A New Look at Market Tier and Ranking Systems

Professionals commonly analyze and compare individual U.S. commercial real estate markets by dividing them into ranked tiers based on their investment potential or growth characteristics. Although the methodologies they use to create these rankings are broadly similar from one report to the next, each is slightly different. As a result, cities are ranked differently in different reports. This can sometimes lead to confusion as industry participants sort out which markets are the best candidates for new investment. Adding to the potential for confusion, different analysts use different terms (e.g., “Tier 1,” “Primary,” “24-hour,” “Gateway”) to describe which markets they think are the top markets in the industry.

The NAIOP Research Foundation commissioned this report to examine how tier and ranking systems are currently developed and used, their advantages and disadvantages, and ways they could potentially be improved. The authors of the report interviewed many of the brokers, consultants and academics who develop these ranking systems, reviewed recent examples of different ranking methodologies and compared these to their analysis of market and census data. This research produced several findings:

• Market tier and ranking reports vary from each other because each uses a methodology that is tailored to a specific objective.
• Even the most comprehensive market-tier models are not suitable for every application. Each is designed for a different audience, such as the general public, industry insiders or specific clients with specialized needs.
• Ranking markets may not always be the optimal way to categorize and compare them to each other. Ranking works well when tailored to the needs of a specific investor, but is less useful to audiences seeking to understand how different markets compare to one another.
• The authors recommend transitioning from one-dimensional tier and ranking models to a two-dimensional comparison of each market’s size to its potential risk and return.

See A Two-Dimensional Approach to Evaluating Commercial Real Estate Markets for the NAIOP Research Foundation’s subsequent study, which outlines an alternative to market tier and ranking methodologies.

* Research reports are complimentary to all audiences. Webinars are free for members and paid for nonmembers.