There have been a few recent articles about suburban and rural homebuilders getting a boost from urban flight amid the pandemic/protests.
Trends showed people moved to the cities during most of the 2010s bull market and a lot of money was invested into CBD real estate.
Do you think this shift is temporary and trends will reverse back to the city after this blows over? Or we will see a longer-term shift back to the suburbs and subsequent suburban commercial development? People usually have short memories but there’s always exceptions.
I suspect that residential will trend towards the burbs. Still think that CBD office will outperform suburban.
Great thread idea.
First of all, "the suburbs" mean different things to different people. When people, or writers, or analysts talk about the suburbs, they can be talking about an area 5-15 minutes outside of a CBD or an hour outside of the city. When people picture "the suburbs" in their head, they can be thinking of what is essentially a residential section of an overwhelming urban area or they can thinking of your 1950's-1990's TV suburbia where the city isn't even a factor.
This is important because millennials (who are between 26 and 40 years old, not college kids) had been moving out of big urban city centers since before the COVID-19 pandemic. The media called this "hipsturbia" late last year, and it referred to millennials moving to either smaller cities or to suburbs, in the more urban use of the word, while bringing their favorite amenities, like coffee shops, with them.
This is due to two main reasons. The first of which is that city living has become absurdly expensive in major metros - often literally doubling over the last decade. Millennials who could afford their small 1BR with their fiancee can't afford to drop money on a 2BR or a townhouse once they're married with a young kid. The second is that people have historically moved to the suburbs to start families regardless of era.
I do not see this trend ending anytime soon, and could see an argument for it accelerating in the near term due to the current recession, but I don't see the pandemic creating a long-term push away from cities any more than what has already been occurring and what has historically always existed.
Development may trend to the burbs over the next few years, particularly apartments, but that's more a function of developers still needing to find opportunities to build after having spent the last 10 years building up CBDs. I know that for us, it's a whole lot easier to underwrite a 4 story walkup in the suburbs right now than it is a high rise in the CBD or a wrap in up and coming in-town areas, but again this has little to do with COVID and is more a function of land scarcity and absurd construction prices (which hopefully come down). And again, these suburbs aren't the suburbs I grew up in during the 90s an hour outside of the city - they're in-town burbs that are a 10-20 minute commute from major employment centers.
Thank you for this thorough response. Funny turn of events since I created this thread - I got laid off from the office owner/operator I was with a couple months after posting this. I took the first job offer I got (didn’t want to have to move back to my hometown or default on any of my debts), which coincidentally was with a top 10 public homebuilder in their land acquisition group. I went from underwriting 8%-12% project level IRRs on high-risk, value-add office deals to underwriting 20%-30% for huge land development deals (our IC doesn’t even read IMs if the proforma project level IRR is below 20%).
I don’t see an easy way to fix the housing crisis across America due to a catch 22 we’ve put ourselves in - housing prices won’t decrease without a huge increase in supply but the banking regulations put in place post-2008 essentially ensure that bank lending would freeze if LTV ratios started to spike to levels that would make home ownership more accessible to the middle class. For this reason, I am bullish on suburban development.
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