Real Estate Investors: The Future is Strong Secondary Cities

Authored by Jonathan Needell, Associate Investment Director

October 27, 2020

Investors of all stripes are frequently admonished to go where the growth is. So where should real estate investors be looking in 2020 and into 2021? As the COVID-19 pandemic drags on, and as growth sags in major metropolitan areas and gateway cities, I believe the answer could not be more straightforward: look to strong secondary cities.

Why is growth sagging in gateway cities such as New York, Miami, and San Francisco? The pandemic-driven exodus from major metropolitan areas is only part of the equation. There are other important factors playing a role, such as prohibitively high costs of living, rises in crime, and in many cases serious impediments to increasing the housing supply (limited supply of available land, prohibitive development policies, high construction costs, stringent municipal building codes, NIMBYism, and the list goes on). Critics of high-density development may be tempted to claim that “cities are over” but the truth is more nuanced: cities are coming to you. Secondary cities are urbanizing. And finally, simple mathematics are against major cities: the bigger a city is, the harder it is to continue growing at a rate comparable to the national average.

With these factors in mind, strong secondary cities are looking increasingly attractive to real estate investors. What defines a secondary city as strong? I’m glad you asked:

(1) Strong population growth. A strong secondary city is growing much faster than the rest of the country, ideally two-to-three times the national average. Austin, Texas and Salt Lake City, Utah are excellent examples of this dynamic. From 2000 to 2010, the Austin metro area saw its population jump by an astonishing 37.3%; it grew another 29.8% from 2010 to 2019. Salt Lake City is growing at a slower, but still impressive rate—since 2010 it has grown by 14.44%. For comparison, the national population has grown by about 6.3% over the same period.

(2) A highly educated population. More highly educated residents are a major win for secondary cities, as they can command higher salaries and spend more at local businesses—and, importantly for real estate investors, they can spend more on housing. Again, Austin, Texas is nearly a textbook example of a strong secondary city, with 8% of the metro area possessing a bachelor’s degree or more advanced degree. Over 37% higher than the rest of the country and Texas generally.

(3) Diverse private sector employment. When looking at a strong secondary city, we don’t want a one-company town, as this makes the area vulnerable should the company fall on hard times. Ideally, we’d like to see ten large employers at minimum, which might include a major healthcare system, large universities, and/or a state-level government (in the case of state capitals).

(4) Income growth. Although this is not a must, strong secondary cities should ideally also be showing some strong income growth as well. In this category as well, Austin serves as a prime example. From 2010 to 2017, the city enjoyed annual income growth ranging from 4% to 10%.

Austin and Salt Lake City are far from the only strong secondary cities in the United States that are primed for growth in the coming years. By paying close attention to the characteristics mentioned in this article, real estate investors could be rewarded by finding the next Austin or Salt Lake City before it takes off.

*The views and opinions expressed in this article are solely my own.