|THE POST-COVID URBAN REVIVAL: WHAT’S NEXT FOR BIG CITIES?|
Today, more than four out of five people in the United States live in cities and urban areas. Over the country’s long history of urbanization, cities like New York, San Francisco and Chicago swelled not only in population, but also in their prominence as American cultural icons. That cachet helped these metropolises thrive even when economic conditions were challenging elsewhere, providing landlords and other commercial real estate stakeholders with a level of stability and security smaller cities couldn’t match.
In recent years, though, these storied cities started falling victim to their own success. Unebbing demand for limited residential and commercial space led to skyrocketing costs, and near-constant expansions and enhancements to government services necessitated new fees and higher taxes. At the same time, the emergence of remote working meant that people didn’t have to move to these uber-expensive cities to work for the companies that called them home. New technology, combined with cost of living and quality of life concerns, chipped away at that old preeminence, and businesses and individuals started choosing Atlanta over New York, Denver over Chicago and Austin over San Francisco. A Brookings Institution study found that population growth in the country’s largest urban areas dropped by almost half through the 2010s.
The COVID-19 pandemic amplified some of the disadvantages of living and working in densely populated cities and accelerated that migration. An October 2020 survey by freelancing platform Upwork found that as many as 23 million U.S. workers planned to move due to work from home flexibility, a near-term migration rate four times the usual level. Twenty percent of those planning to move were based in major U.S. cities. In San Francisco alone, 89,000 households have left the city, according to Public Comment in an analysis for USPS, and new office lease activity fell 71% in 2020 compared to the prior year, from 7.7 million to 2.2 million sq ft, according to Cushman & Wakefield. In New York City, January 2021 leasing volume was down 47% year-on-year, according to Colliers. The pandemic also boosted adoption of e-commerce, putting additional pressure on bricks-and-mortar retailers. Recent surveys have found that several years of e-commerce adoption has been compressed into a matter of months as a result of the pandemic.
The impact of this exodus goes beyond just quieter streets and emptier buses. The ensuing loss of tax revenue couldn’t come at a worse time for major cities already struggling with the enormous cost of combating COVID-19. A December 2020 survey of 901 city governments by the National League of Cities found that almost 70% had seen a negative financial impact from the pandemic, with respondents reporting a 21% drop in revenue and a 17% increase in expenditures, on average. And while many individuals and businesses can relocate, landlords and other commercial real estate organizations don’t have that option—their fortunes are inextricably linked to the recovery wherever their properties are located. These commercial real estate stakeholders are facing unprecedented vacancy rates and an uncertain path to recovery as the pandemic retreats.
ConclusionThe actions of tech-industry behemoths reflect a fundamental truth: New York City and the Bay Area will recover as the effects of the pandemic wane and will continue to be dynamic engines of American culture, innovation and finance. Case in point: While New York City experienced a year-on-year decrease in overall real estate market activity over the course of 2020, it was also home to 20 of the biggest lease deals of 2020, totaling 6 million square feet.
“Neither devastating fires when cities were made of wood, nor the cholera of Dickens’s London, nor the urban bombardments of World War II, nor the postwar fears of nuclear holocaust, nor even the shock of 9/11 fundamentally altered the pull to urbanize,” said Alex Krieger, architect and urban designer. “Neither will COVID-19 over the long term.”
In the meantime, landlords are in dire straits and need to shore up their finances to ensure survival. Beyond that, landlords will need to have a fundamental understanding of how their property sector changed due to COVID-19 and offer more flexibility in space usage, lease agreement terms and other areas to attract and retain tenants. Technology can help facilitate the process and drive efficiency.
While there are some steps commercial real estate stakeholders can and should take to make it through the current crisis and be better prepared for the next one, the fortunes of landlords and big cities are inextricably linked. COVID-19 accelerated migratory trends and showed without a doubt that big cities can’t rest on their laurels. Not only are they in competition with other big cities like Dallas and Miami, but with secondary cities like Austin and Charlotte that are getting another look due to the pitfalls of living in a big urban city during a pandemic. All parties can
benefit from getting involved in activities that benefit their shared interests, such as lobbying state and federal governments for aid and collaborating on improvements that will make their city more desirable.
Big cities are in the midst of a prolonged lull in demand from new residents and businesses, which will continue to have a deep and broad impact on everything from rents to government services. How long that downturn lasts will depend on the actions government entities, economic development agencies and even business owners themselves take—or don’t take—in the coming months and years