Urban vs. Suburban: A Structural Shift?

Recap by Paul Bergeron

The country is seeing considerable improvement in supply and demand fundamentals for apartment homes, which leads to a familiar discussion about present-day urban vs. suburban market demand. Michael Cohen presented these insights and more at the Apartments.com Learning Lounge at NAA Apartmentalize 2021.

Vacancies in suburbs remain tighter, with new suburban product outperforming on lease-ups. This rent growth reflects the effects of the pandemic, with many renters leaving urban centers in 2020 for health reasons and to take advantage of work-from-anywhere or work-from-home conveniences and cost savings. Suburbs generally provide larger units (such as a second bedroom for an office).

Prime urban asking rent growth today on a 28-day trailing average is narrowly leading the pack. Downtown rent resurgence probably is not yet driven by return to work, based on Google’s mobility data and retail visits, though both are increasing, even with the Delta variant in the headlines. Pay attention to mass transit ridership as this is a good coincidental indicator of renewed confidence in urban living.

Central business districts and urban submarkets are still working through supply pipeline. Near-term moderation in prime urban starts is expected. Eventually, the return to offices and higher vaccination rates will benefit urban multifamily.

Keep in mind that with the vaccination population growing by the day, more U.S. workers are making their way back to urban markets as they graduate from the remote-only workforce during the pandemic. With only a 10-month experience, the overall perception is that remote work does not hurt rent performance, but variations will persist.

Looking ahead, it will be interesting to see how companies craft and adjust their hybrid work models. A large percent of companies expects a permanent shift to remote work — perhaps the biggest COVID-19 legacy.

However, the debate about the impact of work from home on productivity is still largely unsettled. It is hard to disentangle any changes in perceived productivity in 2020 between the impact of work from home and the impact of operating in an economic crisis, when the sense of urgency around completing tasks is elevated. It may turn out in the next decade that remote work does not work as well as expected.

There are still reasons that people move to cities besides short work commute times, including the amount of experiential retail, which is appealing to the younger renter cohort. This should be beneficial for urban areas moving forward as college graduates look for housing.

Rents are expected to remain elevated heading into 2022 as fundamentals appear poised to tighten further.

Advisory Services, the consulting arm of the CoStar Group, works with clients on strategy formulation, deal support and investor communications. To learn more, please contact mcohen@costar.com.