Private real estate equity investments in secondary markets have consistently outperformed major metropolitan areas over the past decade. While conventional wisdom once favored gateway cities like New York and San Francisco, a significant shift has occurred in investment allocation patterns. Consequently, many institutional investors and fund managers now target cities like Austin, Nashville, and Charlotte for their superior returns.
This performance gap stems from several structural advantages secondary markets possess. Specifically, these locations offer lower entry costs, higher capitalization rates, and less regulatory friction for development projects. Furthermore, many tier-2 cities provide tax incentives that significantly boost investment returns compared to their larger counterparts.
Historically, this shift began following the Global Financial Crisis, when capital began searching for yield beyond traditional urban centers. The resulting transformation has created new opportunities for investors across the risk spectrum, from value-add strategies to opportunistic developments. This article explores why secondary markets have become the preferred destination for private real estate equity, examining both the compelling returns and the unique risks these investments present.
Historical Shift from Core to Secondary Markets
The allocation of private real estate equity underwent a dramatic transformation in the aftermath of the 2008 financial collapse. Initially centered in coastal gateway markets, investment capital gradually flowed toward emerging secondary cities, reshaping the real estate landscape throughout the 2010s and beyond.
Post-GFC Capital Reallocation Trends
The decade following the Global Financial Crisis (GFC) witnessed substantial capital restructuring across real estate markets. Corporate debt levels expanded remarkably during this recovery period, growing from approximately $3 trillion in 2008 to nearly $6 trillion by 2018 1. Notably, much of this debt funded mergers and acquisitions rather than new development—approximately 20% of credit extended to the corporate sector ($2 trillion over the decade) financed acquisitions 1.
This period also marked the emergence of continuation vehicles as strategic alternatives to forced sales. Between 2018 and 2020, a wave of continuation fund opportunities materialized as legacy real estate funds reached their termination periods 2. During this phase, investors who had remained in these funds for over a decade sought exits, while general partners (GPs) attempted to secure additional time to execute business plans delayed by the financial crisis 2.
The secondary market expanded dramatically as a result, with total deal flow increasing from approximately $20 billion in 2008 to more than $100 billion by 2021-2022 2. This growth reflected a fundamental shift in how private real estate equity was deployed and recycled. By 2022, secondary market volume had risen to represent 10% of the overall private equity market size, doubling from just 5% a decade earlier 2.
Decline of Gateway City Dominance in 2010s
Throughout this period, traditional gateway cities steadily lost their previously unassailable position in the real estate hierarchy. Cross-border investors, once concentrated in premier urban centers, diversified into emerging markets. In 2014, the five largest cities (London, New York, Paris, Sydney, and Tokyo) accounted for over 30% of non-domestic transactions globally, but by 2023, these same cities received just 18% of global capital 3.
The shift became particularly pronounced between 2020 and 2024, when New York, Los Angeles, Chicago, Washington D.C., Seattle, and San Jose ranked among the biggest losers in apartment investment share compared to the previous decade 3. In contrast, Dallas-Fort Worth emerged as the clear winner, capturing 7.4% of apartment sales—a 1.3 percentage point increase from the 2010s 3. Other beneficiaries included:
- Phoenix (gaining 1.1 percentage points in market share)
- Miami, Atlanta, Charlotte, Nashville, and Orlando (all showing significant growth)
This transformation coincided with a corporate exodus from major urban centers. Many enterprises relocated from gateway cities to places like Dallas, Nashville, and Charlotte, seeking more business-friendly environments, better access to talent pools, and substantially lower real estate costs 3.
Additionally, private real estate equity performance patterns shifted. Research demonstrated that gateway markets typically delivered higher total returns with greater standard deviation than their non-gateway counterparts 3. However, non-gateway markets consistently generated higher income returns, making them increasingly attractive to yield-focused investors 3. Moreover, although gateway markets showed slightly higher downside risk, they typically experienced faster recovery times 3.
Structural Advantages of Secondary Markets
Secondary markets possess fundamental economic advantages that make them increasingly attractive destinations for private real estate equity investment. These structural benefits create sustainable competitive edges that extend beyond temporary market cycles or investor sentiment shifts.
