In recent years, many of America’s secondary and even tertiary cities have delivered outsized gains in real estate performance, often eclipsing the growth seen in traditional gateway markets like New York, San Francisco, or Boston. Once considered “flyover” territory, mid-sized metro areas such as Austin, Nashville, Charlotte, and Salt Lake City have experienced rapid rent increases, strong price appreciation, and surging investor demand. By contrast, some major coastal cities stagnated or even saw brief rent declines amid pandemic outmigration. The result is a narrowed gap between the returns offered by smaller markets and those of the long-dominant gateways. Investors and analysts are taking notice of this secular shift, raising the question: Are secondary cities now a smarter bet than the old urban giants?
Smaller Markets Outpacing Gateway Cities
A combination of demographic trends and market dynamics has enabled secondary cities to outpace primary markets in growth metrics. Over the past several years, multiple Sun Belt and heartland metros posted double-digit annual rent growth – far above national averages – while ultra-expensive cities like San Francisco and Manhattan struggled with modest gains or declines during the height of 2020’s urban exodus. For example, Dallas–Fort Worth, long viewed as a secondary market, led the nation in multifamily investment volume in 2022, attracting more capital than any coastal gateway that year ( Arbor Realty: Secondary and Tertiary Markets Gain Ground ). Likewise, Charlotte and Raleigh–Durham each saw well over 100 new residents moving in per day at one point, and Austin over 150 per day, reflecting a demographic boom underpinning real estate demand ( Mansion Global: Secondary Cities Investment Potential ). Industry surveys reinforce this momentum: in recent “top markets to watch” rankings, mid-sized cities in the Sun Belt have dominated the top slots, whereas a decade ago those lists were filled with gateway metros. As one PwC analyst put it, “the small city is the new big city,” capturing how investor sentiment has flipped in favor of these emerging hubs.
Key Drivers Behind the Secondary City Surge
Affordability and Lifestyle Advantages. The clear catalyst for this trend has been people and businesses seeking more affordable, high-quality places to live and work. Secondary cities typically offer a lower cost of living, cheaper housing, and a business-friendly environment compared to the high prices and taxes in coastal gateways. They are “less expensive places to live, work, play and run a business” than larger cities, which is a big draw for companies and talent alike ( NAIOP: Second-Tier Cities Thrive Post-Pandemic ). For young professionals and families, a market like Phoenix or Nashville promises attainable home ownership or reasonable rents, plus amenities like space, safety, and proximity to nature – benefits that can be scarce in New York or San Francisco. This cost and lifestyle gap started fueling domestic migration to secondary metros well before 2020, and it only accelerated when the pandemic hit.
Remote Work and Pandemic-Era Migration. The widespread adoption of remote and hybrid work removed the tether keeping many workers in high-cost gateway cities. Suddenly, an engineer in Silicon Valley or a banker in Manhattan could do their job from Austin, Denver, or Tampa and enjoy a larger home office and shorter commute. This flexibility supercharged the existing migration patterns. Surveys in 2020–21 found record numbers of Americans looking to relocate to more affordable regions. According to real estate analysts, the shift to secondary cities “began pre-pandemic, and now with the growing trend of work-from-anywhere, it should only increase” in durability ( NAIOP: Second-Tier Cities Thrive Post-Pandemic ). Markets like the Carolinas, Texas, Tennessee, and Mountain West saw an influx of remote workers during 2020–2022, driving up housing demand. While many renters have since returned to gateway cities (New York City notably saw one of the nation’s highest rent growth rates in 2022 as people came back), the overall migration toward Sun Belt and secondary locales has remained firmly in place ( Arbor Realty: Secondary and Tertiary Markets Gain Ground ). In short, the pandemic didn’t start the secondary-city boom, but it poured fuel on the fire by untethering millions from the traditional job centers.
Population and Job Growth Feedback Loop. The movement of people has naturally been followed by the movement of jobs. Many secondary metros boast growing, educated populations – often anchored by universities and a pipeline of skilled graduates – which in turn attracts employers. Companies from finance to tech have been relocating or expanding in lower-cost cities to tap into these emerging talent pools and enjoy cheaper operations. For instance, major firms have moved regional offices to places like Austin, Miami, and Raleigh, citing the business-friendly policies and lower taxes of states like Texas and Florida. As more companies set up shop in secondary markets, they create even more jobs and economic vitality, reinforcing a virtuous cycle. A recent Brevitas analysis noted that the Sun Belt’s population grew more than three times faster than the rest of the U.S. over the past decade, reflecting this powerful convergence of job and population growth. This dynamic has upgraded cities such as Atlanta, Dallas, and Phoenix into true economic engines that compete head-to-head with the likes of Chicago or San Francisco in certain industries (for example, technology, life sciences, logistics, and advanced manufacturing). The end result is that many “secondary” cities are no longer secondary in their economic significance.
