Episode 24: A Vote By Moving Van Year
Joe and Ryan discuss the movement out of urban areas and into secondary markets. How many people actually relocated? The pandemic led to many people undergoing more drastic life changes like career changes, new home, new state, etc. As this migration winds down there are clear trends we're seeing in our immediate geography and throughout the country.
Start transcript:
Joe Muratore:
It was a vote by moving van year, as we've been saying. 5.3% of San Francisco left, 200,000 people left New York city. Rents dropped 24% in San Francisco, 14% in New York and 6% in Chicago
Ryan Swehla:
Sounds like a blood bath.
Speaker 3:
This is Durable Value. Get investing and business insights from industry experts and successful entrepreneurs every week. Like and subscribe now.
Ryan Swehla:
Well, this last year or 18 months has been quite a rollercoaster ride.
Joe Muratore:
Truly.
Ryan Swehla:
We have seen seismic shifts in how we do business, how we live and that's had some pretty big effects on the urban environment.
Joe Muratore:
It was a vote by moving van year, as we've been saying. 5.3% of San Francisco left, 200,000 people left New York City. Rents dropped 24% in San Francisco, 14% in New York and 6% in Chicago.
Ryan Swehla:
Sounds like a blood bath.
Joe Muratore:
And San Francisco, at the bottom, 70% of office space was vacant, not vacant, but just not occupied. It was rented, but not occupied. And currently it's starting to trim past 50%, but it's largely empty.
Ryan Swehla:
And then, especially during the peak of the pandemic, if you visited those urban environments, you saw boarded up businesses, you saw closed retail, closed restaurants. It was a very challenging, challenging year for the urban environment.
Ryan Swehla:
And I think the movement out of the urban environment came from two different groups. There was the, hey I'm taking a break, I'm taking a sabbatical, the offices said, I don't need to be in. And so I'm going to go travel and work remotely, or I'm going to get an Airbnb somewhere and work remotely with no real intention of permanently leaving the city. And then there was this other group that really, this was kind of the straw that broke the camels back, the nail on the coffin, so to speak. They were already questioning whether that quality of life that they had was right for them. And they used that as an opportunity to reflect internally and say, no, I'm ready to make a different choice. And those were the ones that moved out into suburban or secondary markets. And they chose a quality of life and affordability, the ability to have a house, very sticky, kind of a move.
Joe Muratore:
Well in this last week, the Los Angeles Times pointed to a new UC study. I forget which UC it was, but they pointed out that the death of California was not the case. In fact, most people moved within an hour or an hour and a half of the urban centers. They wanted to be near their jobs because they thought they'd be reporting in at least a few days a week.
Ryan Swehla:
Yeah and a New York Times article reported that there was more in-migration within California than there was out-migration out of California. So this is really a story about people shifting where they choose to live. Many of them permanently, but also some of them temporarily. And if you get into the psychology of it, what were we going through last year? We focused on family, we focused on our personal space, we focused on safety security. There was a lot of uncertainty in what was going on. And so it was almost like a internal, and maybe even a defensive posture that most of the world took. And how has that changed?
Joe Muratore:
There's a Financial Times article on men adopting beards. Like all over the place, men grew beards and an anthropologist there pointed out that this is like a sense of distress or going through a permanent sort of change. Men signaled that things were different. I think that they experienced a distress and a retrenching and they... I don't know. But beads flourished.
Ryan Swehla:
Back to caveman days.
Joe Muratore:
Apparently. It probably runs really deep.
Ryan Swehla:
And then what happened as a response or a reaction, because much of life is about that pendulum swing one direction and then back, we saw already in 2021, as things started to get back to some sense of normalcy, people were turning in droves to restaurants, social environments, parks, experiential retail. Anywhere they could go because they were trying to get what? Human connection. Because at the end of the day, humans are social creatures and we can only handle so much lockdown.
Joe Muratore:
Right.
Ryan Swehla:
And so that kind of turns us back to the cities. Where are urban environments going today? One of the...
Joe Muratore:
Before you really... Let's touch base on that idea of meaning making. And like on the one sense, people left to go make meaning. They wanted to take some chips off the table. They wanted to move to the suburbs. They wanted a yard. They were focused on schools. They wanted driveability, livability, affordability. But when they left, they also left opportunity, dense social networks, deep community, live social events, a tight urban environment so that some meaning was being made in the suburbs. But others said, well, now's my chance to make meaning in the cities. And that sense of community drove them there and opportunity.
