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SHOW NOTES FOR EPISODE 426: DECLINING DOWNTOWNS AND BOOMING BURBS!
With Covid-19 lockdowns, empty office buildings, remote working environments, and riots in the streets, businesses are bailing out of downtown areas. And millennials are following as well. With all their reasons for moving downtown totally quashed, millenials are finding the suburbs as their new haven with affordable rentals and commute-free employment. In today’s podcast, Bill examines this new real estate phenomenon and the investment opportunities newly emerging.
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When Downtowns Were Booming
It was 2016 when General Electric announced it was moving its global headquarters to a smaller space along the central Boston waterfront, away from the quiet suburbs of Fairfield, Connecticut.
Then McDonald’s in 2018 opened its glitzy, new worldwide headquarters in Chicago’s vibrant Loop neighborhood, moving out of a suburban office park in Oak Brook, Illinois – joining Kraft Heinz, Walgreens and other Fortune 500 businesses in a seismic shift of corporate office space to downtown.
And with each of these moves, there were perks: Millennial talent was more plentiful in these bustling districts such as the Loop in Chicago, where the nightlife and bar scene were also strong. Some companies, including GE, found tax breaks from municipalities when they positioned their offices downtown. And reliable public transit systems could seamlessly transport workers back and forth each week.
But that was before the coronavirus pandemic hit.
For months now, companies across the country have been adjusting to entire workforces working remotely. Many of these offices are sitting empty, if only to be frequented by janitorial staff and a skeleton crew of essential workers. Zoom video calls are replacing what would typically have been meetings in conference rooms filled with colleagues breaking bread. Recently, Jack Dorsey’s Twitter and Square tech companies both said employees can work from home “forever.” Google and Facebook, meantime, have told employees they can work from home until the end of this year. Many others are expected to follow suit.
What was once a land grab for downtown real estate could pivot to be a rush to the suburbs, where space is plentiful and social distancing is much easier to enforce.
“Is office space going the way of retail in five years? That’s what investors are really trying to understand,” said James Farrar, CEO of real estate investment trust City Office REIT, which owns 66 office buildings in several major cities including Dallas, Denver and Seattle.
“I think you will see more and more tenants leave the city,” he said. “There will probably be more satellite offices, where people don’t have to be downtown. There will be more part-time working from home.”
And millennials, which are the generation born between 1981 and 1996, might end up driving this trend — again.
Twenty-seven percent of adults in the U.S. are considering moving homes because of the Covid-19 crisis, according to a survey by the International Council of Shopping Centers, which surveyed 1,004 people over a 3-day period from May 22 to May 24. But an even greater 43% of millennials, within that group, are considering a move, the survey found. Many are looking to the suburbs and rural towns, it said.
Meantime, new recommendations from the Centers for Disease Control and Prevention on safe ways for employers to reopen their offices say, among a number of measures: Workers should commute alone (no subways); desks should be positioned 6 feet apart; communal coffee pots and snack machines should be replaced with single-serve options; and windows should be opened to try to help regulate air flow.
The CDC is also recommending elevator use be limited.
That particular guideline does not bode well for towering office buildings such as those found at Related Cos.′ Hudson Yards development in Manhattan, which is still not fully leased but has already signed on office tenants including Facebook and Amazon. (Twenty flights of stairs, anyone?)
Still, experts agree that a permanent work-from-home setup is not ideal for many.
“It’s not working from home that people want to do forever,” said James Ritman, executive vice president and managing director at commercial real estate service firm Newmark Knight Frank’s Connecticut office. “I think the big thing is, people who have commuted in the past are saying, ‘I can be a lot more productive if I can work closer to home.’”
Ritman said he has already done two so-called coronavirus office deals in the suburbs of Connecticut. One is with a company that had an office lease expiring in New York City, he said, that had not been contemplating getting a space in Connecticut prior to the Covid-19 crisis. Another is with a business that signed a short-term deal on an office space for workers that live nearby, to see how it pans out, he said.
“Having these satellite offices is starting to make more sense,” Ritman said.
As Ritman gives tours to prospective clients around Connecticut, he said companies are looking for ample parking space, as opposed to being near a train stop, which had been a top perk up until the pandemic. Companies are also looking for office spaces on the ground floor — to avoid having to use an elevator. And having outdoor space is also important, Ritman said.
