At a glance
The rapid spread of the COVID-19 pandemic has, in very short order, led to a number of behavioral modifications among people. Among those modifications has been, in a number of cases, the decision of where to shelter. The press is replete with breathless stories of a mass exodus from densely populated cities to the suburbs. We do not dispute that there has been a degree of out-migration from some densely populated cities in the US during the COVID-19 spread. In addition, we agree that the pre-COVID trend of interstate migration has continued and could expand. Among the key questions we are grappling with are which changes are cyclical, which changes are structural, and what are the ultimate implications of these trends.
What are the trends to follow as a result of COVID-19?
Notwithstanding our strong belief that large, dense cities will see a substantial return of residents, particularly once a vaccine is available and social distancing limitations are eliminated, there are likely some behavioral changes at both the personal and the corporate level that could be more permanent in nature. We do not believe the office market is dead and that we will all work remotely forever. That said, there is a reasonable likelihood that a number of companies will employ a multipronged solution to utilizing office space. These include having some employees work remotely full-time and some work in suburban locations (the "hub and spoke" model). For companies that are located in very expensive cities including New York and San Francisco, we could make the argument, particularly for someone working remotely full-time, that they do not need to live in the area, or even the state. And among those who moved to a suburban from an urban location, it might make sense from a financial and time-management perspective to reside outside the city.
Should our views prove correct, we believe there are a number of implications, including:
- Demand for suburban homes could increase, particularly among older millennials that are beginning to have families;
- Demand for amenity-rich, high-cost apartments in expensive, dense urban cities could decline. Should this occur, it could also result in reduced new-construction activity and conversion of outdated office buildings to multifamily residences;
- One of the many unfortunate outcomes of COVID-19 is that many small businesses will not be able to recover from the financial devastation the pandemic has wrought. This includes many small businesses in dense urban areas that are dependent on the daily flow of office workers. A significant enough diminution in the number of residents returning to these urban centers would be a negative for the return of many small businesses and, ultimately, retail rents;
- The trend of interstate migration has been on the rise for a number of years. It will likely be exacerbated if companies ultimately move significant portions of their workforce to remote status.
COVID-19's impact on interstate migration
Interstate migration is by no means a new phenomenon, but it is likely to pick up steam as a result of COVID-19. We believe there are a number of contributing factors to this, including economics—there are states that have significantly lower costs of living in terms of real estate costs and taxes; have better climates; are more business- and regulatory-friendly; and have better fiscal outlooks. In the figure "Net domestic population flows for select US states", we highlight faster- and slower-growing states across a number of metrics including population growth, job growth, tax rates, and fiscal position. As one might expect, the lower-tax states have been the beneficiary of the population market share donation from higher-tax states.
Net domestic population flows for select US states, 2010–2018
What cities are benefiting from these migratory trends?
In the full report (you can download it below), we highlight a list of some of the fastest- and slowest-growing cities by population between 2010 and 2019. Perhaps not surprising, the fastest-growing cities are almost exclusively located in zero or low-income tax states that have business- and regulatory-friendly policies. This growth clearly has not come without certain challenges. Many of these cities are faced with significantly greater traffic, have seen housing and rental prices rise precipitously, and often lack the infrastructure to handle the rapid growth they have experienced. Ultimately, we believe these cities will be able to "grow into their growth" given the influx of jobs and tax revenue. That said, residents of some of these cities will likely experience their share of growing pains in the near term.