Navigating Opportunities in Secondary and Tertiary Retail Markets

With the availability of retail space at an all-time low, retailers are looking further afield to expand. Many are moving beyond major metropolitan areas to growing population bases in secondary and tertiary markets. However, a knowledge gap often inhibits their expansion plans, as strategies used in primary markets are not as effective when transacting in smaller metros.

A primer on primary, secondary and tertiary markets

Generally, primary markets refer to major metropolitan areas, and secondary and tertiary markets refer to smaller ones, but there’s often confusion, as the industry lacks a standard definition.

CBRE looks at markets in two ways: by population and by the amount of retail space.

By population, primary markets are metropolitan statistical areas (MSAs) with a population of at least 4 million, secondary markets are between 1 million and 4 million, and tertiary markets are under 1 million.

Since COVID-19’s onset, Americans have migrated away from primary markets, with tertiary markets accounting for 62% of total net migration between 2019 and 2022.

Figure 1: Net Migration by Market Type

Source: Oxford Economics, Q1 2023.

Of course, some markets are growing faster than others. Austin, Raleigh and Jacksonville—all secondary Sun Belt markets—posted 10%-plus population growth from 2017 to 2022. Tertiary market growth has been more widespread, with Boise, Idaho; Lakeland, Florida; and Provo, Utah, notching double-digit population gains from 2017 to 2022.

CBRE designates the 13 largest markets by total supply of neighborhood, community and strip centers, plus urban street retail in Manhattan and San Francisco, as primary markets. Secondary markets have 40 million to 60 million sq. ft. of neighborhood, community and strip center space, while tertiary markets have less than 40 million sq. ft.

Figure 2: Retail Availability by Market Type

Source: CBRE Research, Q1 2023.

Retail availability has dropped markedly over the past decade across all segments to all-time lows, and there is very little development underway to alleviate the shortage. However, more land is available in smaller markets, enabling retailers to enter or expand using ground-up development.

Site selection considerations

In larger markets, many retailers typically rely on criteria like concentric circles, proximity to mass transit and foot traffic to assess the demographics of a trade area or the viability of a potential site. These tools work well in areas with denser populations but can mask opportunities in smaller metros.

Consumers in smaller markets are willing to drive farther to get to stores—often more than 20 minutes in rural areas. Retail centers and shopping districts located in smaller cities and towns draw surprisingly high foot-traffic numbers. Consumers may also shop more at night or on weekends.

For example, Belden Village Mall, just north of Canton, Ohio, anchors a large shopping district that draws consumers from across Eastern Ohio despite being a half-hour’s drive from Akron, Ohio, the largest nearby city.

Cannibalization risk is also lower in secondary and tertiary markets, as stores are spread out more and trade areas are less saturated, allowing retailers to increase sales and market share without affecting sales at their existing stores.

Consumer economics and behaviors

While household income levels tend to be lower in smaller markets—potentially deterring some retailers—so is the cost of living. Many consumers in smaller metros have more disposable income to spend, largely because housing costs are significantly lower. According to CBRE Econometric Advisors, secondary and tertiary shoppers have 1.3% more disposable income on a per capita basis than those in primary markets—a spread that is expected to grow to 1.6% by 2025.

Figure 3: Disposable Income Per Capita, by Market Type

Source: CBRE Econometrics Advisors, Q1 2023.

Moreover, these consumers are more likely to shop and dine in stores. CBRE’s Live-Work-Shop survey of 20,000 global consumers found that U.S. shoppers who live in small towns (86%) and rural locations (83%) are the most likely to shop in-store for grocery and essentials, vs. just 62% for those who live in city centers.

Figure 4: Grocery and essential goods shopping by channel

Source: CBRE Global Live-Work-Shop Report, November 2022.

Retail catering to smaller markets

Major retailers that have little to no presence in primary markets, including Tractor Supply, Duluth Trading and Menards, are thriving in smaller markets. These stores tend to generate high foot traffic and anchor regional retail centers or shopping districts.

As a result, retailers like supermarkets and drug stores, which are often anchor centers in major markets, view these stores as anchors when expanding into new markets. Quick-serve and fast-casual food concepts also fare well in smaller markets, as do discount fashion and dollar stores.

Local developers and owners

One of the differences between larger and smaller markets is the composition of the ownership groups that build and operate retail assets. Developers with local knowledge construct new centers, which are often then bought by entrepreneurs seeking to build regional portfolios. Institutional investors and developers struggle with data gaps, limiting their presence and interest in smaller metros.

With the supply of available space low amid a years-long trend of muted retail development, retailers often partner with local developers to build out new stores. Ground-up development enables retailers to build sites that cater to the latest changes in consumer habits, including more drive-thru lanes and curbside pick-up spots.

While land is generally more available and cheaper in smaller markets, labor shortages and supply chain issues can be more difficult to overcome because there are fewer subcontractors and suppliers to tap into when bottlenecks occur.