Rebirth of a City

Why Primary Markets are Primed for Revitalization

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Freedom to Live Where You Want: Vote by Moving Van

2020: A Reactionary Tipping Point

Community & Opportunity: Primary Markets Return to Growth

Primary Markets as a Safe Haven from Surging Residential Real Estate Prices

Multifamily Units: What’s Demand Like in Major Cities?

City Offices are Back in Some Form After a Long Hibernation

Retail is Slowly Returning and It’s More Experiential

Five Predictions for How Major Markets Will Thrive Post-Pandemic

Conclusion

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People are freer than ever to live and work where they please, which makes the answer to ‘Where do I want to be?’ one with an increasing number of possibilities for millions of professionals. The COVID-19 pandemic illuminated the fact that many jobs can be performed remotely—at least some of the time.

That revelation is shaping markets across the nation. It’s also restructuring companies, communities, cities and regions. A more autonomous worker can demand more things—they are in the drivers’ seat on one level. This is the way it was in 2020 and the early part of 2021.

The pendulum swung in a direction that gives people more flexibility in the workplace—and primary markets felt it. Net exits from San Francisco in the last nine months of 2020 increased 649 percent compared to the same period in 2019, with nearly 40,000 net exits, according to the California Policy Lab. Nearly 200,000 people left the five boroughs of New York City in 2020, according to CBRE. That’s more than one out of every 50 people in New York City. Chicago, Illinois’ largest city by far and its economic hub, wasn’t able to stop the state from losing nearly 80,000 residents in 2020, its largest population loss since WWII.

And yet, despite these sobering statistics from some of our nation’s largest city centers, there are signs of hope. Pendulums are made to swing.

To borrow from a famous Mark Twain quote: Reports of the city’s death have been exaggerated. While we have seen short term migration out of many major cities over the past year, their fundamental attributes will ultimately bring people back.

Freedom to Live Where You Want: Vote by Moving Van

In 2020, people sought space, independence and a higher quality of life. With newfound freedom to relocate, many took advantage of flexible work to move away from major cities, often to secondary markets in search of high quality of life.

As a result, primary markets witnessed financial pain and aftershock from the COVID-19 pandemic. As short term population losses, rent vacancies and lower rent prices imply, some workers with the freedom to do so moved to secondary markets or the suburbs because they were no longer tethered to a physical office. We wrote about this in our last two reports: “The Future of Work” and “The Rise of the Outpost Economy.”

The phenomenon of the outpost economy—a more dispersed economy where employment bases are centered less around major cities and are instead increasingly around smaller cities that offer a high quality of life—continues to ring true. We anticipate that to be the case for the foreseeable future as places like Austin, Charlotte, Nashville, Sacramento and other growing secondary markets attract more untethered workers.

At the same time, there is a parallel phenomenon we are just beginning to witness. It will continue to take shape into 2021 and 2022. People are craving more community. Urban centers will continue to thrive as people who have always wanted to move to a big city find that prices are more reasonable, at the least in the short term.

As people have acted on desires to move, have more space, and embrace remote work, we are preparing for a reaction to those decisions. The reaction—specifically an embrace of community, experiences and a re-entering into society, if you will—favors primary markets. This will be a welcomed phenomenon in the country’s largest cities.

Broadly speaking, people look at their world and environment through self and community. In 2020, a growing number of people leaned into their sense of self. It’s a natural thing to do when faced with a global pandemic. It was a time of reflection and a time to move on for some, which quite literally meant moving for a portion of the population.

However, swinging the pendulum toward a sense of self for more than a year makes people crave another essential element of who we are as humans: community.

While we have been fortunate to create new virtual communities through video services like Zoom and social media, humans have an innate desire to be together. We are social by nature, and that force—the desire to form and be in community—is powerful. It is one of the driving factors behind why people choose to live in urban centers, whether in primary or secondary markets.

With rental prices in metropolises like San Francisco and New York down 10 to 20 percent, the time is ripe for growth. Not to mention, prime office and retail real estate is available for serious discounts. Some demand is back, but it is still a tenant’s market.

As prices increase in some secondary markets that witness rapid growth, people from a variety of industries may choose to relocate to urban areas, while adjusting to a different living and housing situation Moreover, empty-nesters or recently retired people who have financial means may choose to live or move to a major market and embrace the urban lifestyle.

