How has the U.S. city fared over the course of the pandemic?
“I don’t think rentals will ever recover in Manhattan”
“I’m never going back to SF”
“There won’t be enough homes in America to support the suburban eisodos”
Rent prices are collapsing around the world due to COVID-19. All the benefits of living in a city- lots of people, lots of things to do, general hustle and bustle- are not possible right now.
I want to underscore that this movement is not accessible for everyone. Not everyone can choose to leave the city, and having that choice is a privilege.
The pandemic has totally changed the way that we think about living in the United States. The “Zoom WFH-ers” have left the cities in droves, settling in a variety of suburban cities and rural areas without plans to return.
On Twitter, it seems that every 10th tweet is someone else is exclaiming about how Manhattan rent has dropped 10% or that the future of work is entirely remote. And in their specific bubbles, it probably seems that way. It is that way to a certain extent.
But let’s look at the numbers.
A Briefing on the Economics of Rent
I live in Los Angeles. I went to school in a small town in Kentucky.
I did not understand LA rent when I first moved here. It was 5x what I was paying in college, and my apartment here is much, much, much smaller.
But that’s just what the market had set it at — supply and demand drive prices, and a lot of people want to live here for some reason. There simply aren’t enough spaces to support them all (rather, it’s used for parking). It’s the same in NYC, London, Hong Kong, etc. All big cities are expensive because:
- Demand: There is usually someone who will pay whatever the rent is, due to lack of choice
- Supply: There is a constrained number of buildings, due to lack of space. Housing is not endless.
So what’s happening right now in big cities?
- Demand: It’s shifting downward. People are leaving cities or moving somewhere less expensive.
- Supply: It’s increasing. There are more units available because there are less people living in the cities.
This is an old graph of Seattle’s rental market, but the green line is rent change (demand) and the blue line is market vacancy (supply) — as vacancy increases, rent decreases, and vice versa. It illustrates the supply and demand dynamic well.
So what are the key questions to answer to determine what’s going on?
It’s a function of supply and demand:
- Where are people going / leaving?
- What does the rental / home market look like there (vacancy rates)?
And this answers the ultimate question:
How has the ‘city premium’ evolved?
Compared to last year, vacancies have decreased across the board, with the Midwest stagnant. The biggest change was in the South — vacancies decreased by 1.5% from this time last year.
For home owners, a similar story has played out. For the whole U.S., homeownership has increased by 3.8% relative to this time last year for the whole U.S., with the South once again leading growth. 66% of people owned homes in the South last year, increasing to 71.1% as of July 28th of this year.
Where has rent increased the most?
Rental price increase can be used as a proxy for population inflow. If a place has experienced a spike in rent, it’s probably due to more people coming to live there (supply and demand).
Rent has come down dramatically since the pandemic began. Anecdotally, the apartment I was renting in Los Angeles is now being rented for ~15% less than I was paying (incredibly painful to learn that information).
But how much cheaper has it become?
The City Premium
What cities are most expensive relative to their suburbs?
Numbeo has a great dataset on this, so I pulled 1-bedroom data from January 2020 (pre-pandemic) to August 2020 (mid?-pandemic) to calculate the premium of living in a city. I averaged it across datasets from Zumper and Apartmentlist as well, since they all had different numbers.
The City Premium = City rent / Suburb rent
- Rent in San Francisco for a one-bedroom in the city was $3,475 in January 2020. Suburb rent was $2,805.
- This results in a $3,475 / $2,805 = 1.24x premium on city living in SF as of Jan 2020
The table below shows the most expensive cities all over the world in absolute U.S. dollars (USD). San Francisco tops the list and 10 U.S. cities round out the top 21 most expensive places to rent in the entire world.
However, the cities that place the most premium on living in the city center are Manila in the Philippines, Colombo in Sri Lanka, Nairobi in Kenya, and Casablanca in Morocco.
What cities have had the largest decline in rent since the pandemic hit?
Capetown, South Africa leads the way with a 20% drop in City center 1-bedrooms since January 1st, 2020 to August 2020. New York, San Francisco, and Boston are all in the Top 15, with NYC declining 10%, SF declining 8%, and Boston declining 7%.
However, for only U.S. cities, a pattern emerges — Las Vegas and Dallas, two southern / western cities, have experienced > 5% increase in rent prices.
Let’s look at the city premiums — which one of the U.S. cities places the most value on being in the city center?
The COVID City Discount: The Calculation
There leads to something called the COVID City Discount, which shows how much the difference between city apartments and suburb apartments has changed since the beginning of the year.
For example, NYC had a 1.6x City Premium in January 2020 (city apartments were 1.6x more expensive than suburb apartments). In August, that premium has dropped to 1.37x. Still really high, but not compared to 1.6x.
The narrative continues when comparing city and suburb rent in New York. Suburb rent has increased 4%, whereas city rent has declined 10% from January 2020 to now.
Now, we can calculate the ‘COVID City Discount’, which is 23% for NYC. Rent in the city has been discounted by 23% since the beginning of 2020. People are leaving for the suburbs, for rural areas, etc., and that’s resulting in a compression in rental prices in the city.
The table below details the changes in rent prices across the major cities from January (blue) to August (green), as well as the % change between city apartments and suburb apartments.
Las Vegas and Dallas actually have a ‘Pandemic Premium’ in which the rent in the city centers has gotten more expensive — by 7% and 3% respectively. This could be a sign that more people are moving there. Los Angeles has remained at 0%.
Austin now has the largest premium, with city bedrooms costing 1.