The gateway vs secondary markets debate is usually framed as a trade: gateways give up yield in exchange for liquidity, secondary markets pay more yield because they are harder to exit. That framing is wrong in the way that matters. Liquidity is not a property of a city. It is the number of credible buyers who will bid on one specific asset, at one specific size, in one specific year. A gateway office tower can be illiquid. A secondary-market industrial park can trade in a week. Underwrite the buyer pool, not the market label.
Key Takeaways
Liquidity is a count of active, credible buyers for an asset of a given type and size. A market label is a weak proxy for that count.
MSCI's RCA Capital Liquidity Score weights transaction volume and the number of unique buyers at 25 percent each, which is a direct admission that buyer depth is the measure.
In MSCI research covering 83 global markets from 2011 to 2020, more liquid markets earned higher returns, not lower ones, so the assumed illiquidity premium in thin markets mostly did not show up.
Over the ten years through early 2026, MSCI's RCA CPPI showed non-major US metros up about 50 percent in price versus about 19 percent for the six major metros.
The underwriting question is not "gateway or secondary." It is "who buys this from me in year seven, and how many of them are there?"
What is the difference between gateway and secondary markets?
Gateway markets are the large, globally recognized metros where institutional and cross-border capital concentrates. In US usage, the six majors are Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C. Secondary markets are the next tier of large metros with institutional activity but thinner buyer pools. The labels describe where capital has historically gone, not where it will be when you sell.
The standard view assigns each tier a personality. Gateways are deep, transparent and expensive. Secondary markets are cheaper, faster growing and harder to exit. A gateway market carries a lower cap rate because buyers accept less yield for the assurance that someone will be there at exit. That logic is sound as far as it goes. An earlier piece on this blog covered why the same NOI is priced differently by market tier. The error is assuming the tier itself delivers the exit.
How is real estate market liquidity measured?
Real estate market liquidity is measured by how much capital is active and how many distinct buyers deploy it. MSCI's RCA Capital Liquidity Score combines transaction volume, unique buyer count, cross-border share and institutional share. Two of those six inputs, volume and unique buyers, carry half the weight. Liquidity is a census of bidders, not a reputation.
According to MSCI's published methodology, described by Bryan Reid of MSCI Research in Did Market Liquidity Impact Real Estate Returns? (2021), the score weights:
Component | Weight |
|---|---|
Transaction volume | 25% |
Number of unique buyers | 25% |
Share of global cross-border investment | 20% |
Share of zone market-maker investment | 15% |
Share of institutional investment | 10% |
Share of global market-maker investment | 5% |
Read the table as an operator. None of it measures how famous a city is. Every line asks the same thing in a different way: how many independent pools of money showed up and closed. A metro can score well because a dozen apartment buyers compete for every mid-size deal, while the same metro scores poorly for a $400 million office building because two buyers in the world can write that check.
Does lower liquidity earn a higher return?
Lower liquidity has not reliably earned a higher return. MSCI compared average liquidity scores for 83 markets with total returns from 2011 to 2020 and found a positive correlation of 0.25. Markets with high, stable liquidity averaged 8.6 percent total returns. Markets with low, stable liquidity averaged 6.8 percent. The premium for illiquidity mostly failed to appear.
The same MSCI study is careful about its own limits. The R-squared was 0.06, so liquidity explained little of the variation in returns, and causation may run the other way: markets that perform well attract capital and become liquid. That caveat cuts against both camps. A buyer cannot assume a secondary market pays extra for its thin bid, and cannot assume a gateway's depth guarantees anything either.
Price data from the last decade makes the point sharper. MSCI's RCA CPPI, as reported by GlobeSt in April 2026, showed non-major metros up 50.1 percent over ten years against 19.3 percent for the six majors. Downtown office, the most gateway-heavy asset class, sat about 49 percent below its July 2022 level in the same series. A label that was supposed to buy safety bought the deepest drawdown in the index.
"Liquidity is not where the famous buildings are. It is wherever the most people can write your check on the day you need to sell."
