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Real estate has always distinguished between “gateway markets” and “secondary cities.” But thanks to the country’s shifting demographics (spurred partly by the pandemic), the line between the two has started to blur. People are increasingly leaving dense coastal cities and states and flocking to the Sunbelt or the Mountain West. The number of people moving to smaller cities in the first quarter of 2021 more than doubled from the year before, according to a Redfin poll of more than two million Americans. The cities with the biggest net inflows during this period were Austin, Las Vegas, Phoenix, Sacramento, and Dallas. 
A U-Haul survey on 2020 migration patterns backs up that data. The truck and trailer rental company tracks close to two million annual truck rentals for one-way trips from one state to another, and they found the top destination in 2020 was Tennessee. Texas and Florida ranked third, and some of the lowest-ranking states included New York, New Jersey, Pennsylvania, and Massachusetts.
Because of these migration patterns, commercial real estate investment sales activity is also steadily migrating from big-ticket cities like New York and Chicago to smaller markets. About 60 percent of all commercial deals in the early 2000s were in gateway metros like Los Angeles and NYC, but the money started to move elsewhere in 2004. Primary markets now account for just 33.8 percent of total commercial real estate deals, according to Marcus & Millichap. 
The influx of money flowing into commercial real estate is part of the increasing investment in secondary cities. There were about 20,000 commercial transactions over $1 million in 2002, but by 2021, more than 90,000. The total commercial real estate sales activity in primary markets is still trending upward, but the share of the pie for these gateway cities has shrunk over the past two decades.
All this adds up to a shift to secondary and even tertiary U.S. real estate markets. Some reports suggest that secondary metro areas such as Atlanta, Austin, and Dallas have seen such rapid growth that they should be considered the ‘new gateway markets.’ Those three cities, along with Nashville, Denver, and Charlotte, have all experienced population growth between 10 and 30 percent over the past decade, according to a JLL report from 2021. The report also notes that job recovery since the pandemic started has been twice as fast in these markets compared to some bigger gateway markets.
Trepp, a commercial real estate financing data provider, recently ranked the top secondary metro areas of 2022 in terms of commercial real estate investment activity, breaking down the data for 24 secondary metropolitan statistical areas (MSAs). The U.S. Census Bureau defines MSAs as a core area with a substantial population nucleus and adjacent communities that are socially and economically integrated with that core. Secondary metropolitan areas were defined in Trepp’s report as regions with employment between about 1 and 2 million.
Trepp’s report outlines cities with low commercial real estate distress and low unemployment levels, making them metro areas that have bounced back strongly from pandemic losses and managed well through this economic cycle. Many of these cities also may prove to be resilient if a recession happens soon, as many suspect it will, making them attractive areas for investment.
Here are the top 5 secondary metro markets for commercial real estate investment in 2022:
The Washington metro area of Seattle-Tacoma-Bellevue took a substantial hit during the pandemic, especially Seattle’s downtown core. Governor Jay Inslee issued rather strict social distancing and quarantining orders to slow COVID-19, which led to a plummet in demand for the city’s office space in 2020. A Colliers International Report on the Puget Sound office market in the third quarter of 2020 noted that areas of Seattle saw a combined 657,000 square feet of office move-outs, many of which were small businesses.
Many cities suffered during the peak of COVID, but even during the worst of the pandemic, analysts were quick to point out that the fundamentals leading to Seattle’s growth in previous years hadn’t changed. They were right because the Seattle metro area has bounced back.
The Seattle area is home to many major tech and cloud computing firms, such as Microsoft, Google, and of course, Amazon, and the city has had the nation’s fourth highest amount of CMBS loan issuance in 2022 at $1.65 billion. Seattle’s population decline has been moderate compared to other cities, falling 0.33 percent this year. And despite its pandemic troubles, Seattle’s economy still grew 2.5 times faster than the national average in 2020.
Seattle has long been a strong commercial real estate market because of its port location, employment opportunities, and high-tech workforce. The city is also a popular in-migration destination because of its numerous lifestyle and cultural amenities, not to mention its music scene (it’s the home of grunge rock, remember?). If anything, it seems the region hit the pause button during the worst of the pandemic, and it’s coming back to life.
The downtown core of Seattle is part of the comeback. The city’s office workers are gradually returning, with July occupancy figures at nearly 40 percent of pre-pandemic totals, the highest since COVID started, while visits to downtown Seattle are also the highest they’ve been since pre-pandemic times. The 40 percent office occupancy rate doesn’t seem great, especially compared to cities like Austin, Texas, but it’s beating out the rates in San Francisco and L.A. by a wide margin. 
