Why You Should Consider Investing in Secondary Cities

The Trends Behind Millennial Migratory Patterns: Why You Should Consider Investing in Secondary Cities

Many real estate investors have long been attracted to office investments in prime business centers of the U.S. gateway markets such as Boston, New York City, Washington, San Francisco, Los Angeles and Chicago.

Why You Should Consider Investing in Secondary Cities

Many real estate investors have long been attracted to office investments in prime business centers of the U.S. gateway markets such as Boston, New York City, Washington, San Francisco, Los Angeles and Chicago. However, due to recent demographic shifts driven by the millennial population, interest has started to transfer to office investment opportunities in non-gateway cities, particularly secondary markets.

About 40 million Americans move each year, much of which includes young people relocating cities.  Metropolitan Statistical Areas (MSAs) with 1 million people or less are seeing strong population growth and job creation due to these relocations. Since 2012, secondary cities have seen increases in net domestic migration, while major metro areas have experienced decreases.

Why Millenials are Moving to Secondary Markets

Data shows the population growth of millennials in secondary markets has exceeded gateway markets with the trend expected to hasten post-pandemic. As the millennial generation enters a state of maturity in their late-20s to mid-thirties and begins the family formation process later in life, they are abandoning coastal cities for the likes of Nashville, Austin, Kansas City, Phoenix and Raleigh-Durham.

Millennial migratory patterns are driven by a search for:

  1. Well-paying jobs
  2. Access to quality education
  3. Affordable housing
  4. Less intensive work commute
  5. Less tax-burden
  6. High quality of life

These requirements can more often be found in prime business centers of non-gateway markets at a more reasonable price. Since jobs follow workers, many of these markets are experiencing employment growth, creating demand for well-positioned, modernized office assets with full amenities that appeal to millennials.


To be even more specific, as the majority of Millennials mature into their thirties, we believe many have entered or are entering into a stage of life where the confluence of starting a family, continuing to pursue a career and purchasing a home become priorities and, as a result, issues such as employment opportunities, cost of living, quality of life, proximity to work and access to well-regarded schools become increasingly important to them.

According to a February 2018 Federal Home Loan Mortgage Corporation survey, approximately 93% of people between the ages of 21 and 37 reported the desire to own a home. Of that 93%, 21% can afford to buy a home but are renting for convenience reasons. Further, when choosing where to live, 87% of Millennial respondents to a 2015 survey by the Urban Land Institute indicated that the quality of the environment is either top priority or a high priority and half or more indicated that green space, space between neighbors and walkability were among their high priorities. These preferences, combined with diminishing single-family home affordability in the major markets, have caused and are causing many Millennials to pursue opportunities to live and work in urban nodes in target markets that can address their evolving career and personal goals. Further, this shift in Millennial lifestyle preferences will significantly influence the pattern of economic growth across target markets in the near future.

Millennial Population Growth and In-Migration to Target Markets

In 2017, annual average population growth in target markets exceeded annual average population growth in the major markets by more than 50%. By 2017, overall population growth in target markets was 1.1% versus 0.6% in the major markets, according to the Census Bureau. Millennials have contributed significantly to this recent population growth in target markets.


Since 2010, population growth in the 25-to-34 year-old age cohort has been higher in target markets than in major markets and the gap has continued to widen. From 2013 through 2017, the population between the ages of 25 and 34 increased by an average of 1.9% per year in target markets compared with 1.4% per year in the major markets, with four of our initial selected markets among the top 20 fastest-growing markets for this age group. From 2010 to 2017, the population between the ages of 25 and 34 increased 28.4% in Orlando, 20.4% in Tampa, 17.1% in Columbus and 18.6% in Nashville. The number of people between the ages of 25 and 34 in target markets has increased by 1.6 million people since 2010 to 13.3 million in 2017.

Businesses also want to be located in places with higher-than-average population and job growth. As corporate users are thinking through some percentage of their workforce working remote, behavior is going to change. Essentially, this conversation that HR personnel have been having for years is finally taking place in the C-Suite. What’s to stop a CEO in New York City from moving a portion of his or her labor pool from a high-rent, high-tax, high wage state like New York to a higher value location such as Nashville, where the company can enjoy cheaper rent, significantly less tax-burden, more space and the optionality to pay its employees less?

Our View

At Excelsior Capital, when considering investment opportunities we ask the question:

“Which markets around the country are attracting both jobs and people that have desirability and quality of life attached to them?”

As the nation’s population continues to disperse outside of gateway city centers as millennials start families—consistent with the patterns of prior generations—secondary market and suburban office locations likely will become more desirable. Corporate users will consider locations that offer urban amenities in a suburban setting—a blend of the active environment and convenience that today’s workers, including millennials, prize. In a post-COVID world, investors have the opportunity to acquire undervalued secondary market assets, which may allow them to take fuller advantage of the next wave of suburbanization.

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Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

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