America’s Top Tier Cities: How Real Estate Investment Seeks Urban Quality in its Choices


This article was written by Hugh F. Kelly, PhD, CRE. He is the author of 24-Hour Cities: Real Investment Performance, Not Just Promises and a current member of the REALTOR® University Board of Regents.

The world stands at an extraordinary point. For the first time in the history of humankind, the majority of people live in urban areas. That’s 3.5 billion of the seven billion population of the planet. Even more exceptional, by 2050 some 70% of a projected population of nine billion will reside in cities and their suburbs. Hence, city dwellers will increase from 3.5 billion to 6.3 billion, an 80% rise in urban population. That’s a huge challenge, but it is also a great opportunity for development and investment around the world.

During the past two centuries, the United States has led the way in using migration and immigration to create great cities. At the beginning of the 20th century, America’s population was still largely rural despite the advances of the industrial revolution in employing workers in plants and factories that centered on the cities of the Northeastern quadrant of the country. Cities such as New York, Boston, Washington, Miami…. and even West Coast centers like Los Angeles and San Francisco…. fell prey to violence and civil disorder in the Sixties, Seventies, and into the Eighties. Some places still struggle: Detroit, St. Louis, Cleveland, Birmingham among them. But evidence has accumulated that we are in a new and favorable era for urban America.

Research has been accumulating that indicates several observable urban characteristics which combine to indicate successful cities. This research began with the investigations that led to the publication of my book, 24-Hour Cities: Real Investment Performance, Not Just Promises (Routledge, 2016). Studies have continued in collaboration with Dr. Emil Malizia of the University of North Carolina/Chapel Hill, who independently pursued the topic of “vibrant cities” from an urban planning perspective. Our studies are examining a taxonomy of American cities, a grouping together of cities with common characteristics that point toward economic and social success, characteristics that have supported superior real estate investment performance over nearly three decades now.

Those attributes include diurnal activity (measured by the number of drugstores in 24/7 operation), population density (more than 9,000 per square mile), low crime (fewer than 5,000 FBI Index Crimes per 100,000 residents), transportation (a minimum 10% of the workforce using public transit), live/work proximity (at least 30% of workers living within one mile of downtown), and high Walk Scores. Cities that rank at the top of four of the six criteria are Tier One cities, and are popularly termed “24-hour cities.” Those that meet three of the criteria are clustered as Tier Two cities, matching a grouping termed “18-hour cities” in the industry survey Emerging Trends in Real Estate.

Studying 42 cities in detail, we find six Tier One cities at present: New York, Chicago, San Francisco, Philadelphia, Boston, and Washington DC. Eight cities qualify as Tier Two: Seattle, Los Angeles, Oakland, Portland OR, Baltimore, Pittsburgh, Minneapolis, Austin, and Miami. Tier One cities have demonstrably produced superior investment returns, as measured by the NCREIF Property Index (NCREIF is the National Council for Real Estate Investment Fiduciaries) for office assets, and this has made such cities magnets of investment capital. Since 1987, Tier One cities have seen their office markets grow from a 16.3% share of total NCREIF investment in 1987 to a 20.1% share, or $101.4 billion as of mid-2016. Tier Two cities have held a fairly steady share of the NCREIF total, at 6.8% in 1987 to 7.2% ($36.5 billion) in 2016. Tier Three (the other 28 cities) have seen their share fall from 13.3% in 1987 to just 6.6% ($33.5 billion) in 2016.

Apartment investment is more evenly distributed as of 2016, but the trends for the three tiers are distinct. The institutional investors comprising NCREIF’s data contributing membership were late in coming to the multifamily sector, but have been making up for lost time in the past two decades. Tier One apartment markets accounted for just 2.0% of the NCREIF portfolio in 1997, but this jumped to 7.4% ($37.2 billion) in 2016. Tier Two multifamily markets represented 2.1% of total in 1997 and 5.5% ($27.9 billion) in 2016. Tier Three apartment assets stood at 7.1% of total in 1997, and were just slightly higher at 7.8% ($39.2 billion) in 2016.

The increasing share of total investment being captured by Tier One and Tier Two markets arguable forms a potential virtuous circle for 24-hour and 18-hour cities. Their status as capital magnets not only provides superior property appreciation, but it encourages continued investment in the assets in the form of CapEx (capital expenditures) to keep the assets competitive and attractive to businesses and to workers. It also provides municipalities with a strong and durable commercial real estate tax base. If such cities wisely reinvest those taxes in high quality public services and amenities, that further attracts high quality workers and the firms that can put those workers to the most productive use.

This is not to say that top tier cities cannot have problems. I would argue that such cities turn problems to advantage. Problem-free cities are not forced to innovate. Innovation comes from problem solving. More is still to be learned. But as the U.S. grows through 2050, so will its cities. And America’s ability to craft ever more attractive live-work-play environments in its cities is one way in which our nation can lead in an increasingly urbanized world.