A submarket is broadly defined as a distinct part of a larger market. In the commercial real estate context, a market is typically a city or an MSA and a submarket is a smaller defined area within the market such as a neighborhood or suburb. The term describes a defined area that is geographically contiguous and does not overlap with other submarkets. Submarket boundaries may be formed from a variety of factors including natural elements such as a river or lake, man-made structures such as a road or park, or socioeconomic boundaries such as school districts or areas high in a certain demographic.
While a market such as a city or MSA may have official boundaries as determined by a government agency, real estate submarkets usually have unofficial boundaries as determined by investors or brokers and such boundaries and even submarket names may differ from source to source.
Submarkets may also differ by property type, especially when there are “pockets” of a certain property type such as an industrial park or retail corridor. For example, an office building and retail center located next to each other could be considered to be in different submarkets since the office submarket may have a different set of boundaries than the retail submarket.
Analyzing submarkets can help identify smaller trends that might not be as visible in the larger area or city. There are maps available for some submarkets to better identify boundaries. Software is also available that allows you to draw submarkets and track activity within those markets.
Risks to submarkets are likely to be similar to those in the larger surrounding market. Understanding trends in the larger market, then seeing how they impact the submarket, is called top-down analysis. This type of analysis keeps the larger picture in mind. For that reason, submarkets should not be looked at in isolation. They are part of the larger market and will be affected by risks and trends in the larger market.
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