The American Dream: Then and Now

Ken Riggs

After World War II, millions of Americans fled urban areas for a variety of reasons during the beginning of the baby boomer generation, and public policy often encouraged it. That trend started to reverse by the beginning of the 21st century. Developers began taking over decaying downtown areas and building luxury units. People who rented by necessity (i.e., they couldn’t afford to live anywhere else) started being replaced by renters by choice as a wave of gentrification spread throughout the country. Empty-nest baby boomers now wanted to be where the action was, in a 24-hour environment where they could work, live and play. Millennials followed and created a new dynamic.

With many employees working remotely due to the pandemic, this trend appears to have started to reverse again with a new “urban exodus.” Urban dwellers are leaving cities for suburbs in search of bigger homes with more space. If remote work becomes the new normal, that space will become more valuable even after the virus gets under control.

In many regards, however, the pandemic hasn’t changed patterns as much as it has accelerated them. Many urban residents who were plan¬ning to move to the suburbs in a year or so have decided not to wait because suddenly they were working in their crowded, expensive apartments while having to tend to or even teach their small children at the same time.

Falling demand and additional supply have led to a very competitively priced market in major cities, especially now that we are nearly 10 months into the pandemic and typical yearly leases have started expiring. These competitive market dynamics are directly playing out in lower face rates and more concessions, resulting in significant declines in effective rents for the next 12 months. Apartments prefer to give concessions now, with the hope that these concessions will burn off over the next year.

At the same time, many suburbs are seeing increased demand and rent growth, putting suburban office, retail and apartment landlords in a better position—at least in the short term. Before the pandemic, some cities were pushing to decrease sprawl and pollution by allowing new zoning regulations that would encourage more urban density, such as Minneapolis’ master plan. These plans may fall by the wayside, and less densely populated cities may recover more quickly.

Here we go again

So, here’s the key question: Is this the beginning of a new structural change or merely a cyclical change caused by the pandemic?

Based on historical trends and the evolution of how we work, live and play, the current situation is mostly cyclical in nature; however, every event of this magnitude leaves scars and structural elements behind.

But the rolling out of the COVID-19 vaccine has begun to restore the market’s belief in a post-COVID-19 life. A safe, effective and efficiently distributed vaccine will allay both individual concerns and corporate-level liabilities for returning to dense urban offices.

Certainly, urban demand dynamics have dropped, and it will take several years for favorable market dynamics to recover to a new equilibrium. We should remember that rents and prices for several major coastal markets were at extreme levels or priced for perfection before COVID-19. Some who left the urban centers will stay away, but as time passes and the economy grows, there will be some people (and businesses) to fill those spots, as has happened throughout much of history.

Nonetheless, working from home had become more common even before the pandemic. Post-pandemic, I expect more people to continue working at home. Staying home two days a week might become the norm for many professionals. But this still means that many people will have to return to the office, at least part time. Being close to co-workers is still a good thing. The appeal of visiting around the water cooler will never change, and many workers will welcome that after being holed up for a year or more.

Ken Riggs, CFA, CRE, MAI, FRICS, CCIM, is president of RERC, a SitusAMC company.