Ryan Swehla:
And then you add to it, sometimes like in San Francisco a 24% drop in rental rates. All of a sudden...
Joe Muratore:
Affordability. Went back that way.
Ryan Swehla:
Maybe it's a little bit more affordable to be in the city. And so who are those people making that move? Because obviously the ones that made the move out to this, whether it be secondary markets or suburban or whatever the case may be, pretty sticky moves. I mean, they bought a home.
Joe Muratore:
Their kids are in school.
Ryan Swehla:
They had decided that this is the chance for me to have my home, have my space, whatever the case may be. Probably very few of those people are returning to the city.
Joe Muratore:
Well and a Pew Research study pointed out that four out of 10 that live in cities are from there. And about half of the people in more rural and suburban areas are from there. And I think there's a little bit of a rebound too. California has 41 million people and people move to the different parts. But at a time when there was a shift, they rebounded to a place they had familial ties and where they were comfortable. Back to meaning making, that's probably memories they wanted to make for their families and for their kids and the life they wanted to establish.
Ryan Swehla:
Yeah. I mean, even here in Modesto, we have seen people return to their roots a lot of times. People that were from the area, moved out of the area, and all of a sudden that sense of a family closeness, that's what they were striving for. And you know, they made a fairly permanent move back to their roots. But the city, the urban environment, the city calls. Take San Francisco, there is so much opportunity, there is so much culture, so much community. Such a dense environment that people are already being drawn back. We've seen in using realtime data, apartment rents dropped, and they're already starting to rebound. And we're only 12, 18 months out of the pandemic. What does that say? Demand is picking back up.
Joe Muratore:
If you're going to talk about the rebirth of the city, the first question we have to ask is did it die?
Ryan Swehla:
Yeah.
Joe Muratore:
And to argue the data, a different way, only 5% of San Francisco left, that means 95% is still there. Only 1.2% of New York city left 98% still there. 94% of Chicago is still there. So a portion left but a...
Ryan Swehla:
A vast majority...
Joe Muratore:
Most of the city stayed. So the rebirth might be a dramatic language and the death might be dramatic language. In reality, it maybe that there's some pruning, there might be some fresh opportunity.
Ryan Swehla:
Yeah. And take office space for an instance. San Francisco is probably the poster child of questions about where office space is going. And yet we already see some large companies requiring their employees back in the office environment. Some of even the tech companies, because they recognize the importance of that environment. Now San Francisco, probably in the office market, will see the slowest recovery because it's a tech based economy. And a tech based economy is going to be the most inclined to hybrid to work from home type environments. That being said, what does that do. That creates new inventory or new space. And then the drop in housing price creates new inventory or new space for people to come. So you've created a new opportunity for new entrants into the market space.
Joe Muratore:
Yeah. It's not surprising that San Francisco being a tech leader, would lead the way in hybrid work. And in many ways I think San Francisco will be a winner in this because it will create the ability to source talent from all over the world. Still in Silicon valley, still in San Francisco.
Joe Muratore:
I think this is a helpful reshuffling for America in many ways. 5% of San Francisco moved, where did they move? They moved, they moved to the suburbs. Some to other states, but what did they take with them? Talent, network, education. And where did they bring it? They brought it to the East Bay. They brought it to Idaho. They brought it to Texas. They brought those networks and talent and sewed those seeds in those spots. And not only enliven the suburbs, but also created opportunities in the core markets for newer entrants who maybe aren't as talented to come in and be mentored. To learn those skills, to enter those networks, they're willing to endure the barriers to entry, the higher cost of living, the denser place to live in order to experience that mentorship and networking. So I think on the whole, the reshuffling here helps restructure the talent base across the United States.
Ryan Swehla:
Yeah, absolutely. And so, what are some key takeaways or opportunities that we see going forward in the urban environment and the broader United States?
Joe Muratore:
Yeah. I think apartments will be different. I think that with new apartment construction, there'll be much more thought given to an office environment in the apartment. Maybe multi-generational housing within the apartment. Also, an amenity of co-working space or conference room, or some shared environment where you can temporarily leave the apartment space and go do some work and maintain more things. It's like the burden of weight left the office a little bit and moved into the home a little bit. Neither went away, but there was a change there.
Ryan Swehla:
And now it'll probably land somewhere in the middle where the work environment for probably most will go back to being full time in the office. But for some, it will evolve into either full work from home or going in the office a few days a week, working somewhere else. And if you're in a apartment environment, the working somewhere else is a cafe or a coffee shop, or for the apartment owners that are more forward thinking, creating space within the apartment that's an amenity for people to co-work.
