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Primary vs. Secondary Real Estate Markets: Where Should You Focus?
![Aerial shot of an intersection in the United States](https://bpimg.twic.pics/no_overlay/uploads/uploaded_images/1661357219-1.jpg?twic=v1/output=image/quality=55/contain=800x800)
With the abundance of real estate markets available in the US, it’s near impossible to conduct in-depth research on each one of the markets to find the ideal place for you to invest in.
Fortunately, the real estate industry has classified these markets so it’s easier for you to sift through. The industry categorizes US markets into: primary, secondary, and tertiary markets.
Traditionally, investors focus only on primary markets that have gained a lot of investor interest. They generally dismiss secondary markets and completely skip over tertiary markets.
However, with the pandemic messing up long-time assumptions of all real estate markets and primary markets losing their popularity in the last decade, secondary markets are emerging as the best option for investment prospects.
Let’s discuss the main differences between primary and secondary markets, so you know how to choose between the two. We won’t focus on tertiary markets for this particular article.
What are Primary Markets?
Primary real estate markets are also called gateway or established markets. They have large population bases and contribute significantly to the national GDP, making them economic leaders. The industry characterizes primary markets by the following factors:
- - Has a population of around 3-5 million people—largest of the housing markets
- - Has established commerce and trade sectors with innovative and educated workforces
- - Has steady rental demand due to the high population
- - Produces 44% more economic output than secondary markets
- - Contributes to the $5.3 trillion GDP of all primary markets (vs $3.6 million for secondary markets)
- - Prohibitively expensive, highly competitive, and more volatile in a recession
While primary markets grow slower than their secondary counterparts, they offer many investment opportunities that have proven quite successful. They also have the highest housing prices, such as Los Angeles with a typical home value of $944,651—an increase of 16.1% over the past year:
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Large private equity funds, real estate investment trusts (REITs), and out-of-country investors focus intensely on primary markets. As a result, they often turn their eyes to markets such as Boston, New York, Atlanta, San Francisco, Los Angeles, Chicago, and Phoenix in hopes of earning great returns.
What are Secondary Markets?
In contrast to primary markets, secondary markets usually have rapidly growing job markets and populations—faster than the nation’s average growth. They are also called magnet markets because secondary markets are in-migration destinations for many individuals and businesses.
- - Has an increasing population of 1-5 million with a large proportion of young professionals
- - Has an emerging job market within a flourishing local economy
- - Has a significant amount of real estate development
- - Often has home prices that are increasing but are still relatively affordable
- - Often has large rent increases and demand for single-family rental homes
Moreover, due to the growing population and job market, secondary markets will often have impressive rent growth for single-family homes. For example, rent growth in Las Vegas, Phoenix, and Miami has increased by 15.4%, 19.2%, and 21.4% from August 2020 to August 2021. This is huge compared to rent in primary markets Boston and Chicago, which only grew 1.5% and 1.4%, respectively.
Despite growing demand for single-family homes and increasing rent, property prices are still more affordable in secondary markets than in their primary counterparts. Zillow reports that the typical value of a middle-priced home in Nashville, for instance, has increased by 28.3% the past year to reach $420,533:
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Because of this, many builders, developers, and real estate investors prefer secondary markets to primary ones. You’ll find many structures and amenities in secondary markets that you would also find in primary markets, but without the population density. In fact, secondary markets have claimed 8 of the top 10 markets with the best real estate prospects.
How Do Primary and Secondary Markets Differ?
It’s without a doubt that both primary and secondary markets offer potential opportunities for real estate investors. Still, you must analyze the factors that will impact your returns, like the affordability of property prices, the supply and demand in the marketplace, and the current and future population and job growth—which are where secondary markets shine.
Let’s take a closer look at the reasons why you should consider secondary markets for traditional, long-term rental property investments:
- - More Affordable: Secondary markets have more affordable properties than primary markets. Beginner investors with a smaller capital can find more options in secondary markets.
- - Less Competition: While deep-pocketed investors are focusing on primary markets, secondary markets are now a viable option for the average investor trying to avoid major competitors.
- - Higher Returns: Secondary markets will often have higher cap rates and generate stronger cash flow compared to primary markets. This is because the properties won’t be overvalued, but still allow you to leverage on the growing rent prices, economy, and population.
- - Growing Population: Secondary markets are emerging areas. They’ll have high job growth, lower costs of living, and attract many new residents compared to primary markets. As a result, property prices are also on an upward trend in secondary markets.
- - Less Volatile: Secondary markets have less risk in times of downturns, making them ideal for long-term investments. Case in point, primary markets saw significant drops in 2020 when the global pandemic hit the country, while secondary markets experienced recovery and growth.
Moreover, pandemic-triggered trends like remote work and employers seeking more affordable office leases sent many people outside of the usual business areas in primary markets. They’ve “fled” to secondary markets, and will likely continue to stay there for the years to come.
Finding Your Ideal Real Estate Market
We understand that choosing a real estate market can be intimidating even if you’re an experienced investor. The complexities of each market will never get any easier to figure out—unless you have expert guides and property managers walking alongside you.
Whether you’re looking to invest in primary or secondary real estate markets, our team of professional property managers (including myself!) can give you the guidance you need.
We’ve also published a Deep Dive series that unpacks every neighborhood and city in Metro Detroit—one of the most diverse and lucrative markets out there—so you can go through the most important factors that’ll make or break your real estate investment.
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