This survey collected data from 194 commercial real estate owners and managers regarding investments in secondary and tertiary markets. Key findings include: - 44% of respondents expect to make additional investments in non-core markets in 2011, seeing them as offering the best development opportunities. - Nearly half of respondents plan to upgrade existing properties in these markets, while 40% plan to increase rents in 2011. - Average cap rates seen in non-core markets range from 8-12.5%, offering higher yields than core markets. - The strength of the local economy and availability of financing were the most important factors for considering investments in secondary/tertierary markets.

1. Beyond Key Findings
Core Markets
Investors seek hIgher yIelds
 A recent survey conducted
exclusively for National Real
Estate Investor (NREI), Retail
Traffic and Coldwell Banker
In non-Core Markets Commercial® found that 44%
of respondents expect to
make additional investments
in non-core markets in 2011;
A
s the commercial real estate sector continues to recover from the “Great also, 41% of respondents
Recession,” investors across the nation are ramping up their acquisition say those markets offer
and development activity. While core, coastal markets such as New the best development
York, Washington, D.C., Southern California and San Francisco continue to be opportunities today.
the most desirable locales for most larger, institutional investors, non-core and  Owners expect to continue
alternative markets are increasingly attractive. These alternative markets offer to invest in their properties
an attractive option to core markets, particularly for entrepreneurial and non- in secondary and tertiary
institutional investors. markets. In fact, nearly half
of respondents plan to
“Smart money is looking at alternative mar-
upgrade their properties.
“Smart money is kets due to better returns, higher upside and Meanwhile, 40% plan to
looking at alternative less competition,” says Fred Schmidt, presi- increase rents in 2011.
markets due to better dent & COO of Coldwell Banker Commercial
Affiliates. “Secondary and tertiary markets  46% of respondents say the
returns, higher upside allow investors to achieve a higher yield, vacancy rate for their smaller
and less competition. along with diversification of assets and geog- market portfolio is less than
10%. Nearly four out of 10
Secondary and tertiary raphy. They offer an opportunity to generate respondents expect the
markets allow investors real wealth and returns.” vacancy rate to decrease
to achieve a higher A recent survey conducted exclusively for somewhat or greatly in 2011.
Another 40% say the vacancy
yield, along with National Real Estate Investor (NREI), Retail rate will stay the same; 45%
diversification of assets Traffic and Coldwell Banker Commercial of respondents expect rents
and geography. They found that 44% of respondents expect to to increase in 2011.
offer an opportunity make additional investments in non-core
 Respondents have seen
to generate real markets in 2011; 41% of respondents say these
average cap rates of 8% to
wealth and returns.” markets offer the best development opportu- 12.5% in non-core markets.
nities today.
Fred Schmidt,
“Ever yone wa nts to invest in major  Strength of economy and
preSident & cOO OF availability of financing were
cOldwell BAnker markets, but as cap rates are driven down,
the two most important
cOmmerciAl AFFiliAteS investors are willing to accept more risk and factors when considering an
move into secondary and tertiary markets,” investment in a secondary
says H. Michael Schwartz, CEO of Strategic and tertiary market.
Storage Trust Inc., the first and only public, non-traded REIT that specializes in
the self-storage industry. Today, SSTI’s portfolio includes approximately 48,000
self-storage units, 6 million rentable square feet of storage space and 76 proper- Survey Methodology
ties located in 17 states and Canada. Between May 12 and June 5, 2011, NREI and RT
surveyed commercial real estate owner, manager
and developer subscribers using an email invitation
containing a link to the online questionnaire. The
findings presented in this report are based on the
194 qualified responses that were received.