Room to Grow (Until Now). Unlike dense gateway metros that face land constraints and strict zoning, secondary markets historically had more room to build and fewer regulatory hurdles. This meant they could add new housing and commercial space relatively quickly to accommodate growth – a factor that initially kept them more affordable and attractive. Developers flocked to these cities to build apartment communities, office parks, and industrial facilities on cheaper land at the urban fringe or in redeveloping districts. In recent years, cranes have filled the skylines of places like Austin and Nashville as new supply races to catch up with demand. However, the building boom is a double-edged sword: while it enabled rapid expansion, it is now starting to cool off the torrid rent growth. Many secondary markets are reaching a more mature phase where the easy opportunities for new construction are being absorbed. The once plentiful “room to grow” is tightening, with rising construction costs and infrastructure limits beginning to bite. Nonetheless, relative to cities like New York (where adding inventory is notoriously difficult), these markets still offer a more flexible environment to respond to demand – one reason they attracted population inflows in the first place.
Yield-Hungry Capital Chasing Higher Returns
It’s not just people moving to secondary markets – it’s capital, too. Real estate investors, from private equity funds to REITs and family offices, have increasingly directed their dollars to secondary and tertiary cities in search of better yields. In the ultra-competitive gateway metros, cap rates (and thus income yields) had compressed to historic lows by the late 2010s; even trophy assets in New York or Los Angeles often offered only meager returns relative to their sky-high prices. By contrast, an apartment building or office property in a mid-sized city could be acquired at a higher cap rate, translating to more attractive cash flow. As one industry expert noted, smaller cities like Austin or Seattle can offer opportunities for investors to achieve double-digit annual returns “without taking on much more risk” than in a primary market ( Mansion Global: Secondary Cities Investment Potential ). In fact, some institutional advisors report that targeting strong secondary markets has allowed their clients to pursue mid-teen percentage returns – something virtually impossible in Manhattan or San Francisco’s overheated market ( Mansion Global: Secondary Cities Investment Potential ).
This hunt for yield gained momentum after the Global Financial Crisis and has accelerated in the past few years. Investors initially turned to gateway cities as “safe havens” post-2008, but as those markets became saturated and expensive, attention shifted. By the late 2010s and early 2020s, major secondary hubs—often dubbed “18-hour cities” for their around-the-clock vibrancy short of 24/7—rose to the top of many acquisition lists. Surveys from 2021–2022 showed that more than half of commercial real estate investors believed the best opportunities were in secondary or tertiary markets, far outpacing those favoring traditional gateways ( Wealth Management: Investor Sentiment Survey 2022 ). Capital that once flowed overwhelmingly into New York, Los Angeles, or Chicago was increasingly being spread to places like Denver, Charlotte, Orlando, and even smaller “flyover” cities. Notably, domestic buyers have led this charge; many foreign investors still prefer the familiarity of global cities, but U.S. institutions and high-net-worth players have cast a wider net across the country.
The influx of investment has itself become a driver of rising values in secondary markets. Competition for assets in Austin or Raleigh has bid up pricing and, inevitably, started to compress cap rates there as well. In other words, the yield premium that secondary markets once offered has begun to shrink as everyone piles in. As one industry report quipped, “the secret is out” on these locations – the rush of new investors has driven up costs and made finding bargains tougher ( Wealth Management: Investor Sentiment Survey 2022 ). Still, even with some yield compression, many secondary markets continue to pencil out better returns than the coastal gateways, especially on a risk-adjusted basis. And because these cities are generally earlier in their growth curve, investors see more runway for future appreciation. In practical terms, the capital markets have re-rated secondary and tertiary locations from niche plays to mainstream targets – a sea change in how portfolios are allocated across geography.
Is the Outperformance Sustainable?
The critical question for strategists and investors now is how sustainable this secondary-market outperformance will be. After several years of remarkable growth, there are signs that these smaller markets could moderate. For one, their very success has led to growing pains. Housing costs in many Sun Belt darlings have spiked, eroding some of the affordability advantage that drew people in the first place. Markets like Boise, Austin, and Phoenix saw home prices and rents soar by 2021-2022, pushing local inflation rates to among the highest in the nation. The influx of newcomers, while a boon to landlords and developers, has made these cities more expensive for the next wave of migrants. There are early indications that migration into certain hotspots is cooling slightly as the cost gap narrows. In short, life in an “up-and-coming” city is not as cheap as it was five years ago, and that could slow the torrid pace of in-migration going forward.
At the same time, new construction is catching up. The pipeline of apartments, homes, and commercial projects in secondary cities is robust. As those projects deliver, they will increase supply and potentially temper the rapid rent growth investors have enjoyed. Already, some formerly red-hot rental markets have plateaued as vacancies tick up due to the surge of new units. Similarly, on the commercial side, if every investor is building speculative industrial parks or trendy office space in a mid-size city, there’s a risk of short-term oversupply. A once undersupplied market can rather quickly become balanced or even oversupplied if development overshoots. This natural cycle suggests that the extraordinary rent jumps of the recent past will likely normalize in the coming years. Secondary markets can still grow, but perhaps not at the breakneck double-digit annual rates seen during the height of their boom.
