Rethinking the Map: The Rise of Tertiary Retail Markets
What's fueling this expansion beyond primary markets? RCS’ Edward Coury and Spence Mehl weigh in.
Retail real estate expansion strategies have traditionally favored primary and secondary markets, with tertiary retail markets and underserved regions often dismissed for being risky or simply “too small.”
Today, many retailers are expanding their focus outside core metros. Spiraling rents, fierce competition for space and saturation in primary and secondary markets are pushing many national brands to take a hard look beyond the top designated retail areas.
Commercial Property Executive sat down with two executives at RCS Real Estate Advisors—a national retail real estate advisory firm with a history spanning four decades—to unpack this trend. Drawing on extensive hands-on experience in lease negotiations, portfolio strategy and market expansion, Partner Spence Mehl and Senior Managing Director Edward Coury explore the opportunities that exist in less obvious markets and how retailers can enter them wisely without overextending.
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What are the core economic and strategic drivers behind this new trend?
Coury: In many high-growth metros, retail development has lagged well below historic norms for two decades, creating a scarcity of space and pushing rents higher. This makes securing prime urban locations difficult, particularly for expansion-minded brands. Smaller markets, especially cities of roughly 100,000 people located more than an hour from major hubs, offer untapped consumer demand without the risk of cannibalizing nearby stores.
Mehl: To clarify, not all retailers are making this shift. It’s primarily those facing sustained pressure to grow and secure new, best-fit locations. For growth-driven brands, especially in value, grocery and specialty categories, smaller markets provide lower occupancy costs, less direct competition and faster access to underserved customers.
While luxury brands still concentrate in primary markets, other retailers see these tertiary markets as a way to diversify revenue and establish a foothold before competitors arrive.
In dense urban markets like New York City and Los Angeles, retail rents have exceeded suburban rates by as much as 12 times and 200 percent, respectively, CBRE research found. How are these cost differences influencing the way national retailers plan their expansions?
Coury: Dense urban markets command high rents because of their large populations and disposable incomes, which retailers often assume will translate into higher sales per square foot. But limited availability and higher rents are prompting brands to weigh whether the ROI makes sense, leading many to consider suburban, secondary and tertiary markets as more cost-effective growth opportunities, a clear example of today’s retail market trends.
Mehl: In flagship destinations like Times Square, retailers may need $10 million or more in annual sales to justify rent, often making these stores more about brand visibility than profit. Because these premiums ripple into other major metros, many national retailers are now balancing a select few high-profile urban locations with a broader footprint in more affordable suburban and tertiary markets.
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Lease negotiations in tertiary markets often follow a different logic than in major metros. What are some of the key differences in deal structures and landlord relationships that retailers should anticipate?
Coury: Retailers often work with local, hands-on landlords rather than large institutional owners. These landlords prioritize steady cash flow over offering big tenant improvement packages, so while rents may be lower, upfront capital support is minimal. Negotiations tend to be relationship-driven, reflecting the landlord’s local ties and day-to-day property involvement.
Mehl: In smaller markets, regional developers lead most projects, with national developers getting involved mainly if a trusted brand is on board. For retailers with strong developer relationships—like Starbucks or Taco Bell—this can open doors, but deals may be more relationship-based than formulaic.
Beyond financial considerations, what operational challenges do retailers need to be aware of before entering smaller markets?
Mehl: Logistics is the biggest hurdle. Serving remote stores from existing distribution centers can be costly, so many retailers establish regional hubs to improve efficiency. Others partner with local carriers to reduce shipping expenses, but either way, supply chain planning heavily influences expansion pacing.
Coury: Staffing can be easier in smaller markets, where retail jobs are valued, but management oversight is harder. Maintaining regional leadership, training and quality control adds cost and complexity, making it essential to ensure projected store performance can justify those investments.
What are some of the most overlooked advantages of tertiary markets that retailers are beginning to recognize?
Coury: The potential of smaller markets has long been recognized, but for many retailers, they weren’t an immediate priority while opportunities still existed in major metros. Now that prime space in large markets is scarce, growth-oriented retailers are committing a greater share of their expansion strategy to tertiary markets … When supported with modern distribution networks, markets with a solid population base, limited direct competition and strong local demand become an intriguing entry point for retailers looking to expand their footprint.
When advising clients on expansion into smaller, tertiary retail markets, how do you help them avoid overextension?
Mehl: When advising our clients to expand beyond the top 50 DMAs, we start by assessing whether the total revenue potential supports the investment, then tailor the store format accordingly. In smaller markets, a 10,000–15,000-square-foot location may make more sense than replicating a large-format urban store. This lower-risk approach allows brands to test performance before committing further.
How can retailers successfully navigate the risks of entering a tertiary market?
Coury: Successful entrants use technology to tightly manage inventory, tracking SKUs, sell-through rates and stock levels in real-time, to avoid overstock and improve sales per square foot. Coupled with logistics tech that streamlines deliveries, this approach boosts efficiency, reduces costs and increases customer satisfaction.
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What are the most common missteps retailers make when expanding beyond core markets and how can they be avoided?
Coury: A frequent misstep is applying the same operational model used in major markets to smaller, tertiary markets without adaptation. This includes maintaining large store sizes, broad inventory assortments and extended hours that don’t align with the local demand or market dynamics. Such an approach often defies logic and leads to inefficiencies.
Mehl: On the operational side, retailers sometimes underestimate the sensitivities unique to smaller markets, from higher shrinkage rates to challenges like stores not opening on time, which can impact performance. Avoiding these pitfalls requires tailoring the model to fit the market size and consumer behavior, simplifying operations and proactively managing local challenges.
Looking ahead, how do you expect the tertiary markets’ retail landscape to evolve? What external factors could accelerate or slow this trend?
Mehl: Growth will likely continue as long as primary and secondary markets remain saturated and costly. Should urban rents drop significantly, the pace may slow. Demographics, technology-driven logistics improvements and shifts in consumer behavior will be key factors in determining how quickly retailers commit to smaller markets.
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