Earlier this week, I was scrolling through Twitter and stumbled into one of those debates that real estate investors love to have: primary markets versus tertiary markets.
The usual camps had formed. One side (the more institutional side) swore they’d never touch anything but gateway cities, like New York, San Francisco, or DC, because population growth is guaranteed. The other side rolled their eyes and said tertiary markets offer way better returns and actual growth opportunities.
Both sides were absolutely convinced their way of investing is right.
But honestly? I think they’re both missing the point.
The Problem with Market Classifications
The whole primary/secondary/tertiary framework has a fundamental flaw: it’s backwards-looking.
These classifications are based almost entirely on what has already happened – usually population growth metrics from years past. And sure, population growth matters…but it’s not the only thing that matters.
Plus, these categories are constantly shifting. Austin and Nashville were considered tertiary markets just a few years ago. Now? Good luck finding anyone who’d call them that with a straight face. Meanwhile, cities like Knoxville that were too small to even classify now get the tertiary label.
There’s no “Market Classification Council” setting these definitions. Either you’re creating your own definition based on whatever metrics you choose (in which case, why bother with the labels?), or you’re outsourcing your thinking to someone else entirely.
Neither option is great for making intelligent investment decisions.
What Actually Matters
Instead of getting hung up on whether a market is secondary or tertiary, I think passive investors should drill down a level and focus on three things that actually drive returns.
1. Demand Drivers
This is the easy one – it's what everyone already looks at. Population growth, job creation, migration patterns, industry concentration. The standard stuff.
But you need to evaluate demand for your specific asset class. An office building and an apartment building in the same city can have completely different demand profiles.
2. Supply Constraints
This is where the typical market classification falls completely short.
You need to understand if there’s enough supply to meet the demand. Ideally, there’s not – and that undersupply needs to be specific to your asset class.
Even better if there are barriers keeping new supply of that asset class limited…like regulatory hurdles, geographical constraints, high capital requirements, or restrictive zoning.
3. Timing of the Cycle
Where are we in the supply-demand cycle for this specific asset class in this specific market?
Think about what happened with apartments. Pre-COVID and immediately post-COVID, many Sunbelt markets were undersupplied and developers rushed in. Now? Those same markets are oversupplied, and investors who bought at the peak are feeling the pain.
Understanding where you are in that cycle matters more than almost anything else for your returns. And it has nothing to do with whether the market is classified as primary, secondary, or tertiary.
Go Deeper Than the Labels
So back to that Twitter debate I mentioned at the start.
When someone tells you they “only invest in tertiary markets because they have the most growth opportunities,” they might be right. But that’s far too generalized to base actual investment decisions on. You’re essentially speculating that a market will become “the next Austin” – and that’s bordering on gambling, not investing.
The same logic applies if you only invest in primary markets because they're “safe.” A gateway city with massive oversupply can absolutely destroy returns, regardless of its Wikipedia classification.
So the next time you’re evaluating a deal and a sponsor pitches you based on market classification and cap rates, push back a little. Ask them about the specific supply-demand dynamics for that asset class. Ask where they think we are in the cycle. Ask what barriers exist to new supply.
For instance, if a sponsor shows you population growth charts for Nashville, that’s fine. But ask them: “How many apartment units are still under construction right now? Where are we in the absorption cycle?” Those answers tell you if that population growth actually creates opportunity or if this deal is late to the party.
Those answers will drive the macro tailwinds (or headwinds) of the deal. The market classification label? That’s just noise.
Don’t outsource your thinking to simple classifications. Go a level deeper. Your returns will thank you.