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.