Secondary and Tertiary Markets Gain Ground on Primary Cities

The U.S. housing market faces several challenges in 2023, including limited affordability, rising interest rates, and inflation. These conditions have made it more difficult for many individuals and families to purchase a home, making the rental market an increasingly attractive option. Additionally, the flexibility provided by remote work has helped to reshape many real estate markets across the country. The result has been greater parity between primary, secondary, and tertiary markets.

While many renters have returned to primary (or gateway) cities (earlier this year, New York had one of the country’s highest rates of rent growth and construction), people continue to move from coastal areas to secondary and tertiary markets. Now, places like Colorado Springs, Dallas-Fort Worth, San Antonio, Nashville, Charlotte, and Salt Lake City compete directly with primary cities like New York, San Francisco, and Los Angeles. The gap in demand between primary, secondary, and tertiary markets appears to be steadily narrowing, a reflection of a trend that started during the pandemic.

While gateway cities appear less dominant than in the past, most agree they will continue to retain their stature. Gateway municipalities offer walkable amenities like dining, entertainment, and public transit to an urban core, features typically found in smaller cities. Meanwhile, secondary, and tertiary cities tend to provide more living space, relative affordability, and proximity to nature, three quality-of-life priorities that emerged during the pandemic. Many secondary and tertiary markets have become more expensive after recent population influxes, but most are still affordable relative to the larger gateway markets. These factors continue to make secondary areas appealing. In fact, nine out of 10 markets listed to watch in 2023 in PwC and Urban Land Institute’s annual Emerging Trends in Real Estate report are secondary cities located in the Sun Belt region.

The Sun Belt has enjoyed heightened attention from real estate investors over the past few years. Cities in this region have recorded year-over-year investment volume growth, contributing to a blurring of the lines between secondary and gateway markets. For example, Dallas, a key secondary market, attracted $21.8 billion in multifamily sales volume in 2022, the highest of any market in the U.S.

Experts predict that migration to secondary and tertiary markets will continue in the coming years, with these regions able to offer features that enhance the quality of life, such as lower cost of living, easier commutes, and more favorable business environments. These factors may also encourage more companies to relocate from states with higher taxes, subsequently enhancing the desirability of these locations and encouraging migration from homebuyers and renters. Secondary and tertiary markets could soon become even more competitive with gateway markets, with some secondary cities potentially emerging as primary cities.

Tertiary markets, which are generally smaller than secondary markets, have often been dismissed as “flyover country.” However, these markets are becoming more formidable contenders to secondary and primary markets, offering attractive yields for some real estate investors. These markets tend to see less interest from foreign investors, but many domestic investors find the higher yield potential in tertiary markets attractive and worth the potential for increased risks. Lesser-known markets are inherently riskier for investors because they are not as well-established as primary markets and do not necessarily have as many amenities or conveniences for residents.

As secondary and tertiary markets continue to gain parity with larger primary cities around the nation, they offer investors a significant potential for return on investment, even as the U.S. and global economic landscapes face notable headwinds.

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