The downturn appears to have already started. Nine of the 10 largest office markets in the U.S. recorded increases in vacancy rates during the first quarter, which ended April 1, according to commercial real estate services firm CBRE. Downtown vacancy rates increased by 30 basis points, while suburban vacancy rates were up just 10 basis points, it said.
“You’re definitely seeing more tenants coming out of the city looking for suburban space,” said Spencer Levy, chairman of Americas research at CBRE. “But let’s be clear about what they’re looking for. Smaller space … and shorter-term space.”
In Manhattan, office leasing volume dropped 47% during the first quarter, compared with a 10-year quarterly average, according to a separate analysis by real estate firm JLL.
One activist investor is already betting against some of the biggest office owners in New York.
“In the midst of the pandemic, many companies have begun to question the need for physical office space at all, as the necessity of work from home provides a real-time and real-life look into a potential future with fewer workers in offices,” Jonathan Litt said in a memo posted on the website of his hedge fund, Land & Buildings Investment Management, dated May 6.
He estimates New York City office vacancy rates will top 20%, calling out office owner Empire State Realty Trust as bearing “the full brunt of this storm.”
“As firms reduce headcount and cut costs to weather the recession, office real estate will be at the top of the list to shed, and the pandemic concerns will be a convenient scapegoat,” Litt said.
So What’s Happening in the Burbs?
Moreover, it looks like as people are exiting the city, this demand has been increasing in the suburbs. As COVID-19 began to spread in densely populated metro areas back in March, many people fled these areas to social distance themselves in vacation home rentals in rural and suburban areas. However, the pandemic didn’t blow over in just a month or two so, now, many want to move there for good. As a result, the suburban real estate market is experiencing a boom which leads investors to ask: should I invest in suburban rentals?
Suburban Real Estate Statistics
In order to answer this question, we must first look at the real estate data and statistics regarding suburban residential real estate in 2020. A new study from Realtor.com has found that Americans are showing a more profound interest in rural and suburban homes as the US housing market began to recover from pandemic-induced shutdowns in May. According to the real estate listing website, property searches for suburban zip codes grew by 13% in May 2020 compared to the same period last year. This is roughly double the rate of urban areas. Meanwhile, listing views for rural homes were up 16% year-over-year.
Even though it’s not rare for views of suburban real estate listings to outpace views of urban ones, Realtor.com reported that the discrepancy was the second-largest since 2016. In addition, while homes for sale now spend more time on the market overall as it takes longer to close a deal due to the coronavirus pandemic, both rural and suburban housing markets are not experiencing that lag time as much. Due to very strong demand, the time homes spend on the market in the suburbs has not increased as substantially as in urban areas. Average days on market increased 35% in urban areas in May, while it was up 25% in rural areas and 30% in the suburbs.
This presents an opportunity for investors to buy suburban investment properties to rent out. As many people move to suburbs, not all of them will be lucky enough to actually buy a home there. Many of these people are already renters and looking for long-term rental properties.
What’s Attracting Americans to the Suburbs?
The surge in views and the stable number of days on the market are signs that suburban houses are attracting greater demand in the US housing market 2020. But, besides wanting to escape COVID-19 in urban areas, what are the other factors that are driving the demand for suburban real estate? Javier Vivas, the director of economic research at Realtor.com, said in the report:
“This migration to the suburbs is not a new trend, but it has become more pronounced this spring. After several months of shelter-in-place orders, the desire to have more space and the potential for more people to work remotely are likely two of the factors contributing to the popularity of the burbs.”
Remote Work
Vivas says it very clearly: the desire to have more space and more people working remotely are new trends causing the suburban housing market to boom in 2020. After all, where people choose to live has traditionally been tied to where they work. This dynamic spurred extreme home value growth and an affordability crisis in coastal job centers over the past decade. However, with more and more companies shifting to remote work, a vast majority of employed Americans who had the opportunity to work from home want to continue.