Lower Entry Costs and Higher Cap Rates
The financial mathematics behind secondary market investments reveal compelling advantages. Indeed, average home prices in secondary markets run approximately 30% lower than in primary markets 4, while multifamily assets typically sell at a fraction of the cost compared to gateway cities 5. This affordability creates a significantly lower barrier to entry for investors seeking to deploy capital efficiently.
Beyond mere acquisition costs, the yield profile in secondary markets stands out markedly. Cap rates in these locations consistently outperform primary markets by 50-75 basis points according to CBRE’s research 4. This gap widens even further in certain markets:
- Memphis consistently generates rental yields above 8-10%
- Cleveland averages a 9.2% cap rate
- New York City, by comparison, typically offers 4% or less 6
These elevated yields enable investors to achieve positive cash flow from day one, whereas properties in major metros often struggle to cover expenses through rental income alone 6. Subsequently, many secondary markets can deliver total returns with 90% derived from steady cash flow rather than speculative appreciation 7, creating a fundamentally different risk-return profile.
Reduced Regulatory Barriers for Development
The development landscape in secondary markets offers distinct structural advantages. Essentially, these locations typically benefit from:
First, secondary markets generally possess ample developable land compared to densely populated gateway cities that were largely built out decades ago 8. This abundance translates directly into lower land acquisition costs, making more sites financially viable for new construction.
Second, the approval and entitlement process tends to be streamlined and expeditious in secondary markets. While major metropolitan areas often require several years of entitlement work before construction can begin 9, secondary cities frequently approve projects in a fraction of that time. This regulatory efficiency dramatically reduces holding costs and accelerates time-to-market.
Third, building codes in secondary markets typically avoid the “stringent, voluminous, detailed, complex, cumbersome and arcane” nature found in major cities 9. This simplification reduces compliance costs, permits greater innovation in construction techniques, and encourages participation from a wider range of developers—including those who might otherwise avoid complex regulatory environments.
Favorable Tax Incentives in Tier-2 Cities
State and local governments in secondary markets frequently offer substantial tax advantages to attract real estate investment. These incentives take several forms:
In Illinois, for instance, the Affordable Housing Special Assessment Program provides property tax reductions ranging from 25% to 35% of assessed value for qualifying multifamily developments 10. Similar programs exist throughout secondary markets nationwide, creating significant tax advantages unavailable in many primary cities.
Furthermore, several states offer direct subsidies and simplified approval processes specifically targeting secondary market development 11. These incentives create a compelling value proposition for private real estate equity funds seeking to maximize after-tax returns.
The tax benefits extend to commercial properties as well. Many tier-2 cities implement business-friendly tax structures designed to attract corporate relocations, which subsequently drives demand for office, retail, and industrial space 11. This virtuous cycle of business incentives and real estate demand creates multiple entry points for strategic private equity investment.
Through these combined advantages of lower costs, higher yields, reduced regulatory friction, and favorable tax treatment, secondary markets offer private real estate equity investors structural benefits that fundamentally alter the risk-return calculation compared to gateway cities.
Private Equity Fund Strategies in Secondary Markets
To extract maximum value from secondary market opportunities, private real estate equity funds employ three principal strategies that capitalize on the unique characteristics of these cities. These approaches differ markedly in risk profile, capital structure, and implementation methods.
Value-Add and Opportunistic Investment Models
Private equity real estate strategies in secondary markets exist on a risk-return spectrum, with value-add and opportunistic models representing distinct approaches. Value-add strategies typically employ modest leverage and seek balanced returns through a combination of income and capital gains 12. In contrast, opportunistic investments target development projects and distressed assets in high-growth areas, aiming for significant capital appreciation 13.
Nearly a third (29%) of investors now target opportunistic and distressed assets specifically to take advantage of current market conditions, up from 19% in previous years 14. These investors recognize that in today’s high-interest environment, real estate debt offers attractive alternative investment opportunities 14.
Opportunistic real estate deals typically operate with 50-70% leverage depending on whether they involve land deals or anticipated conversions 15. Such investments require extensive expertise and active management, as they remain particularly susceptible to market volatility and financial uncertainties 13.
