new shopping center in a tertiary market might attract local businesses or regional chains eager to tap into an area with limited retail options.

While the lower acquisition costs can lead to higher cap rates and cash flow, investing in tertiary markets requires a greater tolerance for risk. These areas are more vulnerable to economic downturns and shifts in consumer behavior. Additionally, the tenant pool is often limited, and local businesses may need financial stability from national brands.

Despite these risks, tertiary markets can yield impressive returns if the location is chosen wisely and retail demand remains steady.

Who Tertiary Market Investing is Best For: 

• New investors or those with smaller budgets looking for an entry point into commercial real estate. 
• Investors with a high-risk tolerance and strong focus on cash flow over capital appreciation. 

Determining The Best Market For Your Investment Needs 

To decide which market is best for your shopping center investment, consider the following questions:

What Are Your Financial Goals?

• Primary markets are a safer bet if you value stability and consistent income.
• Secondary markets offer a good balance if you want strong cash flow with moderate risk.
• If you aim for high yields and can take on more risk, tertiary markets are worth exploring.

How Much Risk Can You Tolerate?

• Primary markets minimize risk but offer lower returns.
• Secondary markets involve moderate risk and provide a blend of growth and income potential.
• Tertiary markets carry the highest risk but offer the potential for significant returns.

What Is Your Capital Budget?

• Investors with deep pockets may find primary markets more appealing, as they require substantial initial investment.
• Secondary and tertiary markets are better suited for those with limited capital or looking to stretch their investment dollars.

What Is Your Investment Horizon?

• Primary markets are ideal for long-term investors who want consistent appreciation.
• Secondary and tertiary markets may provide quicker returns but can be more unpredictable.

How Hands-On Are You Willing to Be?

• Due to their resilience and established tenant base, primary market properties often require less intensive management.
• Secondary and tertiary properties may demand more active involvement in tenant recruitment and lease negotiations.

Finding Your Perfect Market Match 

Successful shopping center investing requires understanding the differences between primary, secondary, and tertiary markets. Aligning your investment approach with your financial goals and risk tolerance can help you identify the right market for your shopping center investments. 

Whether you’re chasing consistent cash flow or long-term capital appreciation, detailed market analysis and a clear understanding of each market type's offerings are key.

Additionally, now that you have a better idea of what kind of market you want to invest in, continue to specify your investment plan by deciding:

• What type of property do you want to invest in
• If you are looking for a horizontally or vertically integrated partner, 
• And if you wish to invest in a negatively or positively leveraged project 

Equipped with this and additional information, investors can confidently enter deals that are likely to meet their specific financial expectations or fit their long-term investment objectives. Education is the first and most necessary step in successfully navigating this dynamic and rewarding sector.