Article | Intelligent Investment

Gateway Urban Cores Hit by Loss of Renters

28 Sep 2020

building facade

While media headlines about renters fleeing San Francisco and New York are exaggerated, there is some truth to the stories.

Analysis of net absorption in the five-month COVID-19 period (April through August) confirms that many of San Francisco and New York’s submarkets are leaders for renter decline.

Several other metros—mostly gateway and other higher-cost metros—have urban core and close-in submarkets among the country's submarkets with the highest rates of renter outmigration.

The headline exaggeration comes from scale. The 7% drop in renter demand in downtown San Francisco, the country's worst submarket based on net absorption-to-inventory ratio, is unquestionably tough for property operations there. Yet the 7% decline does not equate to a mass exodus despite observations that it seems that way.

Urban Core, Close-In Higher-End - Worst Submarkets

Net absorption data confirms that urban submarkets have underperformed metro market averages during the COVID-19 period while suburban submarkets have outperformed. This is true for nearly all metros no matter how well the metros overall have fared.

More specifically, the weakest submarkets fall into two general categories: urban core submarkets and high-end submarkets located in relative proximity to the urban cores. Both types of submarkets experienced either demand loss or weak demand in nearly all markets in the COVID-19 period.

Many metros also have a large amount of new supply in these urban core and high-end, close-in submarkets. The new supply has impacted rental growth and vacancy. The focus of the current analysis is on demand that is mostly independent of supply. Markets with rising demand can absorb new product better than markets with falling demand.

The intraurban patterns of market performance includes suburban variation. The best performing suburban submarkets—the ones with the strongest demand ratios—are generally the lower-density ("more suburban") and lower-priced submarkets. (This is also related to the COVID-19 period outperformance of Class B and C space relative to Class A space.)

Higher-priced, higher-density suburban submarkets have generally performed in the middle of the spectrum.

Downtown San Francisco Highest Renter Loss

The submarkets with the greatest losses in renters were generally located in gateway metros. San Francisco has been the most impacted with several submarkets among the hardest hit, followed by San Jose and New York.

Other metros with at least a few submarkets with high rates of renter loss include Boston, Seattle and Los Angeles.

Fitting with the intraurban patterns described above, nearly all of the submarkets with the greatest demand losses were urban. Very few suburban submarkets turned up on the worst hit submarkets.

Figure 1: Submarkets With Highest Renter Household Loss Ratio Net Absorption for April Through August Relative to Inventory


Source: CBRE Research, RealPage, August 2020

Net Absorption Positive in Majority of Submarkets

While the emphasis of this analysis was on the submarkets with renter outmigration, it is important to note that the majority (75.4%) of the 719 submarkets analyzed had positive net absorption in the survey period. Only 24.6% experienced negative demand (outmigration).

Similarly, only eight of the 54 metros analyzed experienced negative net absorption overall: San Francisco (-3.0%), San Jose (-1.3%), New York (-0.9%), Seattle (-0.8%), Los Angeles (-0.5%), Boston (-0.3%), West Palm Beach (-0.2%) and Pittsburgh (-0.1%).

Demand for multifamily housing has remained surprisingly strong during the COVID-19 period. It is possible that due to low vacancies pre-COVID, eviction moratoriums and the expected shorter-than-normal recession, the decline of renter demand will be far smaller than in past recessions.

Figure 2: Submarket Summary-April-Through-August Net Absorption Total Relative to Inventory


Source: CBRE Research, RealPage, August 2020

Urban Core Submarkets Face Many Challenges

Yet the outmigration of renters from urban core and similar close-in submarkets have clearly impacted operations in these markets. The urban submarkets have been challenged in unique ways during the COVID-19 period. The recovery in these hard-hit submarkets can be expected to lag behind other submarkets.

Some of the urban renter demand headwinds have begun to dissipate. Many will disappear over the next 12 to 24 months as COVID-19 vaccines become widely available. A return to the old normal is problematical; for example, office workers will go back to the office, but likely not on a 100% basis (perhaps 20% to 60%). Millennials' move to homeownership or at least to less-dense housing options will likely continue irrespective of society returning to a less fearful environment.

Yet, the appeal of higher-density urban living is not vanishing. Current circumstances will not lead to a return to the hollowed-out city of the 1970s and 1980s, when downtowns become ghost towns after 6:00 p.m. and few multifamily renters lived in nearby neighborhoods. Urban living can be expected to regain most of its appeal in the “new normal.”

Figure 3: Urban Renter Demand Challenges


Source: CBRE Research,Q3 2020.