However, one area of concern in Seattle is a new payroll tax on businesses that could push some employers to surrounding towns like Tacoma and Eastside or possibly out of the Seattle metro area altogether. The new tax that started in 2021 was levied on city companies and has led to more than $7 million in payroll expenses. “That tax, that’s going to hurt a lot of businesses because it’s not a small amount of money. It’s legit,” said Brian Hatcher, the president of Kidder Matthews, a Seattle commercial real estate firm.
The pandemic has led to many headlines and much talk about workers and companies fleeing California for places like Austin and Phoenix, especially in the tech sector. San Jose, the business and cultural capital of Silicon Valley, did take a hit from this. But many major tech firms and employees remained in San Jose, which led to a rebound and a strong past year for commercial real estate activity in the metro area.
Silicon Valley’s commercial real estate market recorded its best year ever in 2021, as major tech firms, investors, and developers spent $8.71 billion on office, research, and development properties, according to CBRE. Like Seattle, the bounce back in San Jose and Silicon Valley has been remarkable, and it’s been a bit of a roller-coaster ride. The 2021 record-high commercial property sales volume was more than 81 percent higher than the 2020 sales volume of $4.81 billion. In 2020, the pandemic’s outsized impact led to the sales volume declining nearly 22 percent from 2019.
In late 2021, San Jose’s tech sector added 13,000 jobs, and the metro area reported one of the highest GDPs per capita globally. Unlike neighboring Bay Area city San Francisco, San Jose’s office market has been resilient to the remote and hybrid work shift. The San Jose-Sunnyvale-Santa Clara, California, metro area’s office market has a higher outstanding CMBS balance than its multifamily market. It’s why many real estate investors continue to see San Jose and Silicon Valley as safe places to invest.
The one thing that could be a storm cloud gathering on San Jose real estate’s horizon, though, is tech layoffs that continue to pile up. Layoffs and hiring freezes are spreading everywhere in the industry, with over 41,000 U.S. tech workers being laid off this year as of early September. Some have cited the lingering effects of the pandemic as the cause, while others say tech firms over-hired during periods of rapid growth. More layoffs appear likely, which could significantly slow down the tech industry’s office activity, something that San Jose and Silicon Valley commercial real estate heavily relies upon.
People are flocking to Orlando in droves, making this Florida metro area a surprisingly hot commercial real estate market. In fact, a recent report by the National Association of Realtors ranked Orlando as the strongest real estate market in the entire nation. The Orlando metro area is home to about 2.4 million residents, and it’s growing fast. Population growth in the Orlando area was more than 1.4 percent last year alone, and since 2010, Orlando’s population has swelled by nearly 69,300.
Most people think of tourism and the hospitality sector in Orlando, the home of Disney World and Universal Studios, but the economy is more diverse than many would suspect. The Orlando metro area has one of the fastest-growing tech sectors nationwide, with employment in high-tech industries growing 26.8 percent between 2015 and 2020, compared to 8.9 percent nationally. The pharmaceutical and medical manufacturing industries also boasted an astounding 101.3 percent job growth during the same period.
Orlando has seen a boom in office demand because of its population growth, and a recent report notes that employment in the area is expected to multiply because of lower office rents and a growing workforce. The city also has the lowest available office space (12.7 percent) of all the major metro areas in Florida, with an average asking rate that’s at an all-time high ($22.87 per square foot). And no description of a Florida city would be complete without mentioning the friendly tax cuts and favorable tax landscape for business and investment.
One downside of the Orlando market for multifamily investors is the possibility of a rent control ordinance on the horizon. Orange County’s Board of Commissioners (which oversees Orlando) recently moved to put a rent-control measure on the November ballot that would limit increases tied to the adjustment in the area’s Consumer Price Index. Orlando rents spiked 24 percent in the year that ended June 30th, and the rent control measures have led to a battle between government officials and trade groups. The Florida Apartment Association has sued Orange County, claiming a rent control measure violates state law. Other markets in Florida, like Miami-Dade County, are also considering rent control measures, so it’s something for multifamily investors to keep a close eye on.
California’s capital city is the state’s fastest-growing metro area, with a population increasing by nearly 13 percent since 2010. Californians who have left San Francisco and San Jose have moved north to more affordable Sacramento. The metro area is a major educational hub, home to the University of California Davis, and it’s also been ranked by some as the most diverse U.S. city.