Beyond Core Markets C1

2. Be yond Core Marke tS
The NREI/Retail Traffic/Coldwell and worries that smaller markets are ception often plays a greater role than
Banker Commercial survey collected more vulnerable to shifts in demand reality when it comes to investing in
data from 194 developers, owners and and supply because markets are not as smaller markets. “They haven’t stud-
managers from May 12 to June 6, 2011. deep as larger, core markets. ied the markets enough to know the
Respondents own and/or manage an Since the financial crisis and the real risk, so it’s easier to say ‘no,’” he
average 1.4 million square feet of com- onset of the recession, however, inves- explains. “Sometimes the reasons
mercial real estate in secondary and tors have eschewed risk and focused why an investor won’t look at a par-
tertiary markets. predominantly on the best proper- ticular place have nothing to do with
Additional key findings: ties in the best markets. This “flight market fundamentals.”
investment: to quality” has limited the interest in
• Owners expect to continue to secondary and tertiary markets. Yet, viBrant MiCro-eConoMieS
invest in their properties in sec- investor appetite for risk – or perhaps In fact, many smaller markets not
ondary and tertiary markets. In acceptance is a more accurate descrip- only have vibrant, growing econo-
fact, nearly half of respondents tion – is slowly returning as property mies, but population growth as well.
plan to upgrade their properties. valuations stabilize. An annual ranking of the top eco-
Meanwhile, 40% plan to increase “We’re back to a more normalized nomic growth markets in the United
rents in 2011. market where investors are compen- States conducted by POLICOM found
Vacancy: sated for risk,” Dietrich says. “As a that only one of the top 10 markets
• 46% of respondents say the vacancy result, we’re seeing investors being less was considered “core” or “primary”
rate for their smaller market port- cautious and looking at properties and markets for most commercial real
folio is less than 10%. markets they wouldn’t have looked at estate investors: Washington, D.C.
• Nearly four out of 10 respondents last year.” The Palm City, Fla.-based eco-
expect the vacancy rate to decrease Yet, secondary and tertiary markets nomic consulting f irm measures
somewhat or greatly in 2011. often are overlooked or misunder- 23 economic factors over a 20-year
• Another 40% say the vacancy rate
will stay the same.
what are you planning for your properties
• 45% of respondents expect rents to
in secondary and/or tertiary markets in 2011?
increase in 2011.
returns: Upgrades 48%
• Strength of economy and availabil- Increasing rent 40%
ity of financing were the two most Expansion 26%
important factors when consider- Lowering rent 13%
ing an investment in a secondary Contraction 6%
and tertiary market. Downgrades 2%
rewarded for riSk Other 11% National Real Estate Investor,
Du r i ng t he most recent ma rket
No reply 4% Retail Traffic, Coldwell Banker
Commercial Survey – June 2011
boom, the risk premium for assets
in secondary and tertiary markets stood, especially by larger, institutional period to identify the top performing
eroded as competition for real estate investors. “In general, people think markets in the nation. “The rankings
intensified. The yield spread between that larger markets are deeper – that do not reflect the latest ‘hotspot’ or
properties in core markets such as they have greater demand to capture, boom town, but the areas that have
Washington, D.C., and smaller, non- but they’re missing out,” says Dan t he best economic fou ndat ion,”
core markets such as Minneapolis Bernstein, chief investment officer and says William Fruth, president of
narrowed to the point where it was executive vice president at Campus POLICOM. “While most communi-
almost non-existent. Apartments, the largest privately ties have slowed or declined during
Simply put, investors were not held student housing company in the this recession, the strongest areas
being rewarded for risk, explains United States. have been able to weather the storm.”
Robert Dietrich, managing director in Mark Stapp, a real estate developer “ T he cit ies t hat have no eco-
FMV Opinions’ real estate valuation and executive director of the Master nomic drivers – where industries
services division. Throughout market of Real Estate Development program have departed – it’s very difficult to
ups and downs, those risks have not at the W.P. Carey School of Business think about why one should invest
changed – concerns about exit strategy at Arizona State University, says per- in them,” says Alan Feldman, CEO
C2 Beyond Core Markets

3. Be yond Core MarketS
what is the average cap rate you have been group. “Many smaller cities are will-
seeing in secondary and tertiary markets? ing to provide significant financial
National Real Estate
Investor, Retail Traffic, and tax incentives that aren’t available
0% - 10% 2% Coldwell Banker
Commercial Survey –
June 2011
in major markets.”
