Primary Markets
In real estate, primary markets are metropolitan areas with substantial populations (over 1 million people), high asset liquidity, and a large volume of property transactions. Also known as gateway markets or 24 hour cities, primary markets have historically attracted investor interest with their established economies and lower cap rates.
The six most notable primary markets are Washington D.C., San Francisco, Boston, Chicago, New York City, and Los Angeles.
Per Marcus & Millichap, the six core gateway metros recorded 6.2% year-over-year employment growth in March, on average, versus 4.5% for the nation overall. A few callouts:
Oakland/East Bay Area: The Bay Area remains an appealing gateway metro for highly skilled workers. San Francisco remains the most expensive city in the country per rentable square foot. With large tech employers loosening remote work standards, the East Bay should remain appealing for both affluent renters and smaller employers seeking agglomerative economies of scale.
New York: In Manhattan, Q4 office leasing activity increased to levels not seen since before the pandemic, signaling a long-term recovery is already underway.
These examples of recovery lend themselves to the notion that real estate primary markets have strong underlying market fundamentals.
Primary, Secondary, and Tertiary Markets
The real estate market is split into three tiers (primary, secondary, and tertiary) based on factors including demographics, population and job growth, and amenities. While there is no definitive criteria for categorizing markets, it is important to consider all factors, as population alone is not enough to make a classification.
Primary real estate markets boast long-established commerce and trade sectors, strong job growth, fierce competition among real estate investors, low capitalization rates, significant population growth, urban amenities, and a high cost of living. These markets also continue to attract top talent and a highly educated workforce due to the presence of universities such as Harvard, Georgetown, University of Chicago, Columbia, New York University, and University of Southern California.
Secondary real estate markets, on the other hand, are less densely populated, but are characterized by above-average population and job growth. These midsize metros have similar amenities to primary markets and are frequently referred to as 18-Hour Cities, as they operate on an 18-hour basis.
Tertiary markets are smaller than their counterparts with populations well under one million. With higher cap rates, investments in these markets are generally riskier, with the potential for outsized returns.
It is important to distinguish between markets when making investment decisions, as the classification can both indicate and influence perceptions of risk, demand, potential returns, property prices, and more.
The Bottom Line
Primary markets are major metropolitan areas with strong market fundamentals that make for strong, low-risk investment opportunities.