While Sacramento’s office market continues to struggle, the city’s retail, multifamily, and industrial sectors have powered its overall real estate growth. Momentum in Sacramento’s industrial market doesn’t show any signs of slowing, with a vacancy rate (2.3 percent) below the national industrial average. The city’s retail vacancy rate is also at its lowest since the pandemic began, and multifamily sales prices have recently hit record highs, despite the market cooling somewhat.
Economically, Sacramento has sprung back since the pandemic, which is excellent news for real estate investors. The city is ranked among the top American cities with the most robust recoveries from the COVID-induced recession based on criteria like changes in consumer spending, small business openings, and job listings, according to SmartAsset, a fintech firm. Sacramento’s GDP of $145 billion has also grown 49 percent over the past decade. The metro area’s real estate market seems well-positioned to weather a downturn if a recession comes to fruition.
The northern California city’s biggest weak point may be its office market, where the vacancy rate increased to 13.4 percent in the second quarter of 2022, according to Newmark. Several large office spaces came on the market or became vacant last quarter, and the increase in quarter-to-quarter vacancy was the biggest jump the Sacramento office market has experienced since 2010. The cause for the vacancy increase was like any other nationwide: more companies downsizing their office footprints because of changing economic conditions and the staying power of remote and hybrid work.
If a recession comes soon, Sacramento’s commercial real estate market could be well-positioned to weather it. The industrial market is largely recession-proof, with many logistics and manufacturing companies likely to remain in business despite a downturn. The region’s strong employment anchor industries of government and healthcare, which account for roughly 40 percent of regional employment combined, are also considered to be recession-proof. “The government and healthcare industries would help alleviate concerns of employment losses because these sectors are largely not impacted by recessions,” said Bob Shanahan, Research Manager for the Sacramento and Reno regions at Colliers. “However, a real estate recession could impact other growth industries like finance and construction.”
Unlike some other metro areas, San Diego’s office market leasing activity has been strong, with notable new transactions throughout the second quarter of 2022 (like Apple’s 95,000-square-foot lease). A Newmark report notes that the city’s submarkets like Carlsbad, Torrey Pines, and Sorrento Mesa have seen the most office absorption activity, mainly centered on biotech and technology companies. Other traditional office users have slowed or paused new lease commitments, which has been a nationwide theme, but overall office vacancies declined 1.1 percent in San Diego in the second quarter from the first quarter of 2022.
San Diego is a defense and research hub whose economic numbers are rock-solid. San Diego County recorded a 3.1 percent unemployment rate in July 2022, well below the California rate of 3.9 percent and the national average unemployment rate of 3.8 percent for the same period. Employment is expected to grow at a rate of 5.4 percent in 2022, and the San Diego economy is predicted to grow by 5.2 percent through the rest of this year.
The multifamily sector is also solid in San Diego, as the market saw revenue and NOI growth of 4.6 and 5.8 percent in 2021, respectively. Rental increases are expected to continue in multifamily around 5 to 10 percent this year as newer-class inventory hits the market, according to Avison Young.
One minor downside to San Diego’s strong commercial real estate market is that the booming industrial sector is cooling off. Amazon has been the market’s main driver of leasing activity in recent years and has signaled it’ll stop adding new distribution space. San Diego industrial sales volume remains strong, but it has dropped from recent record highs, and higher interest rates are expected to cool sales even further. Add rising construction costs to the mix, and the area’s industrial sector could see much less activity soon.
Emerging Trends in Real Estate is one of the most highly regarded reports in the real estate industry, compiled annually by PwC and the Urban Land Institute. The recent 2022 report notes what many real estate investors have noticed: the pandemic has shaken up some long-held assumptions about U.S. property markets. And one of those assumptions is that gateway cities are the best places for overall real estate prospects.
Along with the cities listed above, a wide array of secondary cities in the U.S. have become very attractive for commercial real estate investors. Sun Belt cities like Atlanta and Dallas have big, diverse, growing economies and, frequently, more business-friendly governments than in primary markets like New York and Chicago. Then there are cities like Charlotte and Salt Lake City that feature active downtowns that have recovered nicely from the pandemic in many cases. Housing prices aren’t as low as they once were in some of these secondary cities, but they continue to benefit from population growth and people moving away from even more expensive markets.
Primary markets like Los Angeles and Chicago will always draw the lion’s share of real estate investment because of their significant employment bases, highly talented workforces, and robust transportation systems and infrastructure. But as the lines between secondary and primary cities continue to blur, it’s a trend that has accelerated since the pandemic started. As population migration patterns continue to shift away from big gateway cities, the U.S. secondary real estate markets stand to gain. So if commercial real estate investors get tired of the ultra-competition and high prices of markets like NYC and Los Angeles, they have plenty of secondary markets to choose from.


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