It is said that in the modern era, the pace of social and technological change accelerates continually. This phenomenon was never more apparent than last year, when the foundation of nearly everything we previously understood about work, social interaction, housing and technology was shaken to the core. Among the lessons learned is that housing and locational preferences can change overnight.
Before the pandemic, a broad consensus held that the changing nature of work and the economy would contribute to the increased concentration of employment in roughly a dozen large metropolitan areas, and that the population would cluster in the urban precincts of these “gateway” markets. This consensus was undone by the pandemic. Indeed, the primary markets suffered disproportionately, especially in the urban core, while secondary growth markets and suburban areas vaulted to the top of the list of preferred destinations.
Will this last?
Is the demographic shift away from density a lasting phenomenon? The answer remains in dispute, but data suggest the tide of residents that flowed out of the cities began to come back during the winter. The flow of residents back into urban neighborhoods began in December and is gaining momentum as cities reopen.
Lument Research took a deep dive into the data to quantify the trend. Each of over 27,000 Yardi Matrix-surveyed same-store properties stabilized at least 15 months in the nation’s top 47 markets, with singular city centers measured for proximity to downtown centers using latitude and longitude coordinates. Occupancy and rent trends were calculated for 11 radial areas around the central point ranging from 0.25 miles to over 25 miles.
The data confirm that during the first nine months of the pandemic, property performance was inversely correlated to proximity to the city center: the closer a property cohort was to the center, the weaker its occupancy and rent performance. In fact, the relationship was nearly linear on an aggregate basis, with cohort proximity accounting for about 85 percent of average cohort rent and occupancy rate change.
The occupancy tide turned late last year, however, shifting in favor of downtown areas in December and gathering momentum over the winter months. Average occupancy in city outskirts remained significantly higher than core urban areas, but the gap closed, tightening by an average of about 15 basis points (0.15 percent) per month. At this pace, properties located within a 15-mile radius of city centers will return to the pre-pandemic relationship with suburban properties by about mid-2022.
Urban rent trends lagged the occupancy recovery by about three months, however, turning positive only in March, when properties inside a 5-mile radius began to post positive sequential monthly growth for the first time since fall 2019. March and April gains were relatively modest and no stronger than those posted by properties located farther out, which already had begun to record sequential monthly growth in June 2020. Although urban rent trends are likely to gain momentum as economic and social activities recover, these statistics suggest that the road back to pre-pandemic norms will be long.
Similar patterns are evident across metros. Performance metrics in the most densely populated metro areas—New York, San Francisco and San Jose— stabilized during the winter but remain depressed by comparison to pre-pandemic levels, with metro average rents down more than 10 percent from observations one year ago. By the same token, Sun Belt growth markets recently recorded some of the fastest annual rent trends in recent years.
Property level data demonstrate that the appeal of urban life is returning, and that city neighborhood performance will improve over time. But primary market leadership was affected in profound ways last year, and it will take time for the cracks in the leadership model to be repaired. At least for the moment, the notion that a handful of cities will dominate our economic life regardless of relative cost seems shopworn in a more decentralized world in which talent and capital have become more mobile.
Daniel Hogan is Lument’s managing director for research. The views expressed herein are those of the author and do not necessarily reflect the views of Lument or of the author’s colleagues at Lument.