A submarket in commercial real estate (CRE) is a sub-set of a defined CRE market.
Markets are defined by geography (using a geospatial polygon – so they are comparable) and property category (e.g. office, retail, industrial). Markets, by definition, should never overlap with other markets. They can be considered as competitive areas. A market can be considered as a node – a consolidation of suburbs and part-suburbs.
Building on the definition of markets, submarkets are divisions of markets. As with markets, they are geospatially defined – and the total area of submarkets should sum to the parent market’s area. To achieve this, submarket polygons should be contiguous, and should never overlap. A submarket should also contain a meaningful number of properties to enable meaningful analysis and comparison. A submarket can comprise of one suburb or part-suburb, or a consolidation of suburbs and part-suburbs.
The definition of markets and submarkets is required for CRE analytics / data points such net absorption and net absorption rates.
Submarkets and markets in the USA
A market is typically a city or an MSA (Metropolitan Statistical Area)
As per above, a submarket is a smaller defined area within the market such as a neighborhood or suburb.
Because submarket definitions and names may differ from party to party, it is recommended that such geographies are geospatially defined.
Expanded concept of a submarket
Given that property, and commercial real estate in particular, is a non-homogenous asset, submarkets are necessary for meaningful comparisons and benchmarking.
It is proposed that submarkets should be defined in absolute and quantitative terms (vs relative and qualitative). The scope for opinion must be minimised. To enable time-efficient high-quality decision-making, criteria should be described in such a way that classification can be achieved through simple yes / no judgements.
It is also proposed that sub-markets be segmented beyond geography and property category classifications.
Example of a submarket
You are a landlord interested in understanding at what level your soon-to-be-vacant warehouse for say 3,000 sqm should be priced, and what the demand for that particular product is.
Looking at the industrial market for the relevant geography could deliver an asking rental of R48 / sqm gross, with vacancy rates at 9%, and negative absorption.
This number bundles all industrial sub-categories into one.
In response, you price the product at this price, and it is soon let. Both landlord, broker/agent and tenant are overjoyed.
On deeper analysis, it becomes apparent that the product was grossly underpriced. The property was rare and in high demand, for the following reasons:
- While industrial is at 9% vacancy, warehouses are in short supply – seeing an average vacancy of 6%
- Further, warehouses between size 2,000 and 5,000 sqm are 5% vacant and letting at an average rental of R57 / sqm gross.
- Drilling deeper into this sub-market, there are very few vacant or soon-to-be-vacant warehouses satisfying the following criteria:
- Coverage ratio of less than 60%, with 25 meter turning circles, allowing for easy truck access and optimised distribution
- Height to the eaves of more than 6 meters (allowing for more efficient racking)
- Fire suppressant systems
- High-quality flooring (FM2 and above)
- An office ratio of less than 15%
- A decent dock ratio, with docks both canopied and equipped with dock levelers, and generous-dimensioned, automated shutters doors
For such a submarket, the achievable asking rental, was comfortably R75 / sqm (if the product could be found).
For meaningful analysis in CRE, further categorisation into submarkets is thus recommended.