3% - 5% 10%
6% - 8% 40% ChaSing yield
Investors interested in secondary and
9% - 10% 35% tertiary markets are chasing yield
Over 10% 13% and focused on markets with strong
economic drivers and dominant prop-
No reply 1%
erties in the market.
“Part of the beauty of investing
at Philadelphia-based Resource Real “Because of our region’s afford- in secondary and tertiary markets is
Estate, which manages roughly $1.5 ability and projected growth, we’ve that there’s less of a herd mentality,”
billion in assets. “But smaller towns seen a number of large national insti- Bernstein says. “People flood larger
that have something to offer – sustain- tutions and industries transfer from markets and suddenly there’s greater
able industries and growing regional their existing metro locations to our competition – prices are driven up
economies – those can offer outsized market,” Redmond adds. “We have and cap rates are driven down.”
returns because fewer people are inter- even seen financial service compa- Bernstein recalls a recent opportu-
ested in investing in them.” nies relocate to Raleigh-Durham nity to acquire a student housing asset
Consider Shreveport, La. – a ter- from Manhattan.” in New York City. The property was
tiary market by anyone’s measure with priced to trade at a 2% cap rate. “I’d
a population of 398,694, according to “In general, people think rather make additional investments
the 2010 U.S. Census. This southern that larger markets are in the markets in which we’ve seen
city currently is enjoying an economic deeper – that they have higher yields – markets like Lancaster,
boom, driven primarily by the natural greater demand to capture, Pa., or Richmond, Va., where we have
gas sector. It is experiencing in-migra- a 23-building portfolio – than invest
but they’re missing out,”
tion as people seek jobs created by the in a core market and get a 2% return,”
dAn BernStein, chieF
Haynesville Shale, one of the largest he says.
inVeStment OFFicer And
natural gas deposits on the planet. executiVe Vice preSident Better yields are one of the reasons
Admittedly, Shreveport is not a At cAmpuS ApArtmentS why Phoenix-based Cole Real Estate
market that most investors seek out. Investments is open to investing in
Given the opportunity and knowledge “With corporate clients, we’ve smaller markets, according to Scott
of the market, however, smart inves- noticed that many of them willingly Holmes, vice president of acquisitions
tors jump at the chance to invest there. bypass larger markets in favor of sec- and team leader for multi-tenant retail
For example, earlier this year, ondary or tertiary markets when it acquisitions. He notes that second-
Inland Diversified Real Estate Trust comes to setting up back-office, call ary and tertiary markets can provide
Inc. invested $43.5 million in the mar- center or data operations,” according yields premiums – anywhere from 50
ket to acquire Regal Court Shopping to Vik Bangia, a senior vice president to 150 basis points higher than pri-
Centre, a 363,167-square-foot power with Realogy’s Global Client Solutions mary markets.
center anchored by Kohl’s, J.C. Penney
and Dicks Sporting Goods. The Oak
Brook, Ill.-based REIT expects to real- what is your average vacancy rate
ize an 8.1% cap rate on the property. in secondary and tertiary markets?
Likewise, Raleigh-Durham, N.C., 0% - 10% 46%
has seen its star rise, according to
Billie Redmond, president of locally- 11% - 20% 31%
based Coldwell Banker Commercial 21% - 30% 10%
Trademark Properties. She points
to the recent trend in which sizeable
31% - 40% 6%
organizations are choosing to move Over 41% 5%
National Real Estate
from large metropolitan markets to Investor, Retail Traffic, Coldwell Banker
smaller cities.
No reply 1% Commercial Survey – June 2011
Beyond Core Markets C3

4. Be yond Core Marke tS
Capital Flows to Smaller Markets
The non-traded R EIT recently
Availability of capital is a key determining factor when it comes to
invested nearly $33 million in the ter- investing in secondary and tertiary markets, according to a survey
tiary markets of San Marcos, Texas, a conducted exclusively for National Real Estate Investor (NREI), Retail
college town located about 45 minutes Traffic and Coldwell Banker Commercial.
