It’s hard to get one’s arms around all the ways Covid reshaped commercial and residential real estate, and those impacts continue to ripple through our cities and suburbs. Chief among them: one-quarter of all days worked in the US are now remote, and WFH continues to destroy long-standing norms related to suburban and urban real estate values.

New research on WFH’s impacts finds suburban CRE pricing has sharply appreciated relative to urban assets. In 2017, suburban assets traded at a 9% average discount to urban assets, and that narrowed to zero by 2023.¹ Office, the most sensitive to WFH, saw pricing nationwide move from a 20% discount to a suburban price premium in the same time period.

Unsurprisingly, a city’s suburban appreciation was found to be highly related to its concentration of industries amenable to WFH. More on that below.

The paper analyzes sales of multifamily, industrial, office and retail assets, and, at a high level, the researchers don’t see the observed trends changing “as long as firms continue to support WFH.” Here’s a look at pricing trends in urban vs. suburban assets before, during and after Covid:

Unlike past economic or social shocks, Covid drove both swift technological improvements in and wide adoption and normalization of WFH, establishing it as a viable alternative to traditional office use. Since the shock itself is long over and the market has had time to “price in” expected changes in demand stemming from WFH trends, now is a good time to look for trends.

We expected to see WFH’s negative impact on office, especially urban office, but its effects on other commercial property types were a little harder to forecast. Retail is less intrinsically sensitive to WFH - you can’t work from home at The Gap - but is highly sensitive to trends in local population density, and increased WFH in the suburbs may imply more demand for suburban retail. On the residential side, downtowns saw meaningful out-migration during Covid, but we didn’t have a clear sense of suburban multifamily appreciating significantly faster than urban apartments in the last two years.

And the market didn’t know what to think either, at least at first. Early Covid pricing was a head fake: Industrial pricing dropped the most in the first year - 6% for urban and 4% for suburban - because of 2020’s supply chain problems. Urban office and multifamily dipped only slightly. But as the Covid vaccine became available, CRE sales volumes returned, and the longer-term WFH trends were priced in quickly: By the end of 2021, the suburban discount to urban assets was largely gone.

However not all suburban boats have been lifted by the WFH tide. In fact WFH caused more of a reorganization of real estate values than broad suburban/urban rebalancing.

So who were the winners? Suburban multifamily, especially older buildings, mostly driven by a well-documented demand for lower-density housing that no longer needed to be proximate to an office. As noted, suburban office also did well, especially driven by older-vintage buildings. Suburban industrial modestly outpaced urban industrial although not enough to influence materially an investment strategy. Suburban retail actually moved in tandem with urban retail nationwide, although the study notes it only looked at malls and strip malls, not street retail, which likely was more impacted by WFH trends.

That said, the real driver of relative suburban outperformance - and the biggest driver of the winners and losers - was a city’s workforce’s ability to work from home. For example, when segmenting along these lines, a low-WFH-potential city saw urban office price declines of 7% from 2019-2023 compared to 33% in high-WFH cities.

On that, the yawn of the first graph below shows - on a percentage basis - annual urban and suburban pricing trends in low-WFH-potential cities, across all CRE. They move in tandem. But the second graph shows how pricing changed dramatically in high-WFH-potential cities. And at the core of the trend, the massive urban price declines in high-WFH-potential cities essentially drove the overall outcome that the researchers found. Cities with high-WFH potential have seen the deepest reset in urban and suburban values.

The study illuminates the downstream outcomes of the demographic and behavior changes sparked by WFH. These are not minor adjustments, they’re fundamental disruptions. In our opinion a city’s work from home potential should now be a core component of any institutional underwriting.

Case in point, we all know urban office in high WFH-potential cities is a lot more risky than it used to be, but so is urban multifamily and older urban properties in general, down 40%, 31% and 25% from 2019 prices, respectively. Urban retail, which performed at par with suburban retail at the aggregate level, dropped 16% relative to 2019 in high WFH cities.

The trends you may have intuited since Covid are now unambiguous and quantified and impossible to ignore. As pre-covid leases continue to roll, these trends are likely to continue. It’s a good time to avoid trying to catch a falling knife.

Who: Osage Capital Group

What: Capital-raising consultants for public and private REITs, with a focus on 1031 programs.

The Sparkle: Capital is never easy to raise and these days it’s especially hard. Enter Osage. They design and administer innovative capital raising programs for public and private REITs (including NAV REITs) that allow individual property owners to sell to any buyer and roll their pre-tax proceeds into Osage-client REITs. Those REIT investments bring significant benefits to the individual: diversification, professional management, better liquidity, and no need for active investor management, and did we mention, all pre-tax?

Andy Weir fans eager to see Project Hail Mary on the big screen, this one’s for you: In 1995 scientists found the first “exoplanet,” or planet outside of our solar system, and there are now more than 6,000 identified exoplanets with another 8,000 waiting to be classified. There are Jupiter-size planets that orbit closer to their parent star than Mercury orbits the Sun; planets that orbit two stars, no stars, and dead stars; planets covered in lava; some with the density of Styrofoam; and others with clouds made of gemstones.

Link: https://www.jpl.nasa.gov/news/nasas-tally-of-planets-outside-our-solar-system-reaches-6000/

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