Because of that, we are predicting a boom in the short term for primary markets that will impact all types of real estate. In this report, we’ll analyze how it specifically impacts residential and commercial real estate (multifamily, retail and office space). From there, we will share our five predictions for major urban markets over the next year. Hope is present in some places, and it’s on the horizon in others. And in between, savvy investors and professionals are making strong deals and lifestyle decisions informed by a changed economic landscape.

Community & Opportunity: Primary Markets Return to Growth

Primary Markets as a Safe Haven from Surging Residential Real Estate Prices

There’s opportunity for individuals and families desiring a lifestyle change to move into big cities and not face the kinds of inventory shortages or surging prices imminent in a red-hot housing market. Some secondary markets and suburbs are witnessing just that as the average national home price was up 16 percent in February 2021 compared to last year.

While residential real estate hasn’t been affected nearly as much as commercial real estate during COVID-19 in primary markets, there are still deals to be had. Take New York City—prior to the pandemic, there was an excess supply of luxury inventory, with prices softening for several years. Manhattan witnessed a 15 percent drop in sales prices from 2018 to the end of 2019, falling another 5 to 7 percent since the start of the pandemic (still at $1.075 million). Sellers appear to be setting realistic expectations, which creates an opportunity for prospective buyers looking to get in at a good price.

Relative affordability in primary markets may provide an incentive to individuals and families to either move to and/or buy in these cities. People craving the sense of community an urban market provides likely find themselves intrigued by some of the current prices.

If you are a renter, things look really rosy right now. Rent prices in Chicago are down 6 percent compared to last year (around $1,860) while New York is down 14 percent year-over-year (to a little over $3,600). San Francisco has witnessed a substantial drop in rent prices—down a jarring 24 percent to $2,600 as of May 2021, according to Zumper.

Primary markets may witness a surge in new dwellers, with attractive rental rates and opportunities to buy. But the reprise from high prices may be short-lived for renters, as rates have started to rise again in San Francisco. It’s still down more than 20 percent from the pre-pandemic peak, but experts predict a steady increase over the course of the year.

While rent prices are affordable right now, what does the overall market for multifamily look like in primary markets?

Rental demand in the urban core of Chicago decreased in 2020 and metro vacancy rates were several percentage points higher than usual. According to Marcus & Millichap, widespread vaccinations helping workers return to offices along with a slower delivery for new construction will likely improve rental demand in the urban core of the city. That will drive up rent and help stabilize the multifamily market.

New York’s multifamily market is also showing signs of recovery. There are several reasons landlords are hopeful there, according to a recent Ariel Property Advisors’ report. This includes the ongoing pandemic recovery, better rent collections, fewer rental concessions, and lower vacancy rate.

West Coast primary market San Francisco shows promise in the multifamily space too. As major companies in the Bay Area begin to bring back workers to offices in some capacity, experts anticipate a trickle-down effect on sublease, leasing and rental rates. And as noted, with prices at such a low point in San Francisco, renters may flock there to live in a city unlike any other in the U.S. There is a culture, community and climate in the Bay Area unlike anywhere else, which will attract people back—especially with more than a 20 percent drop in rental costs.

Multifamily Units: What’s Demand Like in Major Cities?

City Offices are Back in Some Form After a Long Hibernation

As we predicted in our “Outpost Economy” report, we project that downtown high-rises will decrease in value by 10 to 15 percent over the next few years. But there are signs that companies are planning to return.

For example, prominent hedge fund Citadel announced that it anticipates most of its U.S. employees (mainly based in their Chicago headquarters, with some in Manhattan) to return to the office starting in June. Other companies like Google are returning to the office with remote flexibility for some employees.

There are indeed major signs of activity and life in the office space across industries. According to Globe St, demand for office space is rising back to levels it hasn’t seen since late 2019. In New York City, for example, demand for office space has skyrocketed 140 percent in 2021.

KPMG’s 2021 CEO Outlook Pulse Survey paints a strikingly different picture than a survey conducted just six months ago. Only 17 percent of CEOs plan to downsize their office footprint. When surveyed in August 2020, 69 percent planned to do so.

Office life is returning in some capacity for millions of workers, and primary markets stand to benefit from that given the amount of commercial real estate dedicated to office space there.

As retail slowly reopens in New York City, some neighborhoods and areas are getting back to what feels like near-normal, while Midtown continues to lag behind according to a recent New York Times report.

And rents for retail are still 15 percent lower than what they were pre-pandemic. There is demand, but it is a targeted demand, according to Michael Wang of brokerage Project Queens.

