How The Urban Core Will Regain Its Luster In A Post-Pandemic World
The recent news of highly effective coronavirus vaccines has commercial real estate professionals daydreaming about fully staffed office buildings, long lines at lunch counters and bustling central business districts all by the middle or end of 2021.
But a lot of independent variables will have to pan out in order for the hollowed-out cores of the nation’s biggest cities to return to their former vibrancy, and none of them — from a corporate push for the return to the office to strong stimulus legislation from Congress — is a given.
On the most recent Walker & Dunlop Walker Webcast, Boston Properties CEO Owen Thomas and Equity Residential CEO Mark Parrell expressed cautious optimism about the future of urban centers and for owners and investors in commercial real estate. However, the two also laid out the short-term hurdles that city-based businesses face, as well as the long-term threats to urban living.
“What I’m more concerned about [than economic-driven migration away from big cities] is what I'll call quality-of-life concerns: just being in a position where the cities are exciting and safe places for people to live,” Parrell said. “And we've lost a little bit of that. And I think we need to regain that.”
The first and most important step to regaining the luster for urban centers, Parrell and Thomas agreed, is an effective campaign of vaccination, which has numerous hurdles, from the pending approval of vaccines themselves, to the logistical conundrum of manufacturing, distributing and administering hundreds of millions of doses of vaccine.
However, the more direct problem for real estate will be building a general consensus that residents and workers are coming back — and ought to come back — to office buildings and the city at large.
“The office census matters as an indicator of the economy,” Thomas said. “In our cities, if people aren’t coming into the office, the local merchants are suffering, the restaurants are suffering, a lot of the small businesses are suffering. And I think that's key. We've got to get people back in the office. We've got to get people coming back to the big cities for the overall economy to recover.”
Ultimately it will fall to companies themselves, and perhaps even to their employees, to decide whether and how to enforce a return to the office. Parrell said that urban economies can withstand a heavier emphasis on working from home than many may think, noting that on weekdays long before the pandemic began the lounges at Equity Residential’s apartment communities were full of tenants working from home.
Strangely, large tech companies like Facebook and Google that have given employees the longest leashes and most flexible timelines in terms of working from home are the same companies making the biggest bets on urban office space with new long-term leases.
Thomas was positive on the future of urban core office as an investment vehicle due to both the cultural pull of cities that brings in companies in search of talent and to the red tape that keeps newcomers out of the office market.
“We're not a merchant player, we need rents to go up over time,” Thomas said. “For that to happen, you need not only employment growth, but barriers to entry. Gateway markets are complicated. It's hard to get things entitled and it’s expensive. We think over the long term that makes for better real estate investing on the office side.”
The longer-term struggle for cities may be fighting against the sudden tide that has pushed urban residents out to the suburbs and toward single-family housing, leaving vacancies in multifamily buildings of all stripes. Parrell expressed confidence that Equity’s multifamily building stock, which caters particularly to young professionals, could capture many new residents who might have been priced out in a stronger market.
“The peninsula and San Francisco are now about the same price, which is unprecedented,” he said. “You're going to have a Stanford graduate, who is coming out of school with a great job, and she’ll say ‘I can live in San Francisco, a city that’s safe and activated, at the same price as a suburb where there’s considerably less activation.’ I feel good about my chances of capturing her as a customer.”
To make the urban centers a compelling place to live though, they will need that “activation,” which Parrell thinks comes down to local leadership taking a stand to make sure city streets feel clean and safe and that the federal government steps up to make sure small businesses can weather the storm of the pandemic.
The contents of the next stimulus bill will also be crucial in determining the fate of urban real estate. Industry advocates and organizations have been lobbying to bolster a rental assistance program in any forthcoming stimulus package to help American renters meet monthly payments. By bailing out struggling renters, they argue, the federal government can make sure everybody in the ecosystem of real estate gets paid, and thereby avoid a “death spiral” of tenant evictions, landlord bankruptcies and crises in municipal budgets, which rely on taxes from commercial property owners.
“Real estate taxes are supporting $400M worth of local government,” Parrell said. “That's badly needed. For that ecosystem to get wrecked is something that's in no one's best interests.”
This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.