Real estate markets in the United States are generally grouped into three baskets. The primary markets include the largest, most densely populated cities. Tertiary markets refer to areas with smaller populations that are more spread out. In the middle are secondary markets. But what exactly makes a real estate market a secondary market?
While there isn't any specific criteria, here's a general outline of what a secondary market is and what it means to you as a real estate investor.
What is a secondary real estate market?
The difference between primary, secondary, and tertiary markets is in the size of each one. Primary markets are the largest, secondary markets are the midsized real estate markets, and tertiary markets are less populated.
In real estate, a primary market refers to the largest housing markets in the U.S. For example, New York City is clearly a primary market, as well as are cities like Atlanta, San Francisco, Boston, Phoenix, and other large population centers. Primary markets are also commonly referred to as "gateway markets."
When it comes to secondary markets and tertiary markets, it's not quite so clear. There's no set-in-stone definition of what makes a housing market a secondary or tertiary market. The best way to think of secondary markets is U.S. cities that aren't among the most populous or dense areas but still have most of the amenities associated with larger cities.
One commonly used definition is that a secondary market is one with a population of up to 500,000 (with populations above this cutoff being primary markets), and tertiary markets are defined as smaller markets with up to 100,000 people. On the other hand, some experts consider cities with up to 1 million people as secondary markets, while others set the popularion bar even higher, especially if you're considering an entire metropolitan area, not just the city itself.
Another definition is a bit looser, considering secondary markets midsized cities growing at an above-average rate and considered "hot" or high-interest markets. By this definition, secondary markets would have strong job growth and a growing population. As a result, housing prices would likely be on a clear uptrend while the city's vacancy rate would be relatively low.
Markets that are commonly considered to be secondary markets -- also known as secondary cities -- include the following:
- Orlando, Florida.
- Nashville, Tennessee.
- Austin, Texas.
- Kansas City, Missouri.
- St. Louis.
- Portland, Oregon.
Some cities can be considered in more than one category, depending on the definition. Philadelphia is a good example -- with a seven-figure population, it is one of the largest U.S. cities, but it isn't considered much of a growing or "hot" market by many standards like population growth or home price growth.
Charleston, South Carolina is an example of a pretty clear-cut secondary market. With a population of about 140,000, strong job and population growth, and solid home price gains, Charleston is clearly not a primary market, satisfying most widely accepted definitions of what a secondary market is.
Are secondary markets the best places to invest in real estate?
While it isn't a part of most definitions of secondary markets, most tend to be far more affordable than primary markets. Secondary markets tend to have significantly lower costs of living than major U.S. population centers and not surprisingly have seen an influx in population in recent years. As an example, Austin, Texas, experienced population growth of nearly 20% from 2010 through 2016. The population of Charlotte, North Carolina, grew by more than 15% during that time, and the same can be said for Denver. New York City's growth rate during those years? Just 1.9%.
The COVID-19 pandemic may accelerate the growth of secondary markets even further, as more corporations are allowing employees to work remotely and pandemic-fueled lockdowns have given many Americans a desire for more space than they can afford in major cities like New York and San Francisco. If you're an investor, the growth in secondary markets could be an opportunity.
The bottom line
Obviously, real estate investments should be evaluated on a case-by-case basis. Just because a rental property is located in a certain city doesn't necessarily mean it's a great investment opportunity. But the demographic trends point toward growing real estate values, which could result in some interesting real estate investment opportunities in secondary markets in the years ahead.