Secondary and Tertiary Markets in Western U.S. Prove Stronger and More Stable
by Elise Mackanych
Despite misconceptions around market performance of secondary and tertiary markets in the Western United States, these markets prove to be more economically robust and less volatile than primary markets, according to Graceada Partners’ research reports, Economic Vibrancy in Secondary & Tertiary Markets and Real Estate Fundamentals in Western U.S. Secondary & Tertiary Markets.
Common misconceptions are that primary markets experience stronger economic growth and greater vibrancy, particularly during economic downturns and that secondary and tertiary markets have a more volatile, less robust and more concentrated economic base.
Analyzing data over the past 20 years, Graceada’s findings show secondary and tertiary markets as economically more robust and less volatile than primary western markets. These markets have exhibited stronger GDP growth, income growth, job growth and population growth, even during economic downturns. Population growth in these markets has been consistently positive over the past 20 years (unlike primary markets) and did not change meaningfully post-pandemic.
Specific highlights cited by Graceada include GDP growth in secondary and tertiary markets exceeding primary markets GDP growth during the GFC by 300 basis points, as well as these markets having more broadly diversified economies. Additionally, during the GFC, primary markets had worse income declines and also negative income growth during the pandemic.
Job growth in secondary and tertiary markets is consistently better and less volatile, even during the GFC and markedly during the pandemic. Secondary and tertiary markets have consistently higher population growth and significantly less volatility over the past 20 years.
Additional common misconceptions regarding secondary and tertiary markets include the idea that their real estate fundamentals perform worse than western primary markets, specifically in economic downturns. In addition, there is a misconception that secondary and tertiary markets are more volatile in the development cycle.
Graceada’s analysis shows that real estate in these markets historically performs as well as real estate in primary markets — and in some respects better. During the GFC, secondary and tertiary market real estate values declined in parity with primary markets (not worse). Primary markets exhibit more of a supply/demand boom and bust cycle than secondary and tertiary markets, as measured by net absorption volatility.
In addition, secondary and tertiary markets have stronger average workforce housing rent growth and volatility of rent growth. They have a higher and more stable net absorption rate in comparison with primary markets. Vacancy rates are 1 percent higher than primary markets, on average.
In the industrial market, secondary and tertiary markets lead in net absorption rates, even during the GFC. Due to a greater boom in primary market development, industrial rent growth was weaker in the GFC. Following the crisis, it was stronger but returned to trail secondary and tertiary growth after 2017. Overall, during the past 20 years, primary market absorption rates have been negative and more volatile. While industrial vacancy rates are higher in secondary and tertiary markets, they have converged over the 20-year period, says Graceada.
Graceada’s research on secondary and tertiary markets shows these markets exhibit strong demand side fundamentals, with leads in key metrics such as GDP growth, population growth, and job growth. Supply-side discipline, which produces higher rent growth, and higher net absorption, reinforces the attractiveness of investing in secondary and tertiary markets, despite current misconceptions.