Another factor is the potential resurgence of gateway cities. As the pandemic effects fade, America’s global metros are gradually regaining their footing. Offices are re-populating (albeit in hybrid fashion), international immigration is resuming, and the cultural and economic magnets of big cities are drawing people back. For instance, Manhattan’s apartment rents hit new record highs in 2022–2023, and tech companies that once allowed complete geographic flexibility are re-centering at least some operations in the Bay Area and New York. Gateway municipalities still offer unique advantages: deep labor pools, premier infrastructure, diverse economies, and a concentration of lifestyle amenities (from fine dining to world-class arts and entertainment) that smaller cities, for all their improvements, cannot fully replicate. It’s reasonable to expect that primary markets will always retain a measure of desirability and pricing power, especially for certain investor profiles and occupants. In essence, the pendulum could swing partway back – not to the extreme dominance of gateways seen in decades past, but toward a new equilibrium where primary and secondary markets each claim their share of growth.
None of this negates the fundamental leap forward that secondary and tertiary markets have made. It does, however, imply that recent outperformance will evolve. The gap between secondary and primary market returns has already narrowed as secondary prices rise. Future gains in those markets may be more in line with national averages, rather than dramatically above. In addition, the next phase of the cycle – with higher interest rates and the possibility of slower economic growth – will test how resilient these smaller markets truly are. Many secondary cities have never experienced a major downturn as prime investment markets. How will an Austin or a Raleigh fare in a recession compared to a Los Angeles or Chicago? Will investor capital stay put if local conditions soften? These questions will likely be answered in the coming few years as the economic environment shifts.
Strategic Outlook: Balancing Opportunity and Risk
For now, the verdict is clear: smaller markets have delivered in a big way, and they’ve earned an elevated place in real estate investment strategy. It’s no longer an alternative idea to deploy capital to secondary cities – it’s often a core component of a diversified portfolio. Investors have learned that overlooked “backyard” markets can sometimes outshine the coastal icons in growth and yield. A savvy multifamily investor in, say, Indianapolis or Tampa, might have seen far greater rent surges and property value gains in recent years than peers focusing only on San Francisco high-rises. The rise of remote deal-making and online marketplaces has also made it easier than ever to source opportunities in these markets, reducing the information advantage that gateway cities once had. In short, secondary markets are now firmly on the radar of institutional capital and should continue to play a prominent role in allocation decisions.
That said, prudent investors will approach this trend with a healthy dose of caution. Every market – especially smaller ones – carries its own risks. It’s important to remember that many secondary and tertiary cities rely on a narrower economic base. An unforeseen blow to a major local employer or a downturn in a key industry can have an outsized impact on a smaller metro’s real estate compared to what a diversified global city would experience. For example, a mid-sized city dependent on a single tech employer or a regional manufacturing hub might see property demand falter if that employer relocates or downsizes. Additionally, liquidity can dry up faster in secondary markets during a correction; there are fewer active buyers in a Kansas City or San Antonio than in a New York, which can exacerbate price swings. Investors should also factor in that today’s “up-and-coming” city could become tomorrow’s overbuilt market if exuberance isn’t checked – chasing last year’s hottest market often means paying top dollar right before growth levels off.
- Diversification and Due Diligence: Diversifying across markets and understanding the specific drivers of each city is crucial. Not all secondary markets are created equal; the best candidates have diverse job creators, steady population gains, and attractive quality-of-life features. Investors should perform deep due diligence on local economic fundamentals rather than simply chasing the latest trend.
- Long-Term Perspective: Those who have profited from the secondary-city boom should remain level-headed about the future. It’s wise to take a long-term perspective and be prepared for growth rates to moderate. Secondary markets can absolutely be long-term winners, but they may not consistently outrun gateway cities every single year or in every cycle. Strategic planning means expecting some volatility and not overextending based on recent performance alone.
In conclusion, the emergence of secondary and tertiary cities as high-growth, high-return real estate markets marks one of the most significant shifts in the industry’s landscape over the past decade. These “smaller” markets have proven their ability to punch above their weight, reshaping how and where investors deploy capital. A seasoned real estate executive now speaks of markets like Austin, Charlotte, or Boise with the same respect that was once reserved for San Francisco or Boston. The playing field has leveled to a degree, and that creates a wealth of opportunity for those astute enough to seize it. By balancing optimism with diligence – capitalizing on the superior returns that secondary cities can offer, while staying alert to their unique risks – investors, brokers, and fund managers can make the most of this paradigm shift in commercial real estate.
