First American

REconomy Podcast: What Does the Rush to Suburbia Mean for Real Estate?

In this episode of the REconomy podcast from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi explain the dynamics influencing the second coming of suburbia and the implications for the broader real estate economy.

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“We've noticed in the commercial price indices that office prices in the urban core are not growing as fast as the ones in the suburban core. So, that shift away to suburbia is already happening in the office data. And we expect the same thing for retail. In fact, retail locations, and more broadly, restaurant locations in the urban core are going to see a reduction in demand, but that demand will be shifted to places near where we work, now untethered from the office, at home.” – Mark Fleming, chief economist at First American

Transcript

Odeta: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American. And here with me is Mark Fleming, chief economist at First American. Hey, Mark, you know what I was thinking about today? How it's been more than a year since I've been in the office. And more importantly, since I had lunch at my usual spot by the office.

Mark: Hi, Odeta. I can't imagine it has been actually over a year, right. We've been doing this since March of a year ago. And I am kind of hopeful that we will get back to the office again and actually do something in person, like a podcast episode with you. Yes. I do feel very fortunate to have been able to work remotely from home, not everybody has been able to. But, you know what, I missed the Starbucks coffee and the lunch spot that we would always go and get sandwiches from. I've found other spots right around my house for coffee and beers and lunch. So yeah, it's not too bad.

Odeta: Right? It hasn't been that bad. And, in fact, a lot of people may continue to work from home even after the pandemic ends, which actually brings us to our topic of conversation today, the ability to work from home, and the fact that it's enabled much greater geographic flexibility in residential and commercial real estate demand. But today, we're actually going to focus on commercial real estate. Commercial real estate markets, retail office, and multifamily in particular, are all influenced by our housing location choices, and the pandemic may result in what we're calling the second coming of suburbia. But, first, I'm kind of curious to hear what prompted the first coming of suburbia?

Mark: That's a great question. In order to do this, we don't have to go back to the 1980s, which is my favorite decade, but a lot further back than that. Let's go back to the turn of the 20th century, when you know, you can imagine in your mind's eye, there were a lot more people working in agriculture in rural America than there were working in urban cities. The Industrial Revolution had started in the late 1800s. And think about what it must have been like living in a city around 1900, you were living there, most likely because you worked in some sort of manufacturing capacity. And this is before cars were widely available, so your ability to get to work was either foot or horsepower, which meant you had to live pretty close to where you worked. And so cities at the turn of the 20th century were quite compact, horse- and foot-power based, centered around manufacturing. And you can actually look at old maps of the development of places like Washington, D.C., where I am, and they were very conscious of the fact that those residential neighborhoods, and what we now know are our big urban cities, usually on the East Coast, those things were very dense and were designed for people to be able to largely walk to work because even owning a horse was something that only the wealthier people could afford. Very, very different back then. Very dense and foot- and horse-power based.

Odeta: Okay, so that makes a lot of sense. There's demand for living near your job, especially because of course, you didn't have a car available to you. So, what changed?

Mark: Ah, well, you know, we gave up on horse and foot power is what changed, so the confluence of a number of events, and we like to talk about that it wasn't necessarily the light bulb that changed the world. It was the electrification of New York City that allowed all peoples and people in New York to stay up at night and continue to work or do other things. And in this case, it wasn't necessarily just the invention of the car. But it was the ubiquitous availability of the car, making it affordable for many, many people. And in the 1920s, 30s and 40s that increase in the number of people who could afford to own cars was very dramatic. Add to that the construction of the interstate highway system, so people could get places in those cars. All of a sudden, living near your manufacturing center or your office, if you were working in an office location, wasn’t as necessary. You didn't have to walk anymore, which meant you didn't have to live close by anymore, either. And that's why the suburbs were born.

Odeta: Ah, the suburbanization of America. But, looking at the population data, I still see that there was a sizable share of people living in cities of all sizes, small cities, midsize cities, large cities. And that makes sense, right? Because cities and urban centers specifically have office space and offer amenities that aren't often found in suburbs.

Mark: That's true, and there's a lot of issues around why you make that choice of living in the suburbs or not. I mean, even if you could live and drive to work, maybe you don't want to. I know we've talked a lot around about millennials preferences for housing and how millennials have historically wanted to live in the city. And it's true because there are lots of amenities. And it's nice to be able to walk to the restaurants and the bars and all the things that a city has to offer. And so the allure of a city wasn't completely removed by suburbia, but large shares of the population, making lifestyle choices, usually around family formation and children, created the demand for suburbia. Yet, they still had to make that commute into the city. And then it gets really interesting because we start to see in the latter part of the 20th century, a revitalization of the city relative to the suburbs.

