People view the Space Needle from Kerry Park as smoke from wildfires fills the air in Seattle, … [+] Washington, U.S., on Wednesday, Sept. 16, 2020. This has been a terrible year for urban life. Photographer: Chona Kasinger/Bloomberg
© 2020 Bloomberg Finance LP
Everyone in New York is talking about it. Friends and colleagues fled the coop during the height of the pandemic. They went to Connecticut, Hudson River Valley, Cape Cod, Jersey farm lands and south Florida. Will they come back?
The death of urban centers of the Western world, primarily big ones like New York, are becoming somewhat of an urban legend. Will they recover, not to their pre-pandemic economic prowess, but as places where all walks of life want to live. Will they cater only to the young and single, or still be habitable and affordable for families with school-aged children. What about the rich, who always complain about taxes, and now have something else to complain about: civil unrest and crime right outside their doors.
Where are these cities heading?
In its second report on the commercial real estate market, Barclays Capital says that the death of the city is “a myth.”
How Bad Has 2020 Been For Real Estate?
It’s a sellers market. If that’s any indicator…
Property prices have risen across the U.S. during the pandemic and have risen in rural, suburban, and urban markets.
“Despite widely reported speculation about a collapse in demand for urban living — likely spurred by the outsized attention given to New York City and San Francisco — our data suggests that people left urban areas, but at a more modest pace than media reports might suggest,” says lead report author Ryan Preclaw, equity research at Barclays in New York.
Covid-19 has not caused people’s housing preferences to permanently shift away from the amenities of urban living, he wrote in an 82-page report dated September 29.
The biggest of our cities, and their cramped living spaces and costs, are becoming more of a turnoff. But people are not leaving New York, necessarily, for the Berkshires in Massachusetts. They’re often leaving it and going to smaller cities, like Nashville.
People still want easy, walking access to restaurants, bars, and cultural institutions found in cities, and can find that outside of Manhattan.
On the other hand, those who don’t mind commuting, or have more opportunities to work from home, are moving to suburban developments close enough to public transportation.
Barclays sees cities underperforming suburbs, a contrast to many years when home price increases in cities outpaced suburban and rural housing price gains. Real estate prices are likely to rise all over, says Preclaw, but “urban areas are at risk of losing their long stretch of outperformance.”
The Empire State building and the Manhattan skyline are seen behind the tombstones at Calvary … [+] Cemetery, Saturday, April 11, 2020, in the Maspeth neighborhood of the Queens borough of New York. The city was the heart of the global pandemic that month. (AP Photo/Mary Altaffer)
Moreover, working from home trends, and the risks around restrictions of beloved urban amenities like nightlife and — in New York City — theater are turn people off from the more dense cities and give nearby suburbs the edge.
Barclays estimates that this could create an incremental demand bump of up to 500,000 new housing units in the U.S. if just up to 2% of people permanently relocate out of urban areas.
Cities in Crisis
Cities are no place to be during a crisis.
But despite what we have seen from damages due to lockdowns, riots and looting, urban home prices will rise again after the pandemic. New York, San Francisco, Chicago, Seattle…all of these cities are desirable, and come with a certain amount of cache and convenience for those who can afford its amenities.
Also, lower mortgage rates are pushing up housing prices, so younger people who do not have enough saved for a home will be forced where both apartment housing and job markets are the most robust.
The basic argument in the Barclays report is that people left cities during the pandemic, and some of them are not coming back. Most will. The beneficiaries of this will be housing in lower density suburbs, on one hand, and mid-sized, less dense cities, less costly urban centers on the other.
Assuming SARS 2 eventually dies down like the first SARS and its equivalent, MERS, what Barclays expects as fallout is mostly behavioral. “(Official) responses to the virus will likely have long-term effects on the real estate sector,” says Preclaw.
The question for real estate investors and developers is which of these changes are most likely to remain in place once Covid-19 is contained and we return to normal. If that’s not possible, the biggest cities are the ones who will see their value slip away for investors, and in the hearts and minds of those who live, or want to live there.