September 6, 2023 0 Comments Real Estate

Vladislav Doronin: Exploring the Explosion in Second-Tier City Demand

Vladislav Doronin, OKO Group founder, chairman and CEO, heads a market-leading real estate development and asset management company that has implemented numerous ambitious projects, developing landmark buildings in New York and other major US cities. This article will look at the rapid increase in interest in second-tier cities, identifying driving factors behind their soaring popularity, from cost savings to population growth.

Second-tier cities offer many of the benefits associated with the urban giants while avoiding the crowds, expense and overall hustle and bustle. The main advantage of second-tier cities lies in the fact that they tend to offer comparable hotel options, shopping facilities, restaurants and access to cultural pursuits as major cities, albeit on a more modest scale. In addition, such locations also tend to have a smaller suburban footprint, making them an ideal base for exploring the surrounding countryside.

On the flip side, lack of air links has traditionally been a significant drawback in second-tier cities. As they feature smaller airports, travellers are often forced to fly to the nearest major city and take a connecting flight on to their second-tier destination. In the United States, for example, travelling to destinations such as Milwaukee, Oklahoma City or Nashville can be convoluted by the need to go through a hub such as Denver, Chicago or Atlanta to board a connecting flight. With multi-stop journeys, the chance of weather delays and missed connections increases too.

Nevertheless, a report from the Commercial Real Estate Development Association suggests that the future could be bright for second-tier cities, with smaller metropolitan areas appearing to recover faster than larger destinations. Just like large global cities, second-tier cities suffered the economic ravages of the pandemic. However, experts in the United States report that smaller metropolitan areas appear to be gaining jobs and recovering more quickly in general than the country as a whole.

Over the past decade, second-tier cities have been an attractive option for companies due to their reduced operational costs. In addition for workers and families, second-tier cities present a range of different benefits too, offering a less expensive place to live, work and play. According to the Commercial Real Estate Development Association, this is a trend that seems to be accelerating.

In second-tier cities such as Dallas, Nashville, Austin, Raleigh, Charlotte, Atlanta and Denver, a recent JLL report suggests that there has been population growth of between 10% and 30%, rapidly outpacing the 2010 to 2020 US population growth average of 7.1%.

Surveys in the United States also indicate that citizens are increasingly showing a preference for second-tier cities over major cities. A poll conducted by the residential property website Redfin involving some two million users revealed that 30.3% were looking to move to a different metro area in the last quarter of 2020. This represented a 16% increase over the same quarter in 2019. In the first quarter of 2021, the number of people moving to affordable metros more than doubled compared with the previous year.

The Gensler Research Institute’s City Pulse Survey polled residents of four global cities. The report revealed that two out of three respondents wanted to leave their global city for a smaller, more low-cost city with a lower cost of living and higher quality of life. The City Pulse Survey results suggested that the pandemic was a major driving force behind people’s desires to move away from global cities. In the poll, one in four respondents living in London said they were thinking of leaving. Of those who wanted to move, many agreed that the pandemic had been a factor in their decision – particularly in New York, where 71% of residents agreed that it had influenced their choice.

However, the Gensler Research Institute’s poll suggests that many respondents were already contemplating leaving their global cities even before the arrival of COVID-19. Take for example San Francisco, were 76% of poll participants said they were already thinking of leaving. Generationally, even prior to lockdown, 80% of Gen Xers were already considering moving away.

After the start of the pandemic, some of the fastest-growing cities prior to COVID-19 began to grow at a much slower rate. In the United States, while many cities remained roughly the same, there were some notable differences. By 2021, San Francisco topped the list of America’s top fastest-declining cities, having seen a 6.3% drop in population compared with the previous year.

Meanwhile, in the United Kingdom, second-tier cities that were traditionally eclipsed by the nation’s capital may be on the verge of enjoying their heyday. Under the UK government’s ‘levelling up’ policies, designed to promote investment and job creation, cities such as Glasgow, Cardiff, Belfast, Newcastle, Leeds, Bristol, Sheffield, Liverpool, Nottingham, Birmingham and Manchester are poised to become more competitive.