• About That Shift From City To Suburb

    About That Shift From City to Suburb ...

    About That Shift From City to Suburb ...

    “City people make most of the fuss about the charms of country life.”
    — aphorist Mason Cooley

    It may end up being the case that the defining feature of the COVID lockdown recession is density, both at the micro and macro levels. Public spaces where many people gather for longer periods of time are high risk, like restaurants, gyms, and public transit. And high-density cities seem also to be at higher risk (New York became the pandemic’s global epicenter). Imagine being a densely packed micro environment inside of a densely packed macro environment: New York City’s subway ridership is still, over half a year in, down 70% from normal times.

    Economic data are showing a clear divergence in performance along these same lines. Using high-frequency data on consumer spending from Harvard's Opportunity Insights policy research team overlaid with ZIP code data on rural versus urban areas, we create a proxy for spending by population density. What we see is that consumption in rural areas is not only back to normal, but rising to new highs for the year at a relatively hearty 5% gain year-to-date. Urban areas have seen a healthy spending recovery as well, but have yet to regain the ground they lost early in the lockdown. That trend has become even more pronounced in recent weeks.
    There’s also been a gulf forming in job markets, too. While both areas have plateaued since June (something we’ve noted in jobless claims as well), we see that rural job gains have outpaced their urban counterparts, by a widening margin.

    While this data is interesting, it mostly just confirms prior observations about the difficulty operating during a pandemic. A question we and our clients obsess over, and rightfully so, is whether this will be sustained over the next year and beyond. Are we on the verge of an Urban Exodus? A recent Bloomberg CityLab piece analyzed migration trends so far, largely finding this talking point overblown:

    So far, there is little support for the dramatic claims that people are fleeing cities writ large. In fact, available data indicates that overall, fewer people moved at all since the beginning of stay-at-home orders and through June — even with interest in moving on the rise again … A select few cities including New York City and San Francisco do seem to be seeing more out-migration than most. But guess where many of those people are going? Other very large metropolitan areas, like Seattle and Los Angeles.

    What does the CoStar data say?

    The chart below will be familiar to viewers of the multifamily webinars by our very own vice president of market analytics John Affleck. As of earlier this month, there was a wide gap in performance between asking rents on one-bedroom units in central business districts (or CBDs, which tend to be the most densely populated areas of a metropolitan area) and the suburbs. While suburban asking rents are down only 1.4% from the 2019 pace of growth, CBD rents are down over 7%.

    A quick check in CoStar’s Custom Analytic Search function shows that this trend has continued throughout September. But differences in performance based on density aren’t only for stores and cities!

    There also seems to be a shift in demand for apartments based on density as well. In the chart below we see the same CBD/Suburban divergence for larger two-bedroom units, but note how two-bedroom units are handily outperforming one-bedroom units regardless of location.

    The Bloomberg article above mentioned the two metros seen as most at-risk for exodus: New York City and San Francisco. Let’s look at what we’re seeing in those regions.

    Again using Costar’s Custom Analytic Search filters, we can see daily rent trends broken out by commute time. For this exercise, we picked the most central transit areas for each city: Penn Station for New York and Union Square for San Francisco.

    The charts below break out units into commute time buckets from as close as the very walkable 10-20 minutes all the way out to what are surely more suburban commutes of 50-60 minutes.

    New York has seen a staggering divergence in rents by how close the unit is to Midtown Manhattan. While walking distance commutes have seen a nearly 5% decline year-to-date, our suburban commuter rents have seen a 5% increase.

    San Francisco has seen the same stack ranking of rent growth by distance to the city center (with one exception of 30-40 minutes and 40-50 minutes switched, ever so slightly). But the degrees are different, and most notably, declining across the board.

    San Francisco has the distinction of being the priciest multifamily market that we track, though at this rate it is quickly dropping to approach New York.
    Multifamily daily asking rents have proven to be a useful, high-frequency indicator during the COVID-related recession. New renter preferences show up quickly, as we have seen above. People seem to want space, both in the form of larger apartments and lower density areas.
    The real test will be whether the office market follow suit. With its longer lease terms and bigger price tags, the office market moves much more like a battleship: when it turns, it turns very slowly. Some early indicators suggest that office demand is holding up better in the suburbs than the CBDs, but that will have to wait for another CoStar Economy at a later date.

    The Week Ahead ...

    It’s Jobs Week! Every macro observer’s favorite data release, nonfarm payrolls are projected to come in just under one million new jobs in September. This will be a further slowdown from previous months, especially as August received a favorable boost from Census hiring. The unemployment rate, after showing an unexpectedly large drop to 8.4% in August, is anticipated to fall slightly to 8.2%.
    Perhaps just as significant, if not as timely, will be Thursday's release of personal income and outlay data for August. Since the CARES Act was passed, the Bureau of Economic Analysis has been breaking out income contributions from the fiscal stimulus programs. What has been clearly a significant boost to the economy has been waning since the second quarter.
    There is little Fedspeak to come this week after a deluge of confusing comments last week, with the lone scheduled speeches to come from New York Fed president John Williams who has two appearances on Tuesday.