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Commercial Real Estate Glossary
3 min read

Submarkets in Commercial Real Estate

In commercial real estate, a submarket is a smaller part of a larger market. While a market may be a city or MSA, such as New York City, or the Dallas-Fort Worth-Arlington MSA, a submarket is likely to be a neighborhood or Suburb, such as Williamsburg, Brooklyn or downtown Dallas.

In this article:
  1. What Are Submarkets in Commercial Real Estate?
  2. Different Property Types Have Different Submarkets
  3. How Submarkets Impact Financing & Investment
  4. Related Questions
  5. Get Financing
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What Are Submarkets in Commercial Real Estate?

In commercial real estate, submarkets are, at their most basic level, a way of dividing up a market. A market — often a wide area including a major city and its surrounding areas — is not a group of homogeneous areas, and submarkets help break down the differences to investors, lenders, and tenants.

Consider the difference between a 200,000-square-foot office property in downtown Chicago and a similarly sized asset located 20 miles west in the suburb of Oak Brook, Ill. Both neighborhoods are within the wider Chicago office market, but the two buildings — even given the same level of quality — will have vastly different property values, leasing rates, and even perceived investment risk.

As a result, commercial real estate investors and analysts would classify these areas as different submarkets. CoStar, for example, breaks the Loop — that is, central Chicago — into no fewer than three office submarkets just by itself. The suburban property would fall into the much larger Eastern East/West Corridor submarket, which includes Oak Brook and several other neighboring suburbs.

Submarkets — and even markets — are not defined precisely the same way by everyone. One brokerage firm may break the Miami industrial market into 15 submarkets, for example; another may divide it into 30 or 40. Some may not even consider Miami an industrial market by itself, but place it within a larger South Florida market, broken down into wider-ranging submarkets that cover far more area.

Different Property Types Have Different Submarkets

Submarkets and markets aren’t defined the same way across all asset types, either. This is, at its core, because different asset types are placed differently. Think of how industrial properties are often located in the suburbs or exurbs of a major metropolitan area, and contrast that with where office buildings tend to be found. As a result, an industrial market would likely cover a much larger area, further outside a metro compared to an office or retail market. Its submarkets would also be different as a result.

If you’re curious how a specific market is broken into its component submarkets, there are a few places to do some quick research. Many brokerage firms like CBRE, Cushman & Wakefield, and JLL, publish regular market reports, which often contain a map of all submarkets within the focus metro. Additionally, CoStar has a free, searchable list of submarkets, categorized by metro and asset type, covering most markets in the U.S.

How Submarkets Impact Financing & Investment

Most lenders use some assessment of a property’s location in determining the risk associated with extending financing. While much of this is at the market level, submarkets, too, play a key role. Even when a market has relatively weak fundamentals, there will always be submarkets that are performing far better (and, of course, far worse) than the average.

Similarly, submarkets are highly useful for determining where to deploy investment capital. You may know that the Austin multifamily market is a strong performer, but choosing the most suitable submarket is crucial — after all, some neighborhoods may have been overdeveloped, or rents may have hit their peak.

Related Questions

What is a submarket in commercial real estate?

In commercial real estate, submarkets are, at their most basic level, a way of dividing up a market. A market — often a wide area including a major city and its surrounding areas — is not a group of homogeneous areas, and submarkets help break down the differences to investors, lenders, and tenants. Different property types have different submarkets, as industrial properties are often located in the suburbs or exurbs of a major metropolitan area, and contrast that with where office buildings tend to be found. To learn more about submarkets in commercial real estate, you can check out market reports from brokerage firms like CBRE, Cushman & Wakefield, and JLL, or CoStar's free, searchable list of submarkets.

What are the different types of submarkets in commercial real estate?

In commercial real estate, submarkets are a way of dividing up a market. Different asset types are placed differently, so the submarkets for each asset type will be different. For example, industrial properties are often located in the suburbs or exurbs of a major metropolitan area, while office buildings tend to be found in the city.

Many brokerage firms like CBRE, Cushman & Wakefield, and JLL, publish regular market reports, which often contain a map of all submarkets within the focus metro. Additionally, CoStar has a free, searchable list of submarkets, categorized by metro and asset type, covering most markets in the U.S.

What are the advantages of investing in a submarket in commercial real estate?

Investing in a submarket in commercial real estate can offer several advantages. Submarkets can provide investors with more granular information about a particular area, allowing them to make more informed decisions about where to deploy their capital. Submarkets can also provide investors with more targeted opportunities, as they can focus on areas that are performing better than the average market. Additionally, submarkets can provide investors with more flexibility in terms of financing, as lenders may be more willing to extend financing to properties in areas that are performing better than the average market.

Sources:

  • Submarkets in Commercial Real Estate

What are the risks associated with investing in a submarket in commercial real estate?

The risks associated with investing in a submarket in commercial real estate depend on the specific submarket. Generally, investors should consider the following factors when assessing the risk of a submarket:

  • Property values: Are property values in the submarket increasing or decreasing?
  • Leasing rates: Are leasing rates in the submarket increasing or decreasing?
  • Perceived investment risk: How risky is the submarket perceived to be by investors?
  • Overdevelopment: Has the submarket been overdeveloped?
  • Rents: Have rents in the submarket hit their peak?

It is important to note that different brokerage firms may define submarkets differently, so it is important to understand the specific submarket you are investing in. For more information, see Submarkets in Commercial Real Estate.

How can investors identify the best submarkets in commercial real estate?

Investors can identify the best submarkets in commercial real estate by looking at a variety of factors, such as property values, leasing rates, and perceived investment risk. CoStar, for example, breaks down markets into submarkets based on these factors. Investors should also consider the wider market and how it impacts the submarket they are looking at. For example, if the wider market is performing poorly, it may be best to look for submarkets that are performing better than the average. Additionally, investors should look at the specific area they are considering and research the local trends and conditions that may impact the investment.

For more information, see Submarkets in Commercial Real Estate and Chicago's Office Headwinds.

What are the key factors to consider when investing in a submarket in commercial real estate?

When investing in a submarket in commercial real estate, the key factors to consider are location, investment variables, and the risk associated with extending financing. Location is the most important factor, as it can influence a property’s value for certain buyers. Investment variables, such as the current market conditions, the potential for future growth, and the availability of amenities, should also be taken into account. Finally, lenders will assess the risk associated with extending financing, taking into account the property’s location and other investment variables.

For more information, please see the following sources:

  • Submarkets in Commercial Real Estate
  • Investment Variables in Commercial Real Estate
In this article:
  1. What Are Submarkets in Commercial Real Estate?
  2. Different Property Types Have Different Submarkets
  3. How Submarkets Impact Financing & Investment
  4. Related Questions
  5. Get Financing
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  • Commercial Real Estate
  • Commercial Development

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