Not All Real Estate Is Dead

The work-from-home trend has people calling for the end of cities and an anticipated reversal of the rural-to-urban trend of human civilization that really dates back from the beginning of industrialization and transportation innovations in the 18th Century.

Real estate, as an asset class, has survived years-long revolutions and world wars. Global pandemics will have major impacts, both short and long term, and liquidity issues will shake out many industries and landlords. There will be major transformations, but not necessarily what you think.

Cities are not going anyplace. The difference is in who can survive in them, who can afford them, and who wants to be there. One global shift is the primacy of a workplace-orientation life, in which where you live is driven by where you work.

A second shift will be the desirability for safety. This used to mean “good neighborhoods.” Now, the meaning will include health and sanitation. People will insist on healthier living spaces and working spaces. This will mean that people who can afford it will make “the home” a self-contained sanitary environment. They will pay for more space, and they will pay for privacy and safety. The new desirable real estate will be more expensive, yet overall population growth in cities will decline as more space is used by fewer people. The collateral impacts of this shift will be far more significant.

Office space will remain a premium, but again, only for commercial tenants which can afford the luxury and whose owners and managers (read: decisionmakers) insist on walkability or other amenities that fit in with their other living concerns. Yet I believe overall demand will decline (also a function of affordability). As with residential real estate in cities, commercial office rents (measured by space) will decline, but remaining tenants will simply pay more, for more space in order for the insulation of social distancing and perceived safety.

So in general, fewer people will pay more, for more space and safety in their homes and offices.

While working from home becomes the default option for companies needing to retain talent, there should be long-term declines in the demand for office space for use by middle-managers and others whose jobs (or status) do not require their physical presence in higher-rent, central-city offices. We should see more geographically-decentralized office footprints, and workplaces on an overall basis should shift towards the suburbs where, again, the ability to use private cars should be a major driver and amenity insisted upon by workers who can afford to own and operate their vehicles. As entire industries have workers who no longer need to live close to the office, overall demand in certain central city districts will fall, prices and rents will drop, and the population mix among remaining workers and residents should shift towards more of the ownership and executive classes whose members can afford the privacy and insulation discussed earlier. Stores catering to this select clientele may survive, but the volume-dependent businesses accustomed to making lots of sales to a customer base overflowing with residents, workers and tourists will be in serious danger as each segment of their customer base declines significantly. There may be no return of the urban retail of yesterday, as this sector may be beyond rescue and should be allowed to fail. In fact, a lot of previously-high-demand real estate in every sector, from street-level retail to so-called luxury condos, may go vacant for a long, long time until landlords agree to take new types of tenants and for just a fraction of their pre-pandemic rent rates. 

In fact, the urban centers of Western Europe and North America may see “ghost neighborhoods” where entire business districts — and even residential areas — go abandoned.

The business districts which do survive — and which can in fact become highly-sought-after — will trend away from the mass transit serving the “unclean” masses and be overtly friendly towards cars. Self-parking garages will become an essential amenity for office and apartment buildings. This means no one else enters a private car. No more valet parking. You will see surviving office buildings offer parking-friendly environments on a par with suburban office parks. (Perhaps mothballed street-level retail can be turned into private parking.) This will mark a sharp change away from the urban policies of the last half century which have prioritized mass transit and harshly discouraged private automobile use. But I caution that this new demand will accelerate only among select classes which can afford it, and these numbers will not compensate for the other trends I foresee.

The return of the private automobile as the linchpin of the work commute in major cities will change demand to shift to suburbs which are close enough to cities to allow for easy drives (think under 30 minutes one way) to take advantage of the leisure, cultural or educational opportunities that are likely to remain in the big cosmopolitan centers. People who can afford to drive, who can afford to take advantage of what cosmopolitan centers offer, will also be able to afford — and insist on — moving away from multi-unit buildings and into the single-family, detached house. It is this class of real estate which, if located in drivable places near cities with desirable office space, which will become the new prime real estate. The single-family house which offers privacy and a degree of physical insulation from unnecessary outside contact, if situated in the new desirable locations, will be the “new prime” replacing the “old prime” of the last several decades where proximity to mass transit was the key component of value and demand.

These trends will immediately have ripple effects reflected in both residential and commercial real estate. A similar tale will befall once-in-demand suburbs whose appeal was linked to mass transit. I predict residents, with both disposable income and options for driving or working from home, will not return to using mass transit at levels anywhere near pre-pandemic levels. They will flee the commuter corridors, which will become the refuge of lower-income riders without transportation alternatives; in turn, ancillary businesses will struggle to survive as their prospective customer base transforms into people with little to no disposable income.

I predict that in the wealth centers — think the big cities internationally and their desirable surrounding suburbs — existing living spaces will be retrofitted to meet this changed expectation and demand. Construction activity should explode as apartment buildings are renovated to create larger apartments and private entrances. Indeed, any and all space is subject to a re-imagining. Who says mothballed luxury condos cannot be transformed into convention centers that allow for social distancing? And the days of the “efficiencies” of the shared workplace, shared living, communal spaces and so on, as some sort of upper-class amenity are over — even if a covid-19 vaccine is developed soon. Now, shared spaces will carry a stigma and be places to avoid, becoming the environment of last resort for those with no other option. Likewise, the trend of smaller bedrooms within an apartment (which evokes dormitory living for young and often mobile, rootless white-collar professionals just starting out) as a panacea for lack of affordability is going to reverse. I think the old apartment, originally designed for occupancy by one or two and in recent decades converted (often with abominations like “temporary walls”) into spaces for three or four, will return to a single-use or couple-use occupancy. People simply won’t tolerate living with more people than is absolutely necessary, and affordability concerns will resolve by people moving to wherever they can afford the safety they will insist upon. The consumer’s compromising on space yesterday (i.e., doing with as little space as possible) will reverse, with more space and privacy demanded even if at the expense of greater cost and more remote location. 

We could see a death spiral, in which mass transit and surrounding real estate become the domain of only those without other options, the districts of last resort. The urban tenements whose dank, dark conditions and lack of sanitation were identified as major incipient civic challenges some 100 years ago by the urban reformer Jacob Riis, may return.

There is plenty of real estate infrastructure in and around established cities. No one is expecting mass migration or some other depopulating event. Demand for real estate persists. However, some radical rethinking as to what’s possible to use the existing structures can go far in addressing perceived market mismatches between supply and demand.