Odeta: You know, I'll speak to that point about millennials wanting to live in the city. I know that when I first moved to D.C., I was looking to move as closely as possible to my office to cut down on my commute time. And I was even willing to have a smaller and older apartment if it meant being closer to work. And I knew there were newer apartments available to me if I was willing to commute just a little bit longer. But, I wasn't willing to make that sacrifice at that point.

Mark: That's right. And it's not just you, wealthier Americans were making the same choice. You know, that commute from suburbia is getting pretty hairy every day. And I could afford to live in the city, probably not in that small apartment that you live in. But, in a nice brand new condo and a refurbished multi-use complex in downtown Washington D.C. with fancy retail on the first floor. That sounds like a good idea. And so we saw over the last 10-15 years, a revitalization of the city largely by drawing in wealthier affluent households trying to avoid the commute. They still had to go to their office, they would walk or bike or maybe drive within the city, but they chose to live in the city to avoid the commute that actually drew retail in particular, back into the city in ways that were very different. Remember, without the suburbs, the mall didn't exist. The suburbs were born, the mall was created, big box stores were created. Now, we move back to the city and some of that retail followed those wealthier urbanites back into the city as well.

Odeta: That makes sense. And so now I have a better understanding of that first coming of suburbia, and then the interest in the cities once again. But what could be driving the second coming of suburbia? We started out this podcast talking about how there's been this shift to the suburbs that's been accelerated by the pandemic. And that's really because the pandemic has shown us that we can keep our jobs and work remotely, which really allows for a lot of geographic flexibility. I mean, even I considered moving out to the burbs for a little while. You know, you don't have a commute, you have more yard space, all of my streaming platforms allow for endless entertainment. I mean, why not?

Mark: I'm still trying to convince you to come to the suburbs, Odeta.

Odeta: I'm not quite there yet. But I thought about it, which is a lot of progress for me. And you know, in 2020, lower density suburbs experienced the highest annual percentage growth in population about 1.3%, while population growth in the most urban counties in the U.S. actually shrank. Now we know that this trend preceded the pandemic but was likely accelerated by this untethering of workers from the office. But, once the pandemic is over, will everything go back to how it was?

Mark: That's right, we were just talking about the idea of the urban core really being the focus for where you work, whether it was manufacturing at the turn of the 20th century, or the office that you would go to in more modern times. Now that we’re much less a manufacturing-based economy. But, in all cases, whether you were living in the urban core or living in the suburbs, you were tethered to that office. And as we know, the pandemic has shown our ability to untether ourselves from that office that we haven't been to in over a year together. And there's actually good research that's now beginning to show that we won't go back to all going into the office five days a week. In fact, they estimate that basically 20% of all workdays will be done via work from home. And that's compared to 5% before the pandemic, so it's not that we're going to be doing working from home 100% of the time, but it is four times more often than before. And that has significant implications. If we're working from home, we're not going into that office as much. We're also not going and getting that coffee or lunch as much and they’re suggesting that the amount of income being spent in the urban core by those workers will drop by somewhere between 5-10% post pandemic.

Odeta: Well, I did start out this episode by reminiscing about eating at my favorite downtown lunch spot. And if I work from home, I don't really have much reason to eat lunch there again. I will, however, frequent my new favorite spot by my apartment, so that spending lost in the urban core won't necessarily disappear, it will just shift to where everyone is working from home. But, my question is, are we starting to see any of the suburban shift appear in the data right now?

Mark: That's absolutely right. Odeta, you can just imagine that cup of coffee not bought in the urban core still got bought today by me at the coffee shop near my house, which prior to the pandemic was quiet as a mouse every weekday between 8:30 and 5. So, the demand has simply shifted. And we do begin to see this in the data on commercial real estate, we've noticed in the commercial price indices that, you know, office prices in the urban core are not growing as fast as the ones in the suburban core. So, that shift away to suburbia is already happening in the office data. And we expect the same thing for retail. In fact, retail locations, and more broadly, restaurant locations in the urban core are going to see a reduction in demand, but that demand will be shifted to places near where we work, now untethered from the office, at home.

Odeta: Right. And this, by the way, in no way means that we believe there will be a death of the city. But, it could mean that there are new opportunities for commercial and residential real estate in the suburbs. After all, all of the people working from home will begin to demand amenities and will begin to demand their morning coffee in their suburbs. And so, the takeaway of this episode is that the pandemic accelerated our untethering from the office, in addition to increasing technological advancements, allowing us to work and play outside of the urban core. And that may be driving a second coming of suburbia. Thank you for joining us on this episode of the REconomy podcast. Be sure to subscribe on Apple, Google Spotify or your favorite podcast platform. You can also sign up for our blog at blog.firstam.com/economics. And if you can't wait for the next episode, follow us on Twitter @odetakushi for me and @mflemmingecon for Mark. Until next time.