Chapter 3
Disruption in the Pandemic Era
Shaping Tomorrow’s Cities: Fostering Resilient and Vibrant Urban Environments
5 Minute Read
The COVID pandemic abruptly stopped and even reversed the migration of people to dense urban areas, especially within cities. While migration patterns have reverted to more normal averages in recent years, continued strong urban population growth remains uncertain. Reshaping American cities with a focus on livability is the key to future urban development.
Growing Outward
Outmigration from urban areas increased in 2020 and 2021 when density was a public health concern and pandemic-induced remote work was at its peak. This also coincided with millennials reaching the typical home-buying age, contributing to the exodus from these areas during the pandemic and the continuing outflow today. Additionally, the population of 25- to 34-year-olds that had been driving urban migration is beginning to decline in 2024. Although urban outflow has not reversed, the declines lessened in 2022 and 2023 as pandemic restrictions were eased and fully remote working gave way to a hybrid mix of in-office and remote working arrangements.
CBREs Fall 2023 Occupier Survey revealed that while 92% of companies believe that office attendance is necessary, on average, they expect their people to be in about three days per week. The drop in office attendance has reduced foot traffic in cities and led to historically high office vacancy rates. Many companies are still refining their policies, culture and workplace to find a balance between employee and employer expectations for office attendance.
Relief from the daily office commute has undoubtedly freed up people’s time. With their tether to the office loosened, many employees have moved in search of more space and less expensive housing. The suburban areas of the Sprawling Darlings and Developing Destinations have especially benefited from urban outmigration since the pandemic.
Lower-density, high-growth markets are experiencing suburban growth.
Figure 13: Urban and Suburban Domestic Migration by Market Type
Source: CBRE, U.S. Federal Reserve Bank of Philadelphia, 2024.
In general, markets where jobs were highly centralized pre-pandemic (Super Cities and Mixed Majors) were more impacted by the shift to remote work than those where jobs were more dispersed (Sprawling Darlings and Developing Destinations). Explore the below interactive tool to visualize how the concentration of where people live and work varies across the markets in this study:
Figure 14: Live-Work Concentrations and Commuting Zones by Market
Figure 14: Live-Work Concentrations and Commuting Zones by Market
Other Urban Demographic Trends to Watch
Natural population change plunged in 2020 and 2021 due to fewer births and an increase in deaths. While this trend reversed in 2022 and 2023, primarily due to fewer deaths, births have generally been trending down in recent years (despite a brief pandemic-era baby boom). This decline, coupled with the movement of millennials, especially out of cities, continues to drive down the population of school-age children living in urban areas.
Large cities and the metro areas that they are located in that rely on high levels of international in-migration for population growth were hit particularly hard by COVID restrictions in 2020 and 2021. However, net international migration rebounded during the past two years, with metros like New York, Chicago, Los Angeles and San Francisco seeing substantial gains in 2022 and 2023. Coupled with lower average levels of domestic outmigration and higher levels of natural change than during the pandemic, overall population losses in these metros were smaller in 2022 and 2023 compared with the pandemic period.
As natural change slows, international migration becomes a bigger factor in population growth.
Figure 15: Net International Migration to U.S. and Natural Change
Source: CBRE, U.S. Census Bureau, 2024.
Real Estate Impact
Hybrid work and changing residential preferences took a toll on urban commercial real estate, especially in Super Cities and Mixed Majors, which were hit hard by outmigration and the shift to remote work.
- Due to relatively short lease terms, the apartment market was impacted first, with the urban vacancy rate spiking in 2020 before eventually returning to pre-pandemic levels as urban amenities reopened.
- The downtown office vacancy rate increased more substantially, surpassing the suburban vacancy rate in 2022 for the first time since the late 1990s and reaching the highest level on record (19.3%) in Q1 2024. Performance varied greatly by building age and quality as many tenants pursued a flight to quality. According to a CBRE Econometric Advisors (EA) analysis of 16 downtown markets, the EA Asking Rent Index increased by 11% from pre-pandemic levels through Q1 2024 for prime buildings, which are defined as newer construction with a wide array of amenities and wellness standards, compared with a 4% decrease for non-prime buildings.
- Although the urban retail vacancy rate remained relatively stable, it exceeded the suburban vacancy rate in Q3 2022 for the first time in at least a decade.
- Until recently, the recovery in CBD hotel occupancy lagged that of non-CBD hotels, in part due to a slow post-COVID recovery in international tourism.
Urban apartment market remains relatively resilient following pandemic-era vacancy spike.
Figure 16: U.S. Urban vs. Suburban Apartment Vacancy Rates
Source: CBRE, CBRE Econometric Advisors, 2024.
Downtown office vacancy rate hit record high in Q1 2024.
Figure 17: U.S. Downtown vs. Suburban Office Vacancy Rates
Source: CBRE, CBRE Econometric Advisors, 2024.
Downtown retail vacancy exceeds that of the suburbs but remains relatively stable.
Figure 18: U.S. Downtown vs. Suburban Retail Vacancy Rates
Source: CBRE, CBRE Econometric Advisors, 2024.
CBD hotel occupancy hit harder than non-CBD occupancy during pandemic.
Figure 19: U.S. CBD vs. Non-CBD Hotel Occupancy Index
Source: CBRE, CBRE Hotels Research, CoStar, 2024.
Continued ultra-low interest rates caused a surge in commercial real estate values from late-2020 to early 2022 before the Federal Reserve began raising rates to combat rising inflation. This has led to a drop in real estate values, especially for the office sector as it became clearer that office use would not soon return to pre-pandemic levels.
Cap rates still up, but will likely stabilize for all sectors by end of 2024.
Figure 20: U.S. Cap Rates By Sector
Source: CBRE, CBRE Econometric Advisors, 2024.
Falling Office Values Threaten Municipal Revenues
Lower values for downtown office buildings and retail that depends on nearby office workers are starting to impact municipal budgets, as tax revenue from these properties accounts for a large share of municipal revenue in many cities. In New York, “property taxes from the office sector raise more in taxes than any other property type subcomponent, including single-family homes, multifamily rental buildings, condominium/cooperative units and retail properties, despite an aggregate market value that trails each.”1
Because tax assessment methodologies vary across cities, the impact of property value changes is not uniform across markets. However, commercial real estate values are expected to continue changing in response to evolving work patterns, posing a risk to municipal revenues in many cities. Cities need to quickly determine the highest and best uses of buildings and land in their downtowns, potentially reimagining the existing urban composition.
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