End of Urbanization?

By on Sep 4, 2020 in Matrix, News

For years, 24-hour and 18-hour cities, and the live-work-play concept, have been mantras in commercial real estate. Suddenly, however, cities are facing a pandemic-driven exodus. Is this a temporary blip or the start of a long-term trend?

COVID-19’s impact has been particularly deep in major metropolitan areas such as New York City, Los Angeles, San Francisco and Chicago, which have seen sharp drops in apartment occupancy rates and rents as the city centers are largely shut down and residents shelter elsewhere.

In Manhattan, for example, office buildings that were closed for months remain mostly empty upon re-opening, as employers avoid putting workers at risk and people avoid public spaces. Midtown streets that are typically teeming with tourists are nearly empty as Broadway and other entertainment venues remain shut. New York City’s story is being played out in city centers across the country. Not only do urban areas temporarily lack the jobs and cultural institutions that drew people there, but the crowds and closeness are suddenly an element to be feared rather than fascinate.

Few if any saw this coming, as growth has coalesced in cities in recent years. The United Nations has forecast that 75 percent of the global population would live in cities by 2050, doubling their size, and the U.S. seemed to be headed in that direction. A recent study of the largest 30 U.S. metros by the George Washington University School of Business and Smart Growth America in conjunction with Yardi Matrix found that walkable neighborhoods encompassing office, housing, retail and entertainment grew faster and produced higher absorption and rent growth over the last decade than counterparts without that combination. During that time, 70 percent of the jobs created were in the top 50 U.S. metros.

Corporations have been following the preferences of young, skilled talent into urban areas, not only in primary markets, but in the downtowns of secondary and tertiary metros. The pandemic put a stop to all that. A chorus of voices has quickly begun to proclaim the end of urbanization and argue that growth will be concentrated in the suburbs.

Urbanization has been declared dead before, such as in the aftermath of the 9/11 terrorist attacks, when people temporarily avoided cities. Eventually, though, crowds came back because urban areas provided what they wanted from life. The lesson is clear: If there is to be a lasting shift in demographic trends that favors the suburbs, it must be driven by a change in lifestyle preferences that drove urban growth in the first place.

Lifestyle choices favored urbanization

The pandemic is a serious enough risk to merit significant change. Millions are working from home, wearing masks and avoiding public places. But can the threat of a disease alone change what people want out of life? Let’s examine some of the factors that drove urbanization:

  • Young people are getting married later and having fewer children, which favors urban lifestyles. Even before COVID-19, many predicted that Millennials reaching their 30s would increasingly have children and move from city apartments to suburban homes. Many have, but the birth rate and fertility rate in the U.S. have been on a steady downward slope for decades, so that cohort represents an increasingly smaller slice of the population. Reasons for this trend are myriad; among other factors, more women than men attend and graduate from college, and many of those women are prioritizing paying off student loans and establishing careers. Children are a big factor in the decision to buy a single-family home.
  • With fewer births, U.S. population growth is increasingly driven by immigrants, who have historically tended to settle in urban areas. Immigration has been curtailed in recent years, but that is subject to change if the administration changes in January.
  • Transportation has helped drive urbanization. America’s car culture is slowly declining, and a growing number of young people do not get driver’s licenses or own cars. The number of 16-year-olds with licenses fell almost in half between 1983 and 2017, while the percentage of licenses of 20- to 24-year-olds fell 12 percentage points to 80 percent. People are increasingly content to use ridesharing services and live near public transportation in urban or inner-ring suburban communities.
  • Another driver is social consciousness and the desire to live in diverse neighborhoods and maintain an environmentally responsible lifestyle. Some studies—such as one produced several years ago by the University of California, Berkeley—have demonstrated that people living in urban areas produce far less greenhouse gases per capita than those in the suburbs. Urban residents have smaller dwellings on average and use more public transportation. A shift to suburbs might reverse efforts to reduce energy consumption and the effects of climate change.
  • The growth of cities is driven every bit as much by the Baby Boomer generation as by Millennials and Gen Z. Retirees and older workers with accumulated wealth, who are much healthier than their parents’ generation at the same age, want access to entertainment, food and culture. Some in this demographic have multiple residences and have left cities temporarily but are likely to return when health is no longer at issue.

These and many other factors are part of a long, gradual change toward an “experiential” lifestyle. Over the short term, the emergency nature of the pandemic has forced people to change the way they live, but it’s not clear whether that will continue over the long term.

Impact on CRE demand

Commercial real estate faces many questions on the other side of the lockdown. One is how many businesses will survive an extended period of inactivity. People have shown an eagerness to go out in public, often at the risk of spreading or contracting COVID-19, so it seems likely they will return to restaurants and shopping when they can. How many commercial tenants—such as hotels, retailers, restaurants and small businesses—will survive long enough to re-occupy space?

Homeownership is another question. Home prices have solidified despite lower sales volume, but job losses make saving money and obtaining credit more difficult. A recent RENTCafé survey found that 44 percent of renters are inclined to delay or postpone homeownership entirely.

Corporations have post-pandemic decisions to make about office space, regarding both where and how much. In many cases, employees are working from home for an extended period without a major loss of productivity, but how long can that last, and what do employees want? It’s one thing for a team of people who have collaborated for years to work remotely; can productivity remain high for an extended period if employees change and don’t have prior experience together?

It is all but certain that offices will become more flexible, but demand for space changes dramatically in a scenario that assumes a totally remote workforce versus one in which employees go to an office two or three times a week. Those working remotely full-time can live anywhere and would require less office space, which impacts demand for multifamily, office, retail and more. Part-time office attendance still requires an employee to remain within commuting distance.

Given more flexibility, what will employees choose to do? Recent trends in office space have emphasized collaborative design and social activities, such as kitchens, gyms and “play” areas, because that attracted workers. Will those same workers—especially young people who are establishing career connections—prefer to continue working remotely after social distancing is no longer mandatory? If so, that would represent an abrupt change.

How metros can succeed

What will determine which metros succeed in the post-pandemic world? Hugh Kelly, a Commercial Property Executive economics columnist and the author of a book on 24-hour cities, suggests the metros that will thrive will be those that take today’s turmoil as an opportunity to address hot-button issues such as class and racial divides, access to health care and education, and the cost of housing. Kelly said that includes solving economic and justice policies, creative ways to adapt and reuse obsolete retail space and improving education. It also involves governing metros as a unit, making urban and suburban areas complementary instead of pitting them against each other.

Because the economic outlook depends so much on the effectiveness of vaccines and treatments for COVID-19 that are not yet available, making predictions beyond the next few months is difficult. If the virus remains a threat, decisions made by corporations and individuals will be based on safety first. Beyond that, lifestyle choices will determine the durability of changes induced by COVID-19.