The Coronavirus and Commercial Real Estate: Will Previously Booming Central Cities Be Abandoned?

This is a guest post by Larry Littlefield. 

The 2010s were the decade of the booming superstar cities – Manhattan and Brooklyn, San Francisco and Silicon Valley, Los Angeles, San Diego, Boston, Washington DC, Austin, Denver, Seattle, Portland, central Los Angeles, and even Miami.  With spillovers to, and rapid gentrification of, places such as Queens, Jersey City and Hoboken, and Oakland.  Even the downtowns of otherwise economically struggling older cities and metro areas, such as Chicago, Detroit, and St. Louis had a revival.

These were the places the most ambitious and creative Millennials and booming TAMI (technology, advertising, media and information) firms just had to be.  They poured in even as real estate prices soared and crowding increased.  Young working adults were forced to share apartments, and even bedrooms, with roommates, were squeezed into less and less space at work, and saw their wages fall behind the price of necessities, wiping out their discretionary income and ability to save.  Rail transit lines became crowded and started to break down, and in less transit-oriented cities such as Austin, highway traffic increased and commutes got longer.  I called this the New Urban Crisis, a while before Richard Florida published a book of the same name about the same problems.

Meanwhile, suburban corporate office campuses were abandoned, and the value of suburban housing plunged, something that was partially disguised by the fact that highly indebted aging suburbanites would not, or could not, sell at market value.

Now the coronavirus pandemic has hit, businesses have shutdown, the shared amenities that make city life so appealing – the restaurants, museums, concerts and other gathering places – are also shut down.  Well off people and young workers have fled the city in droves.

Everyone is buying houses and cars and looking to move away, those who sell houses and cars are saying.   Will the cities now be abandoned?

Some are predicting a repeat of the 1970s, when the suburbs were where everyone had to be, and the cities were where everyone who was anyone, and just about every business, were leaving.  A repeat of the downward spiral that saw large sections of once-great cities left as abandoned ruins.   Even Robert Shiller, Mr. Irrational Bubble, was recently seen on television comparing the coronavirus to the Soviet Union obtaining nuclear missiles in 1949.  Many fearful people and firms abandoned the cities, the likely targets for a nuclear war, for the suburbs, he said, and that could happen again due to fear of germs.

While the threat of nuclear war hung over the nation for decades, however, the coronavirus pandemic will end, certainly by March 2022 and perhaps sooner.  Everyone will have either had the virus and recovered or received a vaccine, and it will become like the flu, something that makes some people sick every year, and kills a few of them, mostly but not exclusively those older or sicker, but is otherwise in the background.

Still, the coronavirus crisis has accelerated some trends that had been in the background themselves, such as the increasing ability to live, shop and obtain entertainment at home, rather than in shared spaces, and the movement of the large Millennial generation in to middle age.  So what will this mean for the demand for city living, and city business locations?

The important thing to remember is the demand for space and place cannot be understood separately from its price.  Older central cities, rather than being abandoned, may simply become more affordable, attracting new people and businesses to replace the affluent trend-followers and huge FAANG corporations that had surged in, and may now depart.  This is a theme I will carry forward over a series of posts on various types of commercial real estate.

While most city dwellers don’t live in one-family houses, a discussion of relative one-family pricing trends over the past few decades is illuminating.

I live in Windsor Terrace, a neighborhood in Brooklyn that is located 45 minutes from Times Square by subway, and 52 minutes by bicycle, and that is also near Prospect Park.  In 1994 I purchased a 17-foot wide rowhouse, built in 1915, for the equivalent of $364,031, adjusted for inflation into 2019 dollars.

A similar house nearby had sold for the equivalent of $686,150 in 1987, at the height of the first housing bubble, and everyone in the neighborhood knew it.  So the house I bought had been held vacant for years, at a price no one was willing to pay, before the prior owner gave in and sold at the new, lower market price.  Only a decade before that Windsor Terrace had been redlined, and its real estate had been worth very little.  One could only get a mortgage if they had ties at a local community bank.  Otherwise the houses were only worth what the working people willing to live here, many from multi-generation families, could raise in cash.

