Institutional Investors Eye 'Third Cities' As Migration Continues To Shift

Institutional investors are increasingly eyeing so-called “third cities” — tertiary markets across the US with populations between 100,000 to 200,000 residents and within several hours from a major hub — as regions for major potential upside as changing migration patterns continue to disrupt how Americans live, work and play.

A new report from Graceada Partners says these third city markets, or TCMs, “are paving the way for a more geographically diffused economy,” noting increasing momentum toward certain TCMs and away from certain primary and secondary markets, especially in the Heartland, the Southwest (the Cactus Belt), and portions of the Pacific Northwest and Mountain West (Western Interior). The Graceada study examined more than 65 TCMs across the US and compiled a list of the top 20 based on criteria such as renter value, rent growth potential, and purchase value collected using CoStar, as well as quality of life measurement using AARP data and population growth analysis using Census data.

The top 10 TCMs, according to the firm’s analysis, are Cheyenne; Rapid City, SD; Redding, Calif.; Columbia, Mo.; Lake Havasu City, Ariz.; Idaho Falls; LaCrosse, Wisc.; Pueblo, Colo.; Bakersfield, Calif. (South); and Yakima, Wash.

Following the top 10 cities are Yuma, Ariz.; Bloomington, Ill.; Las Cruces, NM; Norman, Okla.; McMinnville, Ore.; Topeka; El Centro, Calif.; Yuba City, Calif. (North); and Kalamazoo.

“Modern migration taking place in the US is centered on affordability and perceived quality of life,” the report notes. “People are looking for cities with relatively lower rent or mortgage payments where they can cultivate a better work/life balance. For some, that means moving out of primary and even secondary markets into tertiary ones.”

The firm expects the “gravitational pull” of TCMs to increase over the long-term, in a phenomenon reminiscent of the success of fast- growing larger markets like Atlanta, Salt Lake City, and Austin.

“TCMs will find themselves seeing spillover from primary and secondary markets, creating accelerated prosperity and population growth in top TCMs with a higher quality of life,” the report predicts.  And that has big implications for investors who may have not considered those markets just a few years ago.

“Our analysis reveals three major regions of the U.S. that hold many of the top 20 TCMs,” the report states. “These regions are the Heartland, the Cactus Belt, and the Western Interior. Colloquially, these regions typically fall into the Midwest, Southwest, and the Western U.S., respectively. TCMs in these regions appear to be well positioned to grow and attract more residents, potentially more than other American regions like New England or the Deep South. While primary markets will continue to thrive, these emerging third city markets could become more competitive in their respective regions.”