Indeed, a new survey conducted by Zillow found that Three quarters (75%) of Americans working from home because of the coronavirus say they want to continue if given the option. In addition, two-thirds (66%) say they would consider moving if given the flexibility to work from home as often as they want. As a result, these trends in the job market are leading economists to predict a boom in suburban real estate and secondary markets post-pandemic. According to the Pew Research Center, over 40% of jobs could be performed remotely, but only 7% of American workers had the benefit of working from home before the COVID-19 pandemic. Now, as more employers see that remote work is a possibility, this gap might narrow once the pandemic is over.
Space Seekers
The next trend causing the demand for suburban rentals to increase is the shift in people’s desire for more space. Zillow predicts that larger homes (particularly those with extra rooms or home offices) will be in high demand in the US housing market 2021. Additionally, the affordability crisis in urban cities may also have a major impact on the suburban real estate surge. Zillow found that those who can work remotely seek out more space – both indoor and outdoor – farther outside city limits, and where they can find larger homes with prices within their budget. Skylar Olsen, Zillow’s senior principal economist, said in the survey:
“Moving away from the central core has traditionally offered affordability at the cost of your time and gas money. Relaxing those costs by working remotely could mean more households choose those larger homes farther out, easing price pressure on urban and inner suburban areas.”
Real estate agents say they’re already seeing the early beginnings of a shift to suburban real estate as buyers and renters are looking to leave the city. According to one agent, buyers who were looking for walkability just a few months ago are now looking for extra land to go along with more square footage. Now that renters are not burdened by a five-day-a-week commute, living in the suburbs is becoming a more viable and affordable option.
Investing in Suburban Real Estate Rentals
While cities like New York and Seattle were the biggest hot spots for the COVID-19 pandemic in the US, these were not the metro areas that appeared most primed for a migration to the suburbs. According to Realtor.com, interest in suburban homes increased the most in the south.
Top 10 Suburban Investment Cities
Here are the top 10 metros seeing the largest gains in suburban real estate demand and where investors should consider buying an investment property in 2020 according to Realtor.com.
1) Columbia, SC
- Median Property Price: $248,823
- Price Per Square Foot: $120
- Monthly Rental Income: $1,264
- Price to Rent Ratio: 16
- Days on Market: 88
2) Little Rock, AR
- Median Property Price: $304,618
- Price Per Square Foot: $127
- Monthly Rental Income: $1,365
- Price to Rent Ratio: 19
- Days on Market: 88
3) Tulsa, OK
- Median Property Price: $417,477
- Price Per Square Foot: $147
- Monthly Rental Income: $1,324
- Price to Rent Ratio: 26
- Days on Market: 60
4) Fort Myers, FL
- Median Property Price: $326,062
- Price Per Square Foot: $168
- Monthly Rental Income: $1,630
- Price to Rent Ratio: 17
- Days on Market: 116
5) Charleston, SC
- Median Property Price: $655,485
- Price Per Square Foot: $314
- Monthly Rental Income: $2,133
- Price to Rent Ratio: 26
- Days on Market: 112
6) Phoenix, AZ
- Median Property Price: 431,544
- Price Per Square Foot: 215
- Monthly Rental Income: 1,838
- Price to Rent Ratio: 20
- Days on Market: 58
7) Virginia Beach, VA
- Median Property Price: $415,452
- Price Per Square Foot: $202
- Monthly Rental Income: $1,627
- Price to Rent Ratio: 21
- Days on Market: 73
8) Knoxville, TX
- Median Property Price: $340,005
- Price Per Square Foot: $149
- Monthly Rental Income: $1,259
- Price to Rent Ratio: 22
- Days on Market: 95
9) New Haven, CT
- Median Property Price: $269,263
- Price Per Square Foot: $173
- Monthly Rental Income: $1,615
- Price to Rent Ratio: 14
- Days on Market: 80
10) Grand Rapids, MI
- Median Property Price: $289,015
- Price Per Square Foot: $157
- Monthly Rental Income: $1,121
- Price to Rent Ratio: 19
- Days on Market: 75
So if you are considering new growth markets to expand your portfolio, you can no longer ignore the suburbs. The burbs are hot and it doesn’t look like it will be slowing down for all kinds of rentals, not just single family – look at multifamily, and even office space. And if you’re counting on millennials returning to the hot downtown life, think again. Safety issues and commonplace telecommunting may change all that.
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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