Adaptive Reuse and Urban Infill Projects
Beyond traditional acquisitions, private equity funds increasingly focus on transforming existing structures. Adaptive reuse has evolved from rejuvenating single properties into a broader neighborhood approach extending to suburbs and secondary metropolitan areas 16. This strategy addresses the challenge of what to do with hundreds of defunct suburban malls and thousands of empty big-box retail stores surrounded by desirable neighborhoods 16.
Simultaneously, urban infill development makes strategic use of land already connected to existing infrastructure. Unlike outskirts development, infill projects utilize established roads, power lines, and water systems—saving both time and money 1. This approach preserves natural habitats, reduces traffic congestion, and can revitalize struggling neighborhoods 1.
For small developers with limited capital, urban infill presents attractive opportunities without requiring the deep pockets of large development firms 1. The strategy allows creative problem-solving with unusual lots and buildings while contributing meaningfully to community revitalization.
Joint Ventures with Local Developers
Joint ventures have become an essential structure for private equity funds entering secondary markets. These arrangements typically involve a general partner (operator/developer) and one or more limited partners (capital sources) 17. The general partner manages assets and executes business plans while limited partners provide most equity capital 17.
Financial structures vary widely, ranging from 50/50 partnerships to 95/5 arrangements in terms of co-investment and ownership interest 17. Compensation for general partners includes acquisition fees, asset management fees, and development management fees, plus a disproportionate share of profits for successful execution 17.
These partnerships offer numerous advantages, most notably allowing real estate operators with extensive experience to work with capital providers in a mutually beneficial structure 18. Joint ventures enable businesses to participate in investment projects they normally couldn’t join independently, often providing limited liability and liquidation preference to investors 18.
Through these strategic approaches, private real estate equity funds can effectively navigate secondary markets’ unique dynamics while capitalizing on their fundamental advantages.
Case Studies: Outperformance in Key Secondary Cities
Evidence of secondary market outperformance can be found through examining three cities that have delivered exceptional returns for private real estate equity investors. These markets showcase how structural advantages translate into tangible investment results.
Austin: Tech-Driven Office Demand
Despite the rise of remote work, Austin’s office market thrives due to its robust tech ecosystem. Major corporations including Tesla, Apple, Google, and Oracle have established significant operations, cementing Austin’s “Silicon Hills” reputation 3. Apple’s $1 billion campus in North Austin and Tesla’s massive Gigafactory represent cornerstone investments driving surrounding real estate development 19.
Office development remains vigorous with over 18 million square feet of new office space completed since 2019 and another 5 million in the pipeline 3. New projects like 6 X Guadalupe (set to be Austin’s tallest building) transform the downtown skyline, offering state-of-the-art facilities attracting premium tenants 3. Nevertheless, Austin faces challenges with a 6.5% annual increase in vacancy rates—the steepest among major US metros 20.
Nashville: Healthcare and Hospitality Growth
Nashville’s healthcare sector powers its real estate market with remarkable economic impact. The industry contributes nearly $68 billion annually to the local economy while supporting 333,000 jobs 21. With 900+ healthcare companies, including 18 publicly traded firms generating $95 billion in global revenue, Nashville has become a healthcare powerhouse 22.
Simultaneously, Nashville’s hospitality sector ranks #2 nationally for hotel rooms opening in 2025, trailing only New York City 23. Tourism continues its upward trajectory with 15.7 million visitors in 2023, 16.8 million in 2024, and projections of 18.1 million within two years 23.
Charlotte: Financial Services Expansion
Charlotte has established itself as a financial services hub, attracting major institutions like Bank of America and Truist Bank 2. The city draws financial firms “because our talent pool rivals that of global financial cities—but at a much more affordable price” 2. Recent developments underscore this growth trajectory:
Coinbase selected Charlotte for its “Center of Excellence,” leasing 58,600 square feet and planning to hire over 130 employees locally 24. Likewise, SouthState Bank announced its regional headquarters relocation, taking 40,000 square feet in a prime location 24. Commercial real estate continues thriving with SouthPark Mall’s strategic shift toward luxury retail and Savona Mill’s $70 million redevelopment into a mixed-use campus 25.
