It happens all the time, I read an article and I’m left with more questions than answers. In this series, we break down trending terms or concepts that need a little more explanation.

Today: Suburbanization

Topic preview

• There is a growing trend of population movement from urban areas to suburbs.
• Multifamily rents are falling in major cities due to increased vacancy.
• Over the next decade, the number of people moving into the prime home buying ages will increase by 4.1% (+0.9 million) to 23.8 million.

What is suburbanization?

“Suburbanization is a population shift from central urban areas into suburbs, resulting in the formation of (sub)urban sprawl.” — Wikipedia

For some, it’s “I’m looking for a place to build equity and settle down.” For others, it’s “I’m coming home mom and dad.” For a growing number, it’s “rents are just too high in the city and I’m not getting any of the big city benefits due to Covid.”

Take note, the statements above are not mutually exclusive. Any combination of the above may draw an individual out of the city and into the suburbs.

Suburbanization in 2020

During Covid, I’ve had two cousins move out of San Francisco and back in with their parents in the sunny Southern California suburbs. I’ve also had four friends have virtual weddings and two of them bought homes in the suburbs.

That’s a small sample size and specific to my little world, but I bet many of you are hearing similar stories.

Let’s talk Statistics

Per GlobeSt.com:

• US multifamily rents decreased by $2 in June, down to $1,457, and year-over-year growth was in the negative for the first time since December of 2010.
• 0.8% (rent) decline in the first half of 2020 and a .4% decline in the second quarter alone, a marked change from the 2.6% growth during the first half of 2019 and a 1.2% increase in the second quarter of that same year.
• Rent growth in the top 30 markets in the US saw 19 of them go negative, with four of the top five markets in populous California showing declines, including San Jose (-1.1%) and San Francisco (-0.9%).
• Since January, rents have declined nationally by $12.
• Some smaller markets have shown strong YoY rent growth as well, such as St. Louis (4.5%), Colorado Springs (4.0%) and Tucson (3.9%) leading the way.

Per CNBC:

• Realogy Holdings (NYSE: RLGY) CEO, Ryan Schneider, said this suburbanization trend has been the strongest in the New York City area and is seeing a similar trend in California.
• According to Mr. Schneider, “In every urban geography, the web traffic of people and what they’re searching for has changed versus 6 to 12 months ago to be much more suburban. Even in the urban geographies where that rotation has not happened in the actual housing purchase and sales yet, the consumer searching is going in that direction and we continue to see that through the whole Covid crisis in the last three months.”

Per Cushman & Wakefield:

• Covid-19 has only accelerated this suburbanization trend that was already in the making.
• Prior to COVID-19, demand for office space in U.S. suburbs was already outpacing Central Business Districts.
• In 2019, 69% of Class A office net absorption occurred in the suburbs, up from the 10-yr average of 60%.
• In 2008, all Millennials were under 30 years old. Today, half of them are over 30. According to the National Association of Realtors, the median home buying age is now 33.
• Over the next decade,the number of people moving into the prime home buying ages will increase by 4.1% (+0.9 million) to 23.8 million.

What does this mean for me?

These data points suggest that we are in the Hyper Supply Phase as discussed in my previous blog, “Recessions are Long. When is the Bottom?”

To be frank, Hyper Supply is typically the worst time in the cycle to buy. That doesn’t mean you should not buy, it just means that you will need to be much more careful.

The USC MRED program taught me many things about real estate. A couple of those nuggets were:

• Follow job growth (well, we’re WFH so the demand for work space is actually occurring in our own homes)
• Usually population growth will follow (where are the homes that can provide more space for our newfound office needs? Those homes are in the suburbs.)
• More people = more demand = rising prices (all else equal)

However if you are currently in the market for an apartment in a big city, NEGOTIATE and negotiate hard! You might just be pleasantly surprised.

How about you? Are you believing this “long suburbs, short urban” movement?

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Good luck out there my friends.

I’m happy to engage with you in the comments so that everyone can learn. If you prefer to share privately, feel free to email me at huber@stacksource.com