Aerial shot of hotel surrounded by greenery

Why secondary cities
could be a sweet spot

Because of economic factors, smaller cities are drawing in waves of both developers and travelers…

Off the beaten track––this is how nearly half the world defines adventure travel, according to a 2017 Expedia General Travel Study. Now more than ever, travelers’ interests are piqued by the unknown and unseen. As a result, travel to small, off-the-beaten-path towns has grown. However, travelers bring with them big city expectations: even a one-stoplight town needs upscale accommodations.

Boutique hotel projects in smaller markets often defy industry researchers—they are often in locations where there is no existing set of comparable hotels to provide reasonable assumptions for the development project’s viability. This can lead to the owner attempting to finance their project through a variety of creative means.

Because cycles are so dramatic, markets change quickly. Sometimes investment in secondary markets makes a lot of sense, other times less so. Whether or not an individual city represents long-term value is often a complex judgment, making investment in secondary cities a riskier prospect.

One potential complexity is limited liquidity, as secondary markets tend not to be as trading-centric as larger cities. Limited exit strategies can certainly give investors cold feet. Overpaying in San Francisco and New York may not be an investor killer, knowing chances are someone will want to buy it from you. Another is volatility. If you miss the timing on a major city’s cycle, it won’t be too long before you find yourself on the other side of the sine curve. But recovery time in smaller markets can take much longer.

Additionally, there are fewer barriers in adding new supply in many U.S. secondary and tertiary markets. As we move inland from the coastal downtown areas of Manhattan and San Francisco, we start to encounter cities whose growth is not limited by physical boundaries. Without a body of water or a range of mountains, cities like Atlanta; Nashville, Tennessee; and Austin, Texas, are able to sprawl beyond the urban center. Unconstrained supply presents its own concerns, but we see a bright side in the blossoming of periphery neighborhoods that now have a chance to raise their hand as the hidden gem in their respective genre. What’s happening in the Gulch in Nashville or West Midtown Atlanta should be signs of encouragement that any city passionate about what they have to offer can become a permanent resident in travelers’ minds.

But secondary cities still have a chance at coming in first. Prosperous economies need prosperous workers, and smaller cities are drawing waves of people who have migrated from coastal cities in search of a lighter tax burden, job growth, a better chance to buy a home they can afford—an overall lower cost of living.

The migration also is driven by the recent tax overhaul, which, among other provisions, capped the state and local tax deduction to $10,000. This particularly impacts states with high property taxes, such as California, Illinois, Pennsylvania, New Jersey, New York and Texas. Not surprisingly, many of Atlanta and Nashville’s new residents are from New York City. New residents in Phoenix, Dallas and San Diego are largely from Los Angeles, and a lot of Portland, Oregon’s, and Austin’s new residents are from San Francisco.

Places with potential must have a confluence of positive economic factors, including local industry and job creation as well as high quality of life features. Examples include a walkable downtown core, access to higher education and an educated workforce, established infrastructure with access to quality health care, and ideally, public transit.

The same reasons that make a city appealing to developers is what is drawing in a younger and more educated demographic.

Well-appointed luxury comes at less than a premium in many secondary and tertiary markets. Non-gateway cities are optimal entry points to demonstrate high-quality hospitality for the newest generation of travelers that are put off by the high-priced glitz of some already-saturated major cities. From Bristol, Virgina, to Santa Clara, California; Asheville, North Carolina, to Stowe, Vermont, secondary and tertiary cities have enjoyed a renaissance in recent years.

As America’s major cities become unrealistically expensive to enjoy, millennials in particular are headed instead to these creative hubs where rent isn’t astronomical and job growth is on the rise. These towns and cities are on the cusp of prime time, just as high-end travelers are looking for new places to explore. Often, all it takes for a secondary city to make the front page in consumers’ minds is the opening of its first high-end property.

These hotels have the potential to be become an adjunct visitor’s bureau or living room for their respective towns, so having a knowledgeable staff is essential for cultivating local immersion. Something that goes hand in hand with the local experience is the ability to connect with residents of the city you’re visiting. Travelers are becoming more invested in the people and personalities that make up a destination, and hotels can meet that need with thoughtful employees who are passionate about their hometown and are able to share the city’s top secrets—from an under-the-radar restaurant to the best shopping, coffee shops and cocktail bars.

Civic leaders need to reimagine land use, especially at former industrial sites and buildings; build strong public and private partnerships; focus on arts and culture; and act locally, instead of waiting for state and federal help. Cities need the right leadership, from both the public and private sector, who are willing to take the risk of reimagining their cities.