Second tier cities, also known as 18-hour cities, are seeing an increase in desirability and popularity – not only for individuals, but also for employers and real estate investors. Historically, 24-hour cities like New York or Los Angeles, have been most popular with these groups, but with many market factors coming into play for those primary cities, people are turning to 18-hour cities instead.
What’s an 18-hour city? The difference is that these cities are not operational 24 hours a day like New York and its counterparts.
Several years ago, the ULI & PwC “Emerging Trends in Real Estate” survey identified Nashville, Charlotte, Tampa, Orlando, Raleigh/Durham and Atlanta as six of the top 18-hour markets. As of the latest survey published in October 2020, this category of medium sized cities still works, although COVID-19 has temporarily slowed both daytime and nighttime activity in many of them. The dynamic economies of these markets continue to make them popular with developers and investors for 2021.
Why are these cities becoming more attractive and what is the allure? There are four factors that are prominent in these second-tier cities.
First is the cost of living. The demand for urban living is stemming from the desirability of individuals looking to have a live, work, play environment in which to reside. 18-hour cities are attracting both employees and employers by having lower costs of living. For example, New York was reported at $72.63 per square foot versus most 18-hour cities being under $30 per square foot. A huge difference.
The second factor is business opportunities. Not only is the cost of living in 24-hour cities high, so is the cost of doing business. Consequently, 18-hour cities are seeing an influx of employers and entrepreneurs as well. The attractiveness of lower costs is combined with a strong workforce, as well. The strong workforce comes from the fact that many millennials are heading into these 18-hour cities. What makes the workforce strong is that they are tech savvy, are just in the beginning stages of their career, and have a creative mindset. These are traits that are very much desired in most companies and startups.
The third factor is investment opportunities. Investors are also getting in on the 18-hour city action, as the same traits that are attracting residents and employers are appealing to them as well. With population rising and most of these cities seeing occupancy rates rise, as well as rents, because of the increasing demand, there is still room for investments to grow their potential yields. In comparison to the “big six” 24-hour cities, the cost of entry for investment is far lower and opportunity for growth is better.
The final factor is “Live, Work, Play.” The true allure of any urban area is the ease of accessibility to not only a place to work, but also a place to enjoy entertainment. The 18-hour cities contain many of the amenities that a 24-hour city would – like an active downtown area with shops, restaurants, and clubs that keep the city alive past the regular workday.
There are many factors creating an allure to these types of cities and the population is only expected to grow in the coming years. For those looking to invest in commercial real estate, these are definitely markets that should be considered and watched.
Asa L. Shield, Jr., CPA
CCP Commercial Real Estate