Speaking to the New York Times, Wang noted: “Pre-Covid, if you had a retail store in the main strip you would have 30 offers. Now the demand is much lower, but you still have five people very serious about moving in.”

Chicago is showing steady progress too as retail vacancy rates have declined for three straight quarters and were at 10.7 percent as of Q1 2021 according to CBRE.

However, many retailers were reducing their brick-and-mortar presence before the pandemic with the consistent growth of ecommerce. This leaves an opportunity for fulfillment centers in major markets or experiential retail spots that offer something you can’t get anywhere else (i.e., product demonstrations, exclusive goods or even augmented or virtual reality experiences in the stores). Major markets are in a great spot to entertain innovative retail because they are still hubs with millions of people and a number of travelers every year.

As a hub for technology, San Francisco has been an innovative place to experiment with omnichannel retail experiences to encourage shoppers to continue physically shopping. They use features such as showrooming (meaning customers browse in store and shop online), facial mapping to push specific deals to frequent customers, and nonstandard checkout to elevate customer engagement.

Retail is Slowly Returning and It’s More Experiential

Five Predictions for How Major Markets Will Thrive Post-Pandemic

Apartments 2.0: Developers and Landlords Who Create Workspaces Will Thrive

Many companies will likely continue to offer a hybrid work model where workers can sometimes work from home depending on task or work function. In an urban environment, this may sometimes be difficult, particularly for someone working in a studio or small one bedroom apartment (or multiple roommates sharing a living space).

That is why we anticipate the rise of multifamily dwellings that offer a flexible workspace within the complex. Some already offer this, particularly in high-rise apartments with a lot of amenities, but we expect landlords and developers to adopt this on a larger scale.

People in urban places still want space at times—they need a spot to focus and work away from others or simply in a space that isn’t where they sleep. Apartments that offer this may very well witness lower vacancy rates and charge a premium for that type of space.

Companies That Embrace Intentional Office Work Will Be the Real Winners

A Gallup study surveying more than 15 million employees indicated that those with a “best” work buddy are “seven times as likely to be engaged in their jobs, are better at engaging customers, produce higher quality work, [and] have higher well-being,” compared to those without. While studies have shown that a quarter or more of employees feel more productive doing their jobs from home, the plurality of workers recognize that a high-performing office environment breeds productivity, a professional community, collaboration, and overall long-term happiness.

Culture can happen anywhere, but it starts with people functioning as a cohesive unit. An intentional plan for how to embrace their office space—and create a culture that can be in sync from anywhere—will help companies embrace some of the positive findings about remote work while acknowledging the benefits of in-person creativity, innovation and team building.

Companies that encourage their employees to come into the office will not see the sort of disconnect that’s occurring for some businesses that are fully or predominantly remote. Being physically absent from any locational workplace could hinder long-term productivity and stymie the potential for team building and overall success. Companies who recognize this will be one step ahead of their competition, and it will begin to show as time moves on.

Not to mention, building culture is a core of business growth. Peter Drucker famously said that “Culture eats strategy for breakfast.” That continues to ring true. A company can have the strongest strategic plan, but its efficacy will be held back by team members if they don’t share, or have access to, the right culture. When it comes down to it, the people implementing plans are the ones who make all the difference.

A 2020 Gensler report illustrates that people in high-performing offices, when faced with a choice of whether or not to work in-person, choose the office. However, those in lower-performing offices prefer remote work. That speaks directly to culture and/or the challenges with building and maintaining it.

Companies that create high performance offices, even those that maintain a hybrid model, will come out on top. They will have factored in the benefits of remote work and understand how to produce a seamless experience that puts culture first.

Resurgence of Entrepreneurship

Amid the tragedy and economic slowdown of the pandemic, there was a perhaps surprising uptick in one area. Americans started 4.4 million businesses in 2020, a 24 percent increase from the year before, according to the Peterson Institute for International Economics. It is by far the biggest gain on record.

We think there will be a continued resurgence of entrepreneurship that extends beyond the pandemic for several reasons.

First, people are more flexible in how and where they work. The opportunity to be working on your own may encourage some who have been tethered to an office structure to take a second look at a business opportunity they may have once dreamed of but never brought to fruition. Additionally, people who moved from primary markets to a different place may have a new outlook in a new city. They too may catch the entrepreneurial bug in a vibrant new place.

