The Flight to Tier 2: Why Student Housing Investors Are Betting on the Middle

In recent years, a subtle yet powerful shift has been taking place in the U.S. student housing market. While Tier 1 cities like New York, Los Angeles, and Boston have traditionally dominated investor portfolios, the spotlight is now turning toward Tier 2 cities. Often overlooked in the past, these "middle markets" are emerging as attractive investment hubs for purpose-built student accommodation (PBSA). c

In this blog, we dive into the key drivers behind this shift, explore the strategic advantages of Tier 2 markets, and analyze how this trend is shaping the future of student housing in US.

Understanding Tier 2 Cities in the Context of US Student Housing

Tier 2 cities are mid-sized urban areas that house large regional universities. Unlike Tier 1 markets, which are characterized by global connectivity, dense populations, and high real estate values, Tier 2 markets offer a slower pace of life, lower cost of living, and significant room for development. Examples include:

• Chattanooga – Home to the University of Tennessee at Chattanooga
• Eugene – Home to the University of Oregon
• Tallahassee – Home to Florida State University
• Lubbock – Home to Texas Tech University

These cities usually have populations between 100,000 and 500,000 and serve as the educational and economic heart of their regions. Their universities may not carry Ivy League status but are often research-driven institutions with strong regional and national reputations.

1. Attractive Investment Yields

In Tier 1 cities, the high cost of land and construction drives down yields, leading to compressed cap rates. In contrast, Tier 2 markets offer higher potential returns:

• CBRE reports that Tier 2 markets often deliver cap rates between 5.5% and 6.5%, while Tier 1 cities hover around 4%–5%.
• Acquisition and development costs are 20%–40% lower in Tier 2 cities compared to their Tier 1 counterparts.

The result is a more favorable risk-adjusted return profile, making these markets especially appealing to institutional investors seeking long-term gains and risk diversification.

2. Enrollment Growth Is Strong and Stable

Tier 2 universities are not just maintaining enrollment—they’re growing. These universities are:

• Expanding course offerings in high-demand fields like STEM, healthcare, and business.
• Investing in marketing and international outreach to attract out-of-state and global students.

Case in point:

• Florida State University reported record enrollment in 2023, driven by rising in-state and out-of-state demand.
• University of Arkansas has grown by 6% over the last two years, with continued investment in infrastructure and academic programs.

These enrollment trends provide a reliable demand base for student housing, making Tier 2 cities more than just speculative opportunities—they’re growth engines.

3. Less Regulatory Burden and Land Availability

Zoning laws in Tier 1 cities often make student housing projects difficult to get approved, requiring multiple layers of government sign-offs, community reviews, and environmental impact assessments.

In contrast:

• Tier 2 cities tend to be developer-friendly, with clearer zoning codes and faster permit approvals.
• They offer ample land near university campuses for development, allowing for larger and more amenity-rich projects.

This translates into faster timelines, lower legal costs, and fewer delays—key factors in an industry where speed to market can mean the difference between success and stagnation.

4. Rapid Urban Growth and Quality of Life

Secondary cities are not just expanding—they're transforming:

• Knoxville, TN and Boise, ID have seen influxes of remote workers, digital nomads, and young professionals.
• These cities are investing in walkability, transit, entertainment districts, and public spaces.

This shift improves the appeal of Tier 2 university towns not just for students, but for graduates looking to stay post-college. A stronger post-graduation community bolsters demand for year-round rentals and adds stability to the local housing economy.

5. Institutional Capital and Diversification Strategy

Major REITs and private equity firms have begun actively diversifying their student housing portfolios. These firms are:

• Prioritizing geographic diversification to hedge against overexposure in saturated urban markets.
• Seeking value-add opportunities where they can modernize outdated housing stock or build new, tech-enabled assets.

6. Lower Development Risk and Operating Costs

Construction materials, labor, and permitting are significantly more affordable in Tier 2 cities. Developers can build modern housing with premium amenities at a lower price point, which allows them to:

• Offer competitive pricing to students
• Maintain high occupancy and renewal rates
• Achieve faster stabilization post-construction

Furthermore, lower ongoing operating costs—including property taxes and maintenance—support stronger profit margins and allow room for future reinvestment.

7. High Pre-Leasing Rates and Stable Occupancy

Tier 2 markets are seeing pre-leasing rates as high as those in Tier 1 markets:

• Texas Tech University reached over 90% pre-leasing for Fall 2024 by May.
• University of Kentucky has also maintained above-average occupancy levels year-over-year.

These metrics underscore the consistency and predictability of demand, even without the national prestige of an Ivy League campus. When paired with a high-quality PBSA product, these markets can deliver reliable cash flows.

8. Rise of Hybrid and Tech-Enabled Learning

Post-pandemic, hybrid education has gained ground. Yet, students still crave the in-person college experience:

• Co-living amenities, communal lounges, and proximity to campus create community and enhance mental well-being.
• Tech integrations—like app-based security access, smart thermostats, and digital leasing—are becoming standard expectations.

Tier 2 markets are more agile in adopting these upgrades, often rolling out tech-forward communities faster and more affordably than legacy developments in Tier 1 cities.

9. Resilience Amid Market Volatility

The past three years tested the real estate sector, especially in high-priced coastal cities. Rising interest rates, inflation, and construction delays hit projects hard.

However, Tier 2 student housing remained stable:

• Fall 2023 occupancy in these markets averaged over 94%, outperforming many Tier 1 multifamily sectors.
• Demand for education—and by extension, student housing—is counter-cyclical, making it an ideal hedge during economic downturns.

This makes Tier 2 PBSA an attractive option for institutional investors focused on recession-resilient sectors.

10. Future Trends and What to Expect

Looking forward, several trends are poised to strengthen the Tier 2 investment thesis:

• Public-private partnerships (P3s) will become more prevalent, enabling universities and developers to pool resources and streamline projects.
• Emphasis on green building and ESG principles will shape new construction and influence investor decisions.
• A growing number of international students will consider Tier 2 cities as visa restrictions and tuition costs steer them away from top-tier metros.

Additionally, advancements in data analytics will help identify high-potential locations based on enrollment forecasts, affordability indexes, and housing demand gaps.

Final Thoughts

The traditional dominance of Tier 1 cities in the student housing landscape is being seriously challenged. A combination of economic logic, demographic trends, and investment strategy is propelling Tier 2 cities into the spotlight.

These markets offer a winning formula: strong universities, manageable costs, untapped demand, and solid yields. For developers, operators, and investors willing to explore beyond the usual suspects, Tier 2 cities provide not only diversification but also long-term sustainability and growth.

In today’s climate of cautious optimism and data-driven decisions, the flight to the middle is not a temporary pivot. It’s a strategic evolution—and one that’s rewriting the rules of student housing investment in America.