Tens of millions of Americans wake up, go to work, and rent apartments in New York, Chicago, LA, and other top cities every day. Surely, these must be the best opportunities for those seeking to invest in multifamily real estate.
Investing in real estate isn’t just a matter of knowing how much to invest or which firm you trust. You’ll need to determine which real estate markets align best with your goals and investment strategy.
In this article, we’ll explain what gateway markets are in real estate, including how to recognize them, what makes them a good investment, and how they compare to other markets.
What is a Gateway Market?
A gateway market is a city or metropolitan area that is considered a stable real estate investment because of its large population, strong economic health, and desirability.
In other words, gateway markets aren’t the up-and-coming sectors of the United States, they’re the faithful standbys. They have historically generated reliable ROIs for investors, cover bustling cities with robust economies, and are business and leisure travel hotspots.
As a result, gateway markets are especially attractive to real estate investors seeking an opportunity for stable returns.
How to Identify a Gateway Market
Gateway markets can typically be identified with the following characteristics:
- Population: Gateway markets are usually major metropolitan areas with populations of 5+ million people and high population density. Examples include New York City, Los Angeles, and Chicago.
- Economic factors: Gateway markets have large, diverse job markets with multiple major industries. This may include a high concentration of Fortune 500 companies and a significant presence of international businesses. They are often major financial centers with high GDP per capita
- Infrastructure: Gateway markets will have a major international airport, allowing them to serve as a global hub. They may also have extensive public transportation systems and seaports.
- Real estate market characteristics: Gateway markets are competitive and have high barriers to entry for new development. They will have historically stable property values with strong rental markets and competitive cap rates. There is often a significant institutional investor presence in these markets due to their stability and potential for steady returns.
- Cultural and educational factors: Gateway markets often have prestigious universities and research institutions. They will likely also have acclaimed cultural attractions (museums, theaters, sports teams) and be tourist destinations.
In other words, gateway markets are often thriving economic and cultural hubs. They are competitive to build in and much more expensive than smaller cities or the suburbs of major cities. Are they the best way to invest in multifamily real estate? Read on as we explore that question in depth.
Are Gateway Markets Good Investments?
Ultimately, what makes an investment “good” or “bad” will depend on your investment goals, qualifications, and risk tolerance.
That said, gateway markets can be attractive options for real estate investors seeking an opportunity for stable returns. That’s because gateway markets represent fairly strong sectors of the country that will likely continue to be in high demand. Gateway markets offer significant advantages through:
- Historically lower volatility in property values
- Proven resilience during economic downturns
- Consistent rental demand, regardless of market conditions
However, these benefits come with notable trade-offs.
Because gateway markets are attractive, they are more competitive to buy into. However, they typically generate lower yields, with cap rates often hovering around 3-4% and higher acquisition costs. Gateway markets may also have more limited upside potential compared to other markets, where value-added opportunities await growth-oriented investors.
Due to their popularity, the barriers to entry are substantially higher, requiring significant capital investment, navigation of complex regulations, and competition with sophisticated institutional investors. These markets are also particularly sensitive to broader economic cycles, showing pronounced reactions to global economic shifts, changes in immigration policies, and fluctuations in foreign investment patterns.
Gateway Markets in the United States
Within the United States, the primary gateway markets include:
- New York City
- Los Angeles
- San Francisco
- Chicago
- Boston
- Washington D.C.
Here’s a tabular breakdown with a bit more info:
However, there are additional opportunities in secondary gateway markets (sometimes referred to as "emerging gateway markets"). These include:
- Miami: A unique combination of strong population growth, international appeal, and status as a major financial hub for Latin America.
- Seattle: A hub for major tech companies like Amazon and Microsoft creates strong fundamentals for property value appreciation and rental demand.
- Houston: Houston's increasingly diverse economy, massive Texas Medical Center, and relatively business-friendly regulations make it an attractive market.
- Dallas: The city's robust job market, major corporate relocations, and business-friendly environment have driven consistent population growth and rental demand.
- Atlanta: The economic capital of the Southeast with the world's busiest airport, multiple Fortune 500 headquarters, and strong population growth.
- Denver: A growing tech sector and geographic constraints on new development create strong fundamentals for property appreciation.
Colony Hills Capital has a long track record of investing in a variety of markets, ranging from Connecticut/New Jersey (close to New York City) as well as thriving suburbs in Dallas, Houston, and Atlanta.
Why Secondary Markets Make a Great Investment
As discussed earlier, there are many attractive secondary markets that offer a bit more growth potential while still being relatively stable.
These secondary and tertiary markets, often referred to as "growth markets" or "smile markets" (due to their geographic distribution forming a smile across the southern United States), can offer compelling alternatives to gateway markets.
These markets often provide higher yields while maintaining relative stability; other benefits include:
- Higher cap rates (often 5-7% compared to 3-4% in gateway markets)
- Lower entry costs
- Stronger population growth
- More development opportunities
- Better cash flow potential
- Less competition from institutional investors
The key is these markets combine enough economic diversity and population size to provide stability while still offering meaningful growth potential and higher yields than gateway markets. Colony Hills Capital specializes in Class B through A- real estate (also called value-add, which offers even more opportunities for a return due to targeted enhancements in each property we purchase.
Interested in Real Estate Investing? Download Our Free Guide
Understanding the different real estate markets is just one piece of understanding the potential of a multifamily opportunity. There are many other ways you can evaluate a deal’s potential and build confidence in the decisions you make for your portfolio.
If you’re looking to invest in multifamily real estate but are not sure where to start, we recommend downloading our free multifamily investing guide. We wrote it to show you the ins and outs of investing in multifamily real estate. Fill out the form below to get your free guide. In it, you’ll learn:
- The tax benefits of investing in multifamily real estate.
- Definitions of key terms
- How to choose a firm.
- The best markets to invest in.
And more!