Also in 1994, I was aware from shopping for housing, we could have paid about the same price — $364,031 in today’s money – for a one family rowhouse in Forest Hills Queens, not far from the West Side tennis club.  Those houses were built a little later, and have front gardens with an alley in the rear that prices access to off-street garage parking.  As in Windsor Terrace one could walk to the subway and shopping, but there is also a Long Island Railroad stop.  Times Square is an hour away by bicycle and 45 minutes by subway, but the nearest major park, Forest Park, is a 40-minute walk away.  Still, one could have a car and not have to park it on the street.

At that same time we could have paid about the same price, about $364,031 in today’s money, for a 1951-built ranch house in North Wantagh NY, out on Long Island, near where my wife grew up.  It would have been necessary to drive everywhere, but between the garage and the driveway we each could have had a car. Times Square is an hour and ten minutes away by LIRR, but that’s after you drive to the train station, where parking is scarce.  But you have a yard.

Three different ways to live, in houses that are about the same size, and about the same price.  It was just a matter of personal preference.

So what would these three houses sell for today, according to Zillow?

Here is a Windsor Terrace rowhouse identical to mine on a nearby street, built by the same builder at about the same time.  Estimated price?  $2,134,057.  That is nearly six times the 1994 price, after that 1994 price was adjusted upward for inflation.  Almost none of my long-time neighbors could afford to live here today.

Here is one of those Forest Hills rowhouses.  Estimated price?  $969,684.  That is nearly 2.7 times the inflation-adjusted 1994 price.  I told my kids if I knew how trending Brooklyn would become they’d have drown up in Queens. Then it became too late for Queens.

And out on Long Island?

That ranch house would sell for an estimated $440,208, or 1.2 times its 1994 price.

And why, given that the Wantagh house is 26 years older, would it even sell for that much?  Even before the coronavirus crisis the average Millennial, those who will be the home buyers, was paid 25 percent less than the average Baby Boomer had been at the same age, despite higher educational attainment.

It is those Baby Boomers who are the house sellers.  This is one reason suburban houses have not been selling.  Suburban sellers have been holding out for too much money.  Only one third of the housing units in New York City have three or more bedrooms, compared with two-thirds nationwide.  For that reason, and the relative quality of the schools, several generations of young adults had moved out of the city as their children got older, with some returning after they had passed middle age and become empty nesters.

Shockingly, in 2018 children ages 5 to 9 were 6.4% of New York City’s population, compared with just 5.6% for New York’s Downstate Suburbs, 5.9% for New Jersey, 5.4% for Connecticut, and 6.2% for the Untied States.   Children ages 10 to 14 followed the usual pattern, accounting for just 5.5% of the population of New York City, 5.9% for New York’s Downstate Suburbs, 6.4% for New Jersey, and 6.2% for Connecticut.

There was a long debate prior to the coronavirus as to whether or not the Millennials would finally start moving to the suburbs as they moved into middle age and became parents.

And there was some evidence that they were starting to do so, as the strong labor force growth New York City had experienced through 2014 had already started to reverse afterward.  The city’s labor force fell by 33,037 from 2015 to 2019, after subway service melted down.  The number of resident city workers fell even as the number of people working in New York City continued to rise, evidence that some of those workers were moving to the suburbs.  Perhaps to get more space, and perhaps because the sky-high housing prices in the city were driving them out.

If suburban housing is overpriced, what is one to say about housing in Brooklyn?  Isn’t it crazy?

One could say the same thing about the huge difference in price between a few booming metro areas and other metro areas across the country.  Adjusted for inflation the median existing home price increased 53.9% from 1984, when it was “morning again in America,” to 2019.  Yes interest rates have been cut, and that lowers monthly payments to an extent, but can poorer later-born generations – paid less, and loaded with all kinds of other financial burdens by the richer generations that preceded them – afford to pay back that much in principal?  Should they go that deep into debt?  I say no.

But if U.S. one-family home prices have been re-inflated into another housing bubble overall, what can one say about housing in the hottest metro areas?  Adjusted for inflation, from 1984 to 2019 the median existing home price increased 99.6% in metro Boston (doubling), 92.4% in metro Washington, 126.7% in metro Denver, 83.7% in Miami, 115.1% in Los Angeles, 150.4% in Orange County, 316.9% in San Jose-Silicon Valley (more than quadrupling), 208.6% in San Francisco (more than doubling), and 161.2 in San Diego.  I don’t have a 1984 median sales price for Austin, but in 2019 it was about 20.0% higher than the U.S. average and far more than other Texas metro areas.  It’s hard to “Keep Austin Weird” at those prices.  The same may be said of Portland, Oregon, with a median price now 49.0% higher than that inflated national average.   And even, at this point, Portland, Maine.

