It took about 7 years from the height of the housing collapse for primary markets to rebound. Until 2016, they were still exceeding the appreciation rates of secondary markets, but then secondary markets surpassed them in the second half of 2016 and continue to outpace primary markets.
PwC (PricewaterhouseCoopers) and Urban Land Institute have highlighted secondary cities that are on the rise in their recent market outlooks. We take a look at which secondary cities we need to be paying attention to in 2018 and why they have become so popular with investors.
Why Secondary Cities?
In PwC’s survey, some of the top primary markets like San Francisco and Manhattan tumbled down to 27 and 46 respectively while secondary cities leapt into the top 20. There are several reasons for the surge in investor interest – chief among them is affordability. Other factors:
· Investors have come to understand the complexities underlying the potential of secondary cities
· Unlike typical real estate cycles, new construction in secondary cities has remained low, preventing the problems created by overbuilding
· Hiring costs for businesses are 14% - 16% lower than in primary markets
· Cost of living is much lower in secondary cities with housing a full 45% lower
· Foreign investors are increasingly focusing on secondary cities, accounting for 10% of transactions involving secondary markets last year
Lower costs of living and of doing business in secondary cities enable investors to save more money on their investments while reaping more of the profits. On the opposite side of the coin, as real estate pricing continues to go up in primary markets, investors are pocketing less and less while also being constrained by limited inventories and interest waning in assets in places like New York, DC and LA. What is more, those macroeconomic factors are predicted to hold for years to come.
20 Secondary Cities to Watch
Save multifamily, there is very little new construction happening in the top secondary cities to watch. That is part of what is attracting investors. There they are finding existing real estate with the potential to be transformed, repurposed, and reused for current and future demographics. Here are the 20 secondary cities to watch in 2018 according to PwC:
1. Inland Empire, CA
2. Philadelphia, PA
3. Miami/Ft Lauderdale, West Palm Beach
4. Baltimore, MD
5. San Diego, CA
6. San Jose, CA
7. Phoenix, AZ
8. Atlanta, GA
12. VA Beach/Norfolk, VA
13. Tampa/St. Petersburg/Clearwater, FL
14. Orlando, FL
15. Raleigh/Durham, NC
16. Denver, CO
17. Charlotte, NC
18. Portland, OR
19. Austin, TX
20. Nashville, TN
ULI (Urban Land Institute) ranks basically the same cities differently based on investment and development. There are several primary markets included in their list as well as the addition of these secondary cities, with Raleigh/Durham, NC in the top 5:
· Salt Lake City, UT
· Charleston, SC
· Oakland/East Bay, CA
Companies are targeting these lower cost secondary cities for office assets that are closer to urban centers and suburbs where costs for similar real estate in primary markets are on the rise. Additionally, the retail sector is contributing to the increase in interest in secondary markets.