What Are Real Estate Market Tiers?

What Are Real Estate Market Tiers?

Real estate market tiers categorize cities as Tier I, Tier II, or Tier III depending on the stage of development of their real estate markets.

Each real estate tier has defining characteristics:

Understanding Real Estate Market Tiers

In contrast, businesses tend to focus more on the established markets in Tier I cities when the economy is in distress, as these areas don't require the investment and risks associated with undeveloped areas. Though they are expensive, these cities feature the most desirable facilities and social programs. 

U.S. cities often classified as Tier I cities include New York, Los Angeles, Chicago, Boston, San Francisco, and Washington D.C. On the other hand, Tier II cities may consist of Seattle, Baltimore, Pittsburgh, and Austin — although classifications may differ through time and based on certain criteria. Still, real estate prices often vary drastically from tier to tier. For example, Kiplinger estimates a median home value in Pittsburgh of $152,000, compared to $418,000 in New York City and $650,000 in Los Angeles, as of Feb. 2020.

Risks Associated with Different Real Estate Market Tiers

Tier I cities are often in danger of experiencing a housing bubble, which occurs when prices surge due to high demand. However, when prices get too high, no one can afford to pay for real estate. When this happens, people move away, real estate demand decreases, and prices sharply drop. This means that the bubble has "burst."

Tier II and Tier III cities tend to be riskier places to develop real estate and businesses. These risks stem from the fact that the infrastructures in Tier II and Tier III cities are underdeveloped and don't have the resources to support new ventures. It's expensive to develop these infrastructures, and there's always the chance that the development won't succeed, and the real estate market will end up failing.