24-Hour Cities Are Not Going Away Post-Pandemic, Even As Secondary Markets Benefit

The run-up to the coronavirus outbreak was a time of rising expectations, and optimistic investors were getting ready to go on a buying spree in the many healthy commercial real estate sectors. But the crisis put much of that planned activity on temporary hold, and now investors have to decide how to deploy all of that capital in a transformed landscape.

But experts say some trends from the past decade will continue, especially the desire among young people to live in dense urban cores. That should keep office and multifamily properties in top-tier cities attractive to buyers even in the pandemic’s aftermath.

“We don’t feel 24-hour cities will close down and be a memory,” Zeller Realty Group Chief Investment Officer Bill Rogalla said last week during Bisnow’s Chicago Deep Dish: Investments: Best Asset Classes & Markets To Invest In webinar.

“Young people are not going to move directly to the suburbs,” McCaffery Interests Senior Managing Director Tom Shanabruch said. “They’re going to continue to want to live in an apartment in the city, they’re going to want to remain close to work and close to their friends.”

“If you’re 22, 25, getting right out of school, you’re still going to want what cities have to offer, even if it’s a watered-down version,” Syndicated Equities principal Jason Schwartz said.

That does not mean urban areas won’t hit a lot of bumps, Rogalla added. Until a workable vaccine becomes available, suburban properties near transportation and with walkable amenities could be in vogue as tenants seek out alternatives that don’t involve packing onto subway cars for an hour each way to reach their offices.

It’s going to take a long time for downtowns to come back, and some people may never opt to get back on those trains, Rogalla said.

“Obviously, it’s going to be a difficult period in the interim, over the next 12 to 24 months.”

During that time, the phenomenon of work from home, which has been more successful for office workers than many anticipated, could permanently shrink the office footprint needed by many tenants, he added.

And even after the economy recovers, core downtown buildings will not be seen as equal. Landlords that can boast of state-of-the-art HVAC systems, ones that neutralize airborne pathogens, will find it easier to attract and retain tenants and draw in investors.

“Others that don’t may have some troubles, but long term, we’re still bullish on those markets,” Rogalla said.

Shanabruch said the recent increase in demand for new, smaller, boutique-type offices just outside the central business districts of big core markets will likely strengthen, at least in the long term. Tenants of such properties in submarkets like Chicago’s Fulton Market won’t have to pack into elevators at the beginning of each workday and will have more confidence about returning to their offices.

“We have a 120K SF office building in Fulton Market, and in today’s world, we think that’s a better position to be in than having a 750K SF building on Wacker Drive,” he said. “With a boutique, you can walk up the stairs, and there aren’t a lot of tenants in the building; you’re not coming into contact with a lot of people.”

“While I think there may be some pain from the apartment side, from the office side, in major cities, they will come back,” Shanabruch added. "No doubt some people will leave for secondary cities, but 24-hour cities aren’t going away.”

Blue Vista Chief Investment Officer Laurie Smith said she agrees big markets will retain their cachet once the crisis ends, and the areas just outside these CBDs could fare particularly well.

“We actually own an office building in Evanston, and during this, we’re seeing a lot of activity,” she said. “Maybe people don’t want to go downtown anymore, but they’re happy to drive over to Evanston if they live on the North Shore.”

Blue Vista already focuses a lot of attention on secondary and tertiary cities, she added. And as workers and companies consider whether they can locate someplace cheaper but just as efficient, such lower-cost markets, especially in Texas, Florida and the Carolinas, could start offering stiffer competition to core downtown buildings.

“They will not be able to command as much rent,” she said.