Economist's Commentary: March 18, 2008

Investment in Commercial Office Real Estate in Tertiary Markets

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

Of the top twenty-five 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 twenty-four markets are classified as secondary or tertiary depending on total population. Salt Lake City ranks 11th on the list of the top twenty-five markets with a high percentage increase in the number of nonfarm 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 twenty-five MSAs with a high percentage change in nonfarm payrolls in 2007 are located in the Southeast. The second table 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, or those similar in size to the MSAs outlined in table below.

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 favoured by office invertors and further research needs to be completed to see where and why tertiary markets in this region are so much in demand, and by whom.

The table below shows the MSAs located in the Southeast that had the greatest change in nonfarm payrolls and the corresponding rank.

Source:BLS

Source: Real Capital Analytics

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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