A submarket in commercial real estate (CRE) is is a smaller part (subset) of a larger property market where buildings tend to compete with each other and behave similarly – in terms of pricing, demand, and tenants.
Properties are all different – the concept allows like-for-like comparison, benchmarking and analysis. Useful to compare gross rentals, vacancy rates, net absorption and absorption-rate/" target="_blank" rel="noopener noreferrer">net absorption rates.
Technical definition
A submarket is a clearly defined, MECE, subset of a broader market, made up of properties that are
1) geographically proximate (close to each other, and contained within an area –> defined geospatially by polygons), and
2) economically substitutable (roughly the same “product” –> defined by property type (category) and physical characteristics (grade))
This means these properties compete for the same tenants and capital.
A submarket should contain a meaningful number of properties to enable meaningful analysis and comparison.
How submarkets are defined
Typically defined using one or more dimensions:
- Geography: Contiguous areas within a broader market (e.g. nodes, corridors, districts, clusters, suburbs)
- Property type: Office, retail, industrial, hospitality, etc.
- Physical characteristics: Size bands, grade, specification, or use-case
In practice, geography is often the primary layer, with additional segmentation applied where needed to ensure assets within a submarket remain truly comparable.
Why submarkets matter
Real estate markets are inherently diverse. Even within the same city, pricing and demand can vary significantly between locations and asset types.
Submarkets provide a way to group competing properties together, allowing for more accurate insights into:
- Pricing (e.g. rent per m²)
- Supply and demand dynamics
- Vacancy and absorption trends
Without submarkets, analysis is either made distorted or made difficult by mixing fundamentally different assets.
Example
You are looking for industrial space to rent. Prices ranges from R120 / sqm to R25 / sqm. How to compare and establish what is a good deal.
Your industrial, within the same metropolitan area, may be made up of large distribution centres and small last-mile facilities. All in close proximity, but serving different tenant needs and achieving different rental levels.
By segmenting the options into separate submarkets – whether by geography, size, or function – you can compare your optoins on a like-for-like basis, enabling you to establish value.
For meaningful analysis in CRE, further categorisation into submarkets is thus recommended.
