It Might Be Too Early To Predict The Decline Of Large Cities - May 21, 2021

May 21, 2021

3 min read

The residential real estate market has changed in unprecedented ways over the past year. Recently, Forbes.com published an article discussing how homebuyers have increasingly moved away from large cities toward suburban locations. As stated in the article, “According to a recent National Association of Realtors survey, one-quarter of new home buyers are looking to move to rural or suburban areas.” 

That is a significant change, and reversed the large migration into cities that occurred in the 1990’s and 2000’s. While this trend towards suburbia started a few years back, the COVID crisis significantly accelerated it. 

Restrictions precipitated by the COVID19 crisis certainly pushed many home buyers away from large cities. However, these restrictions were by no means the only reason. The last few years have also witnessed an uptick in urban crime and unrest in many large cities. From the article,

“What they’re not talking about as much—at least publicly—is that distressed urban police departments and city mayors calling to defund law enforcement are also signaling open season for criminals, accelerating the urban flight many cities are experiencing.” 

Statistically-speaking, large cities are still far safer than they were in the 1970’s and 1980’s. However, the public perception – right or wrong – has shifted, and many homebuyers are opting for suburban locales as a safer place to live and raise a family.

If the movement away from large cities were to continue at the current rate, it could signal future financial and social challenges for many large cities. From the article: “Losing high-net-worth taxpayers for good could be catastrophic for the city [New York]. Tax collections there dropped nearly in half in June, which follows a 32 percent decline in May and a 23 percent dip in April.” Without question, permanently losing significant portions of the tax base would create serious infrastructure and service challenges for many large, urban locations. 

However, it may be premature to count out large cities just yet. While large numbers of wealthy and upwardly-mobile homeowners moving out of the city may signal short-term challenges, it is still not clear that this inevitably leads to permanent population decline. Potentially, what looks like a short-term challenge, could ultimately create long-term opportunities.

Prior to the COVID crisis, one of the main challenges facing large cities was housing affordability. With so much wealth concentrated in urban residential real estate, large demographic groups were priced out of the market. In large-city markets such as New York, San Francisco and Chicago, it was extremely difficult to secure residential housing at affordable rates. Groups such as middle and lower-income families and young professionals were often locked out financially. Perhaps the recent migration of upper-income residents from the cities to suburbs will allow individuals to move in who previously could not afford to do so. 

However, wealthy residents migrating to the suburbs is not the only challenge facing large cities. Many experts are calling for a significant decrease in office leasing due to remote working capability. As stated in the article, “Businesses [are] weighing whether they want to continue to pay for expensive downtown real estate with a workforce that can be productive—and often happier—from home. Given the perfect storm of real estate pressures, it’s no wonder many forecasters are predicting a surge to the burbs.” However, it is not currently clear that this will be the case. 

Remote working situations were forced upon companies, which needed to react quickly to adapt. However, it is not clear that these same companies will be open to remote working arrangements once COVID restrictions are lifted. Without doubt, many companies will recognize the continued cost benefit of having a smaller office footprint. However, many still prefer the social and teamwork benefits that come with operating a centralized office location. It may still be a bit too early to predict a significant decrease in large-city office space.

As we have stated, the COVID crisis forced a significant amount of change on the residential real estate market over the past year. Consumer home buying trends that started years ago were accelerated during the crisis. Businesses and the economy are only now beginning to reopen at a large scale. Many experts believe that the consumer trend away from large cities and toward suburban locales will continue. Only time will tell.

Steve Sapourn

Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.