The inflation-adjusted median existing home price increase from 1984 to 2019 was “only” 63.3% in metro New York, but only because the suburbs have been deflating slowly for some time.    Metro New York’s median home price was 45.4% above the U.S. average in 1984, and it was 54.4% above the average in 2019.  It had been only 4.0% above the U.S. average in 1982, when the Northeast was still down.  Jobs do pay more in metro New York than in other metros, but the gap is not that wide.

In the wake of the coronavirus, the worst case for the previously booming cities is that the price of their housing – owned or rented – will plunge relative to the suburbs.  Perhaps back to even, as when I was shopping for a house in 1994.  And that the price and rent gap between their metros and metro areas elsewhere in the country will shrink.  Not to even, but to a level that is closer to the difference in what people can actually earn in different metros.

Is that, however, really a “worst case,” or a best case?  With lower prices, and lower rents, the next generation of young adults, immigrants, eccentrics, oddballs, creatives and entrepreneurs, the sort of people who have always been attracted to cities, would be able to afford to live here.  As Sam Zell said in this interview at 25:33…

A larger share of families with children might decide to move to the suburbs, especially if aging suburban homeowners finally decide to sell at prices later-born generations could afford.  But young adults think they are invulnerable, and the virus isn’t going to discourage them in living in dense areas after pandemic is over.  In fact, based on what I see in Prospect Park and on the beach in the Rockaways, the virus isn’t preventing them from gathering together right now, even as the authorities try to discourage them.  Eventually, most of them will get back on the subway, just as they did after the 1918 pandemic.  So will I.

What has discouraged young adults from living in cities is soaring housing prices, whether one buys or rents.  Reduce the prices, and the cities will remain full.  And people will be able to live better.

More than nearly 30 years ago, working as a city planning staffer, I was tasked with assisting the City Planning Commission in preparing a Planning and Zoning Report, as mandated by the NYC Charter.  I can’t find a copy online, but a book about the effort followed.

At the time there were some anti-development activists who were arguing that since the city’s population was not growing, no new buildings should be allowed, since they would just devalue and replace existing buildings.   In response that I and others came up with the concept of “qualitative growth.”

New Yorkers lived and worked in older and smaller spaces with fewer amenities than other Americans.  Even without population growth, new development and redevelopment would be required to improve the quality of life, the quality of worklife, and the quality and availability of shopping and services.

I even speculated that since NYC housing units would always be smaller than average, but commercial space was (at the time) abundant, perhaps some activities would move outside the home.  Why have a large living room and dining room used just for company, when party rooms could be rented affordably?  If you can’t have a large basement to store camping gear, could spaces be rented nearby for goods not used all the time, or could the goods themselves be rented?

I clearly deserve the opposite of a Nostradamus award for the “qualitative growth” prediction.  For the next 25 years, instead of a stable population and an increasing amount of square feet per person, at home, at work, and when shopping.  The population of and employment in New York City, and other central cities, soared far faster than the housing stock and the volume of commercial space.  Instead of qualitative growth you had rapid population growth made possible by qualitative decline.  Sharing apartments, sharing rooms, squeezed into smaller cubicles, squeezing through smaller stores, packed in on the subway, and unable to find parking.

I believe that if people and businesses move out of the cities in the wake of the cononavirus crisis, and the real estate industry, perhaps post workout and foreclosure, adjusts with falling rents and prices rather than extends and pretends, cities still won’t have the urban abandonment of the 1970s.   Perhaps the cities will have the qualitative growth I predicted in the early 1990s.  Perhaps the achievable price of my Windsor Terrace rowhouse will fall by 75 percent.  But if it does don’t you think someone would be willing to buy it and live here?  Perhaps in that case, in fact, my children would be able to afford to remain in the neighborhood they grew up in.  And I would still have a larger inflation-adjusted home price increase than Mr. Bubble Robert Shilller proved is the norm over the long term.

Larry Littlefield