Is a Mass Exodus Underway?
Prior to the pandemic, out-migration from high-cost states accelerated, driven by a lack of housing affordability, changes to tax laws, and increasingly onerous regulatory and tax environments, among other quality of life issues.
Leading up to the pandemic, states with substantial numbers of households departing included New York, New Jersey, California, and Illinois—all states with significant tax burdens. During the same period, in-migration accelerated in states such as Arizona, Florida, Idaho, Oregon, South Carolina, and Texas, generally states with lower tax profiles.
On average, roughly 10% of the US population moves each year, according to the Census Bureau. This share has slowly decreased over time as the urbanization trend matures. In comparison, from the 1950s to 1970s, when large portions of the population chose to migrate to large cities from rural regions for better job prospects and lifestyles, roughly 20% of the population moved each year.
A large share of the population moves to cities within the same metropolitan area annually. Since 2000, roughly two-thirds of those that moved remained in the same county. While this share will undoubtedly decrease as full 2020 and 2021 data is made available, we expect roughly half of movers will have remained in the same region.
Many of these movers relocated from urban neighborhoods to suburban housing or from smaller condos and single-family homes to larger homes in the suburbs that offered more space for home offices and distance learning.
Since the pandemic began, data available now indicates that demand for rental apartments and single-family homes remains elevated in suburbs and less dense neighborhoods outside of urban cores. In areas of California such as the Inland Empire, Sacramento, and parts of the Central Valley, for example, households moved from higher-cost coastal counties to inland cities offering more bang for the housing buck.
By examining property sectors, it’s apparent that out-migration to lower cost regions is occurring on a larger scale than the pre-2020 period. Prior to the onset of the pandemic, roughly 15% of movers went to a different state. This share increased in the last decade as affordability constraints, particularly within coastal states, weighed on households.
While the out-migration from high-cost states isn’t new, the pandemic accelerated the trend. Many of these households went to low-cost cities, particularly those in the Midwest and Sun Belt regions, but also to cities and towns in the Central Valley of California, rural Pennsylvania, and other regions that typically lost residents during the previous decade.
The net effect of the early stages of the pandemic was a redistribution of some households to less populated regions, a positive outcome for many cities where population decreased over the last few decades. It’s still a mystery whether these cities will retain these new residents, as well as leverage the new workforce to boost future economic activity.
Out-Migration Doesn’t Mean the End for Major Cities
The popularity of some destinations appears to have shifted as we learn to live with COVID-19.
During much of 2020, large numbers of households moved, or in many cases returned to, slow-growth cities such as St. Louis and Milwaukee. A large share of these households either grew up, went to college, or have family in these cities, easing the transition by providing familiarity with locations and family networks.
According to tabulations by the Federal Reserve, nearly one million people moved from high-cost cities, such as New York, Los Angeles, Chicago, Boston, Seattle, San Diego, and Denver, to small and midsized metropolitan areas.
While this trend of departures from areas with a high cost of living was already entrenched prior to the pandemic, the pace of relocation surged as remote working, caregiving, and health concerns, not to mention job losses, drove more households to relocate.
Into 2021, while migration to the smaller metropolitan areas continued, relocations to high-growth cities accelerated.
The traditional migration destinations of Atlanta, Las Vegas, and Phoenix, as well as parts of Texas and Florida, attracted a growing share of incoming households. Many of these households were in their 30s, 40s, and 50s, often established in their careers, and with the ability to purchase single-family homes in these more affordable locations.
The combination of pent-up demand for housing and new entrants to the market drove home prices higher by double-digit percentage rates in the last few quarters.
At the same time, the flow of younger households and individuals to major coastal cities, as well as urban neighborhoods throughout the country, accelerated. Attracted by employment prospects, leisure activities, and urban lifestyle, all very similar to pre-pandemic trends, many young households and college graduates chose to locate in city centers and dense cities.
Though many of these individuals may continue to work from home for some portion of the week, the employment opportunities and lifestyle, not to mention the drop in apartment rents in some cities, is driving a population recovery in many urban neighborhoods.
Why Are Rent Prices so High?
While it’s too early for solid data on the number of migrants into all city centers in 2021, we can observe apartment absorption rates to provide a relative view.
Across the country, landlords quickly leased vacant apartment units in downtown submarkets and dense neighborhoods early in 2021 and into the summer, driving strong rent growth.