Many retail and hospitality businesses unfortunately didn’t survive the pandemic. However, this leaves a void to be filled. They will need to be replaced and there are signs this is already happening: Yelp’s 2021 Q1 Economic Average report showed signs of recovery across the local retail business landscape nationwide with more than half a million new businesses opening in the last year.

And a larger pool of people has the opportunity to branch out on their own. A recent National Bureau of Economic Research study shows that Black-owned businesses in above average income neighborhoods sprang up faster than other businesses did during the pandemic. The study cites one reason for the growth of Black-owned businesses is a recent focus to support those businesses, including banks reaching out to support Black entrepreneurs in new ways.

In a broader sense, a larger pool of people than ever before is asking real existential questions: ‘What am I doing’ or ‘where am I going’? In a season of returning to semblance of normalcy, some are deciding to not return to normal at all and start anew. They are embracing more opportunity and forging down their own path. The numbers seem to bear that out when it comes to new businesses started during the pandemic.

Some Cities Will Stagnate

In a post-pandemic world, people are increasingly opting for quality of life, community and opportunity for growth. Cities that score low in those areas will not attract people, whether they are primary or secondary markets. Without showcasing an in-demand lifestyle (i.e., art, food and culture) cities will have a tough time attracting new flexible workers. Cities that don’t emphasize quality of life—or those that don’t show real improvement—could feel the long-term impact of COVID-19 via economic stagnation. People choosing where to live are looking at putting a number of items into the equation: from the cost of housing to the community and culture of the city to opportunity for growth professionally and personally. If a city has higher than average housing costs and a lower quality of life relative to other cities that are viable options for flexible workers, they will choose the latter cities. Both primary market and secondary markets need to make their case to an increasingly untethered workforce. If they don’t, they will find themselves struggling to recover from the impacts of the pandemic.

The People Who Left the City Won’t Return

While we do think primary markets will witness a recovery and rebirth post-pandemic, we want to be clear: Secondary markets are continuing to witness explosive growth. According to Redfin, top destinations include Sacramento, California; Las Vegas; Phoenix; Austin, Texas; and Atlanta. Other markets are witnessing growth and will continue to well after the pandemic subsides. And most of the people who left are not going to come back anytime soon.

Most moves involved a sense of certainty: People bought homes and established roots. Others left primary markets and were already feeling the desire to move even before the pandemic. COVID simply amplified it and they were able to make a move because their job turned remote.

This is not to say there won’t be anyone who doesn’t have second thoughts about leaving, say, San Francisco for Colorado Springs. But the reality is that when someone goes through with a big move, they are unlikely to move back (or make another move in the near term) unless they find affordable housing, good job opportunities, and a greater sense of community and culture elsewhere. Many white-collar workers leaving primary markets will not be expected to return in the near future, and their chances for moving back decrease substantially if they buy a house or start a family in their new hometown.

While most who left won’t return, we still anticipate major cities to witness a rebirth. How so? There are millions of people waiting in the wings to embrace big cities. They are living in places with a lower quality of life and less opportunity. Now, they see a prime opportunity to be part of a major city. The ability to grow and advance in a major market is too big to pass up for many people looking for a foot in the door. While people are leaving markets, we expect the net exit to fall substantially in places like New York as people take advantage of lower rent prices and face time in culture-strong offices in the city.

Post-pandemic life will offer primary markets the opportunity to sell themselves to a new crop of excited professionals and aspiring entrepreneurs who crave the lifestyle of big cities. While some pre-pandemic city dwellers may have left and will never return, there are plenty of others waiting in the wings to live in some of the most iconic cities in the world.

City living will continue to thrive in places that offer a quality of life and employment or connections you can’t get elsewhere. Moreover, secondary markets with a high quality of life that allow people to both embrace self and community will thrive.

For example, people are realizing they don’t have to live in San Francisco to work in tech, and many are voting with their moving van. We see the trend of growth in hot secondary markets in places like California’s Central Valley to continue for the foreseeable future.

Those who take advantage of the rebirth of primary markets and/or the trends in secondary markets with a high quality of life will continue to reap the rewards for years to come.

Margaret Mead, American Cultural Anthropologist

“The city is a center where, any day in any year, there may be a fresh encounter with a new talent, a keen mind or a gifted specialist-this is essential to the life of a country. To play this role in our lives a city must have a soul-a university, a great art or music school, a cathedral or a great mosque or temple, a great laboratory or scientific center, as well as the libraries and museums and galleries that bring past and present together. A city must be a place where groups of women and men are seeking and developing the highest things they know.”

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