Shift in Residential Living Leads Companies to Smaller Markets
COVID-19 has impacted our lives in many ways, but for those living in smaller towns across the nation, a silver lining is emerging. The population is beginning to move into smaller markets en masse, abandoning big city living for more affordable, larger housing with outdoor living space.
In recent months this has been directly tied to COVID-19 as workers find themselves creating home offices and desiring an outdoor space of their own. As remote work is becoming the norm for many companies, workers are no longer required to live in the big cities where they work, thus reducing the demand for city center office space.
Where the workers go, the companies are sure to follow. Just as the cost of living is lower in secondary and tertiary markets, so is the cost of commercial real estate. Companies are following the population into these markets and benefiting from lower overhead and price per square foot and a diversified workforce.
The chain reaction of people and companies moving to smaller markets results in a win for small town commercial real estate as a whole – the demand for retail, industrial and medical space will grow as residential and office space is filled.
According to a report from Marcus & Millichap, in 2019, 60% of commercial real estate transactions over $1 million were in non-primary markets. Clearly, investors are also migrating to secondary and tertiary markets. Strong rental rates, higher cap rates and lower cost of entry creates a safe, low-risk investment, which is especially important during times of economic uncertainty.
We can’t entirely attribute the migration to secondary and tertiary markets to COVID-19. In fact, since 2000 the population net migration into these smaller markets was 70% higher than in metros, and that percentage skyrocketed to more than 200% higher since 2014. Ultimately, the comfortable quality of life available at a lower cost than in big cities has been driving people to the suburbs for years.
Here in Louisiana, I have witnessed first-hand the migration into sub-markets like Baton Rouge, Lake Charles, Covington, and Lafayette. Many of the investment deals we currently have under contract are in tertiary/secondary markets. While the primary appeal of larger markets has always been something investors desire, the long-term play in secondary markets is becoming more attractive.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.