Risks and Mitigation in Non-Gateway Markets
While secondary markets offer compelling advantages, investors face unique challenges that require careful navigation. Understanding these risks and implementing strategic mitigation measures proves essential for sustainable success in private real estate equity investments beyond gateway cities.
Liquidity Constraints in Exit Strategies
Exit planning remains considerably more challenging in secondary markets compared to major metropolitan areas. “Your exit strategies are limited,” notes industry experts, as these locations typically lack the transaction volume and buyer depth found in gateway cities 26. Even when properties underperform, investors in major cities benefit from consistent buyer interest, whereas secondary market assets may face extended holding periods during downturns.
This liquidity differential becomes particularly apparent in specialized asset classes. Traditional exit routes—including IPOs and corporate acquisitions—often become constrained during periods of economic uncertainty 27. Throughout secondary markets, these constraints intensify as potential buyers typically represent a narrower pool of investors with specific local expertise.
Tenant Concentration and Market Volatility
Secondary markets frequently suffer from tenant concentration risk, where property performance depends heavily on a limited number of occupants. Research confirms that “REITs with a more concentrated tenant base are associated with lower liquidity and lower dividend growth,” directly impacting valuations 28. One study found that a single standard deviation increase in tenant concentration correlates with a 26.9% decrease in price-to-funds from operations ratios 28.
These locations also demonstrate greater economic volatility. “One event—a plant closure, for example—can dramatically change the profile of a smaller city,” highlighting the vulnerability of non-gateway markets to isolated economic shifts 26. This volatility intensifies timing pressure, as market cycles in secondary locations can take significantly longer to recover compared to major cities 26.
Mitigating Risk through Diversified Portfolios
Effective risk management typically begins with strategic diversification across multiple dimensions. Geographic distribution represents a fundamental approach, as “investing in a single location can leave investors vulnerable to localized economic downturns or regulatory changes” 29. This geographical spreading helps insulate portfolios from region-specific challenges.
Additionally, property type diversification creates crucial balance, as different asset classes respond uniquely to economic conditions 30. This approach ensures consistent income through varied rental cycles—when one sector experiences weakness, others may remain stable 30.
Successful investors also implement tenant diversification strategies to address concentration risk. By limiting exposure to any single tenant, investors reduce vulnerability to unexpected departures or financial distress among major occupants 31. These combined approaches enable private real estate equity investors to maintain balanced risk profiles while capturing the superior returns secondary markets can deliver.
Conclusion
The Future of Private Real Estate Equity in Secondary Markets
Private real estate equity investments have undergone a fundamental transformation over the past decade. Secondary markets now stand as the preferred destination for many institutional investors seeking superior returns. These cities offer compelling structural advantages that directly translate to financial performance.
Undoubtedly, the economic fundamentals behind this shift remain strong. Lower acquisition costs coupled with cap rates 50-75 basis points higher than gateway cities create immediate cash flow advantages. Reduced regulatory friction and business-friendly tax environments further amplify these returns. These factors explain why cities like Austin, Nashville, and Charlotte continue to attract significant capital from sophisticated investors.
Though secondary markets present clear opportunities, smart investors recognize the associated risks. Limited exit options, tenant concentration issues, and greater economic volatility demand careful consideration. Successful fund managers address these challenges through geographic diversification, property type variation, and careful tenant selection strategies.
The data paints a clear picture: secondary markets have established themselves as formidable investment destinations rather than merely temporary alternatives to gateway cities. Their performance advantage stems not from market anomalies but from sustainable structural advantages. This pattern appears likely to continue as businesses and residents alike seek locations offering better quality of life combined with economic opportunity.
Private real estate equity investors who understand both the opportunities and challenges of secondary markets position themselves for continued outperformance. The strategic shift toward these locations represents not merely a cyclical trend but a lasting recalibration of the real estate investment landscape. Secondary markets, once overlooked, now stand at the forefront of private real estate equity strategy.
