Managing Director - Commercial Institutional Investment Sales, Finance and Research at Brookwood-Starboard Commercial
Demand growth for residences will be muted, especially in urban cores During the pandemic, partly because of out-migration, demand for residences grew less quickly in superstar urban cores than it did in suburbs and other cities. Residential vacancy rates increased from 2019 to 2022 in every superstar urban core that we studied, from a 0.8-percentage-point increase in Tokyo to a 9.9-percentage-point increase in London; meanwhile, in the suburbs, vacancy rates grew much less or even declined.5 Prices followed suit, rising eight percentage points more slowly in US superstar urban cores than in their suburbs and 13 percentage points more slowly than in non-superstar urban cores. In San Francisco, nominal prices in some neighborhoods fell by 12 percent from the end of 2019 to 2022. Residences in San Francisco’s urban core are now worth $750 billion less than they would have been if prices there had risen at the national average rate. The effect seems to be a global phenomenon. Before price adjustments are accounted for, the demand for residences in superstar urban cores that we modeled is up to 10 percent lower by 2030 than it would have been if not for the pandemic. It is nevertheless higher than it was in 2019 in every city we studied except San Francisco and Paris. That estimate rests on the assumption that the wave of residents who left urban cores will not return but that population growth in each city will return to its prepandemic rate by 2024. Should population growth remain depressed for longer, the impact on demand would be even bigger. However, prices will probably adjust, and so will rents. Again, our model does not account for such price adjustments, so we could not create demand scenarios that incorporated them. But we can say that homes in urban cores are unlikely to stay empty. Residential space differs from office space in that regard: once prices and rents fall, any available floor space is usually taken up quickly. Indeed, vacancy rates in urban cores have already increased less sharply than urban out-migration would suggest. Unfortunately, the downward pressure on prices and rents is unlikely to make residences in superstar cities—many of which suffer from expensive housing and homelessness—much more affordable.