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:

  • Tier I cities have a developed, established real estate market. These cities tend to be highly developed, with desirable schools, facilities, and businesses. These cities have the most expensive real estate.
  • Tier II cities are in the process of developing their real estate markets. These cities tend to be up-and-coming and many companies have invested in these areas, but they haven't yet reached their peak. Real estate is usually relatively inexpensive here; however, if growth continues, prices will rise.
  • Tier III cities have undeveloped or nonexistent real estate markets. Real estate in these cities tends to be cheap, and there is an opportunity for growth if real estate companies decide to invest in developing the area.

BREAKING DOWN 'Real Estate Market Tiers'

Many businesses see Tier II and Tier III cities as desirable destinations, particularly in times of economic strength. These areas present opportunity for growth and development and allow businesses to expand and provide employment to people in growing cities. Additionally, the cost to operate in prime Tier I real estate is expensive, and companies often see underdeveloped areas as a way to expand and invest in future growth.

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 include 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, real estate website Zillow estimates a median home value in Pittsburgh of $130,400, compared to $586,400 in New York City and $658,500 in Los Angeles, as of January 2018.

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.

RELATED TERMS
  1. Tier 1 Capital

    Tier 1 capital is a term used to describe the capital adequacy ...
  2. Tier 2 Capital

    Tier 2 capital is supplementary capital including items like ...
  3. Common Equity Tier 1 (CET1)

    Common Equity Tier 1 (CET1) is a component of Tier 1 capital ...
  4. Regulation A

    Regulation A is an exemption from the registration requirements ...
  5. NASDAQ Global Select Market Composite

    NASDAQ Global Select Market Composite is a market capitalization-weighted ...
  6. Tiered-Rate Account

    A tiered rate account is a checking or savings account that pays ...
Related Articles
  1. Investing

    Best Ways to Tap Into New York City Real Estate

    New York is known for its real estate investment opportunities. Here are three ways you can invest in the city's real estate market to grow your wealth.
  2. Investing

    Investing in Real Estate Without Buying Property

    Investing in real estate properties can be pricy, but there are options to invest for less.
  3. Investing

    Add Some Real Estate To Your Portfolio

    From investing in REITs to owning your own home, find out how to diversify your portfolio with real estate assets.
  4. Investing

    6 Cities at Highest Risk for a Housing Bubble

    These global cities face a housing bubble, thanks to factors such as demand from foreign investors.
  5. Investing

    The Advantages of Real Estate Versus Stocks

    Real estate investments shouldn't be overlooked as a way to diversify a portfolio and help mitigate risk.
  6. Retirement

    The Tax Implications of Inheriting Assets

    Whether you are passing on assets or inheriting them, it's crucial to be aware of the tax consequences.
  7. Financial Advisor

    Top 4 Global Real Estate Mutual Funds

    Read about four of the best global real estate mutual funds, which invest in the securities of real estate companies or real estate investment trusts (REITs).
  8. Investing

    5 Things to Know Before Investing in Real Estate

    Real estate investment sounds appealing, but consider these facts before you invest.
  9. Investing

    Is Now A Good Time To Invest In Real Estate?

    From carrying costs to investment risk, there's a lot to consider before you invest in real estate.
  10. Investing

    3 Hottest Real Estate Markets in U.S.

    These three cities had the biggest real estate price gains in May.
RELATED FAQS
  1. What Is the Difference between Tier 1 Capital and Tier 2 Capital?

    Tier 1 capital is a bank's core capital, whereas tier 2 capital is a bank's supplementary capital. Read Answer >>
  2. How can I calculate the tier 1 capital ratio?

    Learn about the tier 1 capital ratio, what the ratio indicates about a firm's capital adequacy and how to calculate a firm's ... Read Answer >>
  3. How can I calculate the leverage ratio using tier 1 capital?

    Learn about the tier 1 leverage ratio, how to calculate the tier 1 capital ratio and what this leverage ratio indicates about ... Read Answer >>
  4. What are some of the challenges in real estate development?

    Learn what real estate development is, what developers do, and how real estate development is hindered by both risks and ... Read Answer >>
  5. What is the formula for calculating the capital-to-risk-weighted assets ratio for ...

    Find out more about the capital-to-risk-weighted assets ratio, what the ratio measures, and the formula used to calculate ... Read Answer >>
Trading Center