The confluence of rising rents, historic inflation rates and the availability of remote work has opened new opportunity in so-called “Third City Markets” (TCMs) in the U.S. These tertiary markets provide robust potential for workers seeking lower costs of living and better quality of life.
By extension, they offer opportunity as well to real estate investors.
Those are the findings of a recent whitepaper from Graceada Partners highlighting 20 undervalued tertiary markets, from Kalamazoo, Mich. and Bloomington, Ind. westward to McMinnville, Ore. The list is topped by Cheyenne, Wy., Rapid City, S.D. and Redding, Calif. The cities on the list make the grade based on livability, affordability and proximity to major urban hubs, as well as being home to between 100,000 and 200,000 people.
Graceada Partners identified the most undervalued TCMs by analyzing data from the U.S. Census, as well as AARP livability statistics and metrics from CoStar. The aggregation of these benchmarks allowed the firm to select and rank the Top 20 TCMs from a field of 65 target markets broadly fitting the company’s TCM definition.
Affordability rules
Among the highlights of the whitepaper is the identification of two primary trends fueling the investment worthiness of TCMs. They are an increasing lack of affordability in the multifamily markets within secondary cities (think markets like Austin, Texas; Charlotte, N.C.; and Sacramento, Calif.), as well as industrial expansion in TCMs. Investors interested in TCMs see them as havens for workers with lower incomes leaving larger cities burdened by ever-larger housing costs.
That makes TCMs fertile soil for investors seeking to strategically diversify their real estate investments, a Graceada Partners official asserted in a prepared statement.
Growing interest in industrial development in TCMs is part of the “Amazon warehouse halo effect,” according to the whitepaper. Secondary markets have grown increasingly institutionalized, resulting in tertiary markets – particularly the 20 TCMs identified in the paper – being poised to witness outsized expansion.
The surge in remote work is a significant factor in the rise of tertiary markets. But a longer-standing force in this move is the seemingly unceasing hike in housing costs.
For instance, the whitepaper points to the contrast between big-city Seattle and much smaller Yakima, Wash., one of the Top 20 undervalued TCMs it identifies.
Citing figures from RentCafe, Graceada notes that average Seattle rent has reached $2,334, more than $1,000 a month above national averages, and about twice average rent in Yakima.
Comparative affordability, when combined with high quality of life, elevates other markets to the list. LaCrosse, Wisc., which placed in the Top 10 TCMs on Graceada Partners’ list, didn’t have the lowest rents or home prices, but did notch a 64 on AARP Livability Index, higher than every other of the Top 20 TCMs.
Spillover effect
Recall that one of the qualifications defining TCMs is proximity to primary urban markets. Residents of high-ranking TCMs are able to reach a major hub within a few hours’ drive or a short plane ride, the Graceada whitepaper authors report.
Proximity has fueled the growth of nearby secondary cities, as when San Franciscans began resettling in more affordable Sacramento.
The same spillover effect is likely to benefit cities like Redding, Calif., just 162 miles from the California state capital and 217 miles from the City by The Bay. The fact that Redding could be “next in line” to accept residents leaving higher-cost markets helped lift it to the No. 3 spot on Graceada’s list.
The report concludes investors may want to focus attention on tertiary markets that wouldn’t have been on their radar screens a few years ago. The regions where the paper’s authors see the greatest potential: The Heartland, Cactus Belt, and Western Interior, all poised to benefit more than, say, the Deep South or New England.