south of Austin, and Bismarck, N.D.,
And, after a long dry spell, it seems that financing is finally available
which has a population of 108,779, for investors who are making bets on smaller markets. Both local
according to the 2010 U.S. Census. and regional banks are lending again, albeit sparingly, and as pension
In San Marcos, Cole acquired funds and life insurance company lenders focus on core and primary
Red Oak Village, a 176,000-square- markets, conduit lenders have been forced to head to smaller markets
foot, 96% leased power center for to meet their origination objectives.
about $22 million. In Bismarck, it For example, Stonegate Real Estate Investments LLC refinanced two
bought Pinehurst Square West, a trophy office properties, one in Birmingham, Ala., and one in Oklahoma
69,000-square-foot power center that City, for a total of $70 million. Wells Fargo provided two 10-year, fixed-
is shadow anchored by Lowe’s and rate mortgages for the four-building Urban Center in Birmingham and
Quail Springs Parkway Plaza in Oklahoma City.
Kohl’s, for $10.25 million.
Moreover, rental rate growth in sec- Similarly, Parmenter Realty Partners was able to obtain two CMBS
ondary and tertiary markets still can loans totaling $85 million for its two Class A office buildings, Warren
be rewarding to owners, albeit not as Place I & II. JP Morgan Chase originated the loans for the properties,
extreme or volatile as core or coastal which total 959,928 square feet.
markets. For example, Parmenter “Most secondary and tertiary markets tend to avoid overbuilding
Realty Partners COO Andrew Weiss during development cycles, and one could argue that, because they
says its trophy office buildings, known lack the volatility often seen in markets that investors really like, they
as Warren Place I & II in Tulsa, Okla., actually are less risky,” says Norm Nichols, executive vice president
and manager of income property finance for KeyBank Real Estate
performed well throughout the reces-
Capital, the segment of the bank’s business that is focused on private
sion: occupancy has stayed well above commercial real estate owners, investors and developers.
90% and rents continue to increase.
Tulsa, with a population of 391,906,
has a diversified economy that con- market,” explains Brad Miller, presi- are arriving – more than 15,800 of
tinues to create jobs, Weiss says. As dent of Encore Multi-Family, which whom are working-age spouses.
of May 2011, the unemployment rate has projects under development in El Paso’s apartment market occu-
in that market was just 5.8%, roughly other secondary and tertiary mar- pancy is hovering at 98%, setting the
3.5% lower than the national unem- kets throughout Texas, including stage for rent growth. In fact, a recent
ployment rate, according to the U.S. Texarkana and Temple, for a total of report by MPF Research calculated
Bureau of Labor Statistics. more than $33 million in project costs. that the nation’s strongest rent growth
Tulsa’s strong economy has com- Likewise, in El Paso, Texas, demand during the past year has occurred in
pelled Encore Multi-Family LLC to for apartments has outstripped supply El Paso.
enter the market. The Dallas-based as the city absorbs thousands of new Resource Realty hasn’t overlooked
apartment developer has broken residents from the expansion of Fort the opportunities El Paso offers,
ground on a new project in Bixby, one Bliss. The army base has benefitted Feldman says. “We’ve made a lot of
of Tulsa’s suburbs. from the Base Realignment and Closure investments in El Paso because we
“When we look at a market like (BRAC) program – its population has like smaller markets that have good
Bixby, which is the fastest growing increased from 17,000 troops to 24,000, economic drivers like Fort Bliss,” he
city in Oklahoma, we don’t think it’s with 40,000 troops expected by 2013. explains. “Sometimes bigger isn’t nec-
a risky market, even if it isn’t a core An additional 36,800 family members essarily better.” l
aBout Coldwell Banker CoMMerCial
A subsidiary of Realogy Corporation, the Coldwell Banker Commercial® (CBC®) organization is a worldwide leader in the
commercial real estate industry. Headquartered in Parsippany, New Jersey, the company is comprised of a collaborative global
network of independently owned and operated affiliates. In fact, the Coldwell Banker Commercial organization has one of the largest geographic footprints in commercial
real estate with nearly 200 companies and over 2,000 professionals throughout the U.S. and internationally. CBC professionals offer a comprehensive portfolio of Service
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C4 Beyond Core Markets