Joe Muratore:
Think of our own business. 32 people, but now we have some that work within an hour, an hour and a half away. And we've sort of adjusted to sometimes they'll be here about half the time. But the work product has still been outstanding. I think two years ago we would not have considered that.
Ryan Swehla:
Yeah. And I think another change that we're seeing is entrepreneurship.
Joe Muratore:
Yeah.
Ryan Swehla:
There's been a larger number of new business licenses applied for in the United States than ever recorded. So what happened? People were home. They were thinking, kind of existentially, about where am I going? What am I doing?
Joe Muratore:
Right.
Ryan Swehla:
And now they had time to hatch their plan.
Joe Muratore:
Some people pursued more time with their families during this time, and some people decided their best goal was to start a business. And during their free time they worked on that. So it was a great time to start a consulting business or start something new, especially as new entrance were coming into communities with new talent and networks.
Ryan Swehla:
Maybe we can talk a little bit about winners and losers. So during this time, initially the movement out was opting for quality of life change. So these are people that decided wherever I'm moving, secondary market, suburban environment, whatever, for me, that's a better quality of life choice. That creates space for people, as we're already seeing with rental rates going back up, people reentering into the urban environment. I think one of the more challenging things to talk about is that there are losers in this equation. And if there's a city or a community that is perceived to have a low quality of life, those are the ones that people didn't opt to move to. And arguably people are moving out of, into the urban environment to get that opportunity and that community that they're looking for. So it is a story of quality of life being a driver of decision making and demographic changes.
Joe Muratore:
Well, I think the suburbs were winners and the cities were winners, in that companies based in the city have better access to people living in the suburbs and people in the suburbs have better access to that quality of life plus the network and the connection to the companies in the city. And then some maybe more aggressive in entrance or maybe some that are newer in their careers are able to enter the city and add fresh life, be closer to their companies, seek to grow their careers more aggressively.
Ryan Swehla:
Yeah.
Joe Muratore:
Many people win.
Ryan Swehla:
Yeah, absolutely. And the other thing is you could almost look at it as though, take New York, for instance, the geographic influence of New York expanded. Because now with hybrid work, which again will be a portion of the work segment, but with hybrid work, it took that ring. Instead of, I need to do that commute every single day, okay, I'm going in two days a week, maybe I don't mind a two and a half hour drive if I'm doing it two days a week instead of five days a week. So it also expanded the ring of influence of the urban markets.
Joe Muratore:
Yeah. So who are the losers?
Ryan Swehla:
That's a good question. One, I would say in the office environment, is office environments that don't embrace hybrid work. So I think that works on both ends of the spectrum. The ones that remain rigid about, you report to work every day, and that's our only mode of operation. Certainly. But then on the other extreme, there are businesses and particularly some tech companies that have said, hey, you never need to come in again and you lose something there. In both situations, you lose potential talent. And you also lose in the situation of always work remote, the benefits of the office environment are lost. So those that can navigate the new hybrid environment will be the winners.
Ryan Swehla:
I think on retail, we can talk about retail a little bit. Experiential retail is the winner. They were the loser during COVID, because during lockdown we all wanted maybe, and actually many of us didn't want to be in that dense environment, but it was locked down. Restaurants closed, a lot of that experiential retail closed, but that is the sector that has returned in droves that the biggest constraint right now is labor.
Joe Muratore:
Yeah. I was at an outdoor mall last week in the bay area and there's a amazing large water feature with about an inch of water and kids playing in it, and it was amazing. People are clustered all around it, drinking coffee and experiential retail is back as the community gathering place, the sense of place and self and family and community. And I think the thing we're taking away from this is in death, and death is a strong word, there is rebirth, more of a pruning, but in that pruning there's room for fresh life and to those that are flexible and open to change now is an outstanding time to be in business and to be... those will be the winners. And those who were rigid and inflexible. Those who had low culture workplaces, those that weren't investing in employee health and happiness.
Ryan Swehla:
Yeah.
Joe Muratore:
Those cities that weren't investing in quality of life and opportunity. Those are the losers. And these are themes that have been true for a long time, but they're especially true under the magnifying glass of this last year.
Speaker 3:
Thank you for listening to Durable Value, an investors podcast, where we demystify commercial real estate with safe, sound investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit graceadapartners.com where you'll find more information, investors tools, case studies, and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodic with intro music by Ian Post. Thanks again for listening, and we'll see you next time.