Where does liquidity live?
Liquidity lives at the intersection of property type, check size and buyer type. A $25 million industrial building in a growing secondary metro may draw private funds, regional operators, 1031 buyers and REITs. A $600 million gateway office tower may draw two or three sovereign or institutional bidders. The smaller deal in the smaller city has the deeper pool.
Three dimensions decide the buyer count, and the market tier touches only one of them:
Dimension | Deep buyer pool | Thin buyer pool |
|---|---|---|
Check size | $10 to $75 million, financeable by many lenders | Above $250 million, or below the size institutions will underwrite |
Property type | Sector with many active buyers this cycle, such as industrial or apartments | Sector out of favor, such as commodity office |
Buyer type at exit | Private capital, syndicators, 1031 exchangers, regional funds | One or two core funds or cross-border investors |
This is why the single-employer town is a liquidity risk and not only a demand risk: when the employer wobbles, local buyers vanish at the same moment. It is also why a gateway asset in an unloved sector can be harder to sell than a commodity asset in a secondary metro. Economic-base tests such as the location quotient help here, because a diversified local economy keeps more buyer types interested through a cycle.
Worked example: how do you underwrite exit liquidity?
You underwrite exit liquidity by estimating the realistic buyer pool at your exit size and pricing the cost of a thin bid. The example below uses stated assumptions, not benchmarks. It shows that a deep buyer pool in a secondary market can protect more value at exit than a thin pool in a gateway, even at a higher going-in yield.
Assume two assets, each with $4 million of year-seven NOI at sale.
Input | Gateway office, $70M | Secondary industrial, $60M |
|---|---|---|
Underwritten exit cap rate | 5.75% | 6.75% |
Exit value at underwritten cap | $69.6M | $59.3M |
Plausible active bidders at that size and type | 3 | 12 |
Assumed probability of a failed or re-traded sale | 35% | 10% |
Assumed cap rate widening if the sale re-trades | 75 bps | 25 bps |
Exit value after re-trade | $61.5M | $57.1M |
Expected exit value for the gateway asset: 65 percent times $69.6 million plus 35 percent times $61.5 million, or about $66.8 million. That is $2.8 million below underwriting.
Expected exit value for the secondary asset: 90 percent times $59.3 million plus 10 percent times $57.1 million, or about $59.1 million. That is $0.2 million below underwriting.
Every assumption can be debated, and the point does not depend on them. The thinner pool carries a hidden expected loss at exit that the cap rate alone does not show. A model that prices the market tier but not the bidder count is missing a line.
Frequently Asked Questions
Are gateway markets always more liquid than secondary markets?
No. Gateways have more total capital, but liquidity for a single asset depends on its size, sector and likely buyers. A large gateway office building can have fewer active bidders than a mid-size industrial asset in a secondary metro.
What is the best measure of exit liquidity for one deal?
The best measure is a count of credible buyers who have closed similar deals, at a similar size, in the past 24 months. Transaction volume and unique buyer counts from market data are a starting point, but the deal-level buyer list is what matters.
Do secondary markets pay an illiquidity premium?
Not reliably. MSCI research across 83 markets from 2011 to 2020 found more liquid markets earned slightly higher returns. A higher cap rate in a secondary market reflects many risks, and investors should not assume it fully pays for a thinner exit.
How should a buyer adjust underwriting for a thin buyer pool?
A buyer can model a probability of a re-traded or delayed sale, widen the exit cap rate in that scenario, and weight the outcomes. That turns an unpriced exit risk into a visible number in the pro forma.
Conclusion
The gateway vs secondary markets question gets answered with labels when it should be answered with a census. Liquidity is the number of people who can and will buy a specific asset at a specific size when the seller needs to sell. Sometimes that number is largest in a gateway. Often, for the deal sizes most operators work in, it is larger in a secondary metro with a diversified economy and a sector in favor. The operator who counts bidders instead of trusting the tier sees exit risk before it becomes a re-trade.