Forget Big Cities. Firms, Investors Set Sights on Smaller Markets.

It wasn’t long ago when big city office skyscrapers and downtown apartment towers offering the proverbial live-work-play lifestyle were the gem in real estate. Now, though, they are taking a back seat.

Residents increasingly are opting for secondary and tertiary markets over metropolises with companies and investors following suit. Smaller areas are boasting more big company relocations and a bigger chunk of commercial real estate deals, according to a Marcus & Millichap report. For example, Apple is working on an office in Austin while Amazon plans to open one in Nashville and Deloitte in Phoenix.

The coronavirus pandemic is clearly playing a role as residents are seeking less densely populated areas where there’s less spread of the virus but that’s not the only factor. Firms are also looking for lower overhead and investors looking for low entry costs, less competition from other buyers, high cap rates and healthy yields already were active in smaller cities in the years prior the outbreak, according to the report.

These trends, though, were already well underway before the pandemic began. Population net migration since 2000 into secondary and tertiary markets was 70% higher than in metros and that escalated to more than 200% higher since 2014.  Investors have taken note as they are scooping up more properties in smaller cities. Last year 60% of commercial real estate transactions over $1 million were in non-primary markets, an increase from 40% in 2000.

Apartment vacancy from 2007 to 2019 went down 240 basis points to 4.3% in secondary and tertiary markets, a bigger drop than the 100 basis point decrease to 3.9% in metros. In turn, the average effective rent went up 51% during the same time period, a steeper increase from the 34% gain in metros.

Office areal estate in small and mid-size cities last year had a roughly 12% vacancy, less than the 14% in gateway cities. Industrial had a 5% vacancy, slightly less than the 5.5% in gateway cities.

In addition, this activity is also benefiting asset classes besides just offices and apartments.

“As more residential and office space fills, other types of local real estate will benefit, from retail shopping centers to industrial facilities and even self-storage buildings,” the report authors wrote.