If young professionals didn’t want to live in urban cores, as media pundits suggested, these units would remain vacant and apartment rents would freefall. The average rent in downtown submarkets increased by roughly 5% since 2020 and an even greater amount for some prime urban submarkets.
The improvement in urban apartment operating conditions as well as renter profiles highlights the backfilling of apartments vacated early in the pandemic with new, and often younger households.
Households, and in particular younger households, are returning to urban neighborhoods, attracted by opportunities and amenities that existed prior to the pandemic—diverse and dynamic job opportunities, cultural and recreational amenities, restaurants and nightlife, and vibrant streetscapes. More established households, as well as retirees seeking more affordable housing options, are relocating to secondary and tertiary markets.
While these groups differ in size, the in-migration of younger workers can have a positive impact on cities, particularly those with constrained labor forces.
As local economies normalize and expansion resumes, it appears that demographic trends before the pandemic will resurface, leading to strong economic growth across a range of metropolitan areas.
Implications for Real Estate Sectors
As state-to-state migration patterns revert closer to ongoing long-term pre-pandemic trends, some demand drivers and risks from this period will also return to the commercial real estate sector.
Economic volatility as well as inflation pressures may become more apparent in the post-pandemic era even as demand for space and investment opportunities increase.
Prior to the onset of the pandemic, the primary issues in the rental apartment market were lack of supply, declining affordability, and aging of prime renter cohorts. Conditions in states such as California, New York, and Washington amplified these issues. The pandemic exacerbated some of these trends, causing more households to depart high-cost cities for lower-cost markets, including those in Florida and Texas.
Although wage gains in the last year helped some households, a large share of renters lost some of or all their savings during the pandemic. The loss of income, combined with price gains in the single-family home market, will maintain many households as renters for longer periods.
Additionally, while development activity accelerated in recent months, many projects paused during the depths of the pandemic, delaying the delivery of new apartment units. With supply constraints in most metropolitan areas and pent-up demand for housing, renters absorbed vacant apartment units relatively quickly amidst more stable pandemic conditions.
The recovery in absorption and rent growth started in suburban secondary and tertiary markets, but into the summer of 2021 renter demand accelerated in coastal and high-density metropolitan areas as well.
As the pandemic subsides, the long-term issues of decreasing affordability and under-supply of new rental and for-sale homes will resurface, leading to positive conditions for apartment markets, including much of the West Coast.
Impacts to Commercial Real Estate
No one can tell how office employers will handle employees’ desire for greater flexibility, but overall it appears that hybrid solutions will continue for at least the near term.
Though physical occupancy may decrease as some employees work from home and individual desks in the office are more distanced, tenants may keep all or most of the existing office footprint.
Office use will continue to vary by region as well. In some areas, such as the Midwest and Sunbelt, employers will more likely require staff to return to the office on a regular basis, while major coastal markets may grant more flexibility where lengthy commutes and traffic congestion return to pre-pandemic levels.
Some areas already show this variation, with roughly half of workers in the office in parts of Texas, for example, while regions such as the Bay Area and New York see physical occupancy closer to 25%.
With fewer individuals in the office currently, many corporate tenants have to pause space planning. Until organizations decide when and how frequently employees return to the office, leasing demand may seem lackluster. Additionally, the longer length of office leases may also mean it’s financially imprudent to alter space plans in the middle of a lease given current sublease prospects.
Ultimately, the impact on the office sector will take some time to fully manifest and while large blocks of vacant space exist in most office submarkets, leasing demand should improve modestly into the coming year.
The COVID-19 pandemic may have one of the largest impacts on the industrial sector. With consumers and businesses becoming more accustomed to online purchases and delivery services, the shift of products from retail store shelves to fulfillment centers will accelerate.
In the near term, consumers will return to dining out and visiting experiential retail and other services, releasing some of the pent-up demand of the last year; however, over the longer term, purchasing goods and services online will continue to absorb a larger share of traditional retail sales.
This trend will drive continued strong demand for fulfillment centers as well as last-mile distribution product in infill locations. The migration trends will also boost population outside of coastal markets, leading to more evenly distributed demand for warehouse space across much of the country.
The pandemic will undoubtedly leave a lasting impression on lifestyles and methods of doing business for years to come. Even as everyone may need to learn to live with COVID-19, migration patterns will likely revert to pre-pandemic trends where dynamic cities attracted new and often younger households even as more established households relocated to more affordable locations.
This rotation of households allowed for strong growth in the largest coastal cities as well as inland secondary markets, fueling demand for real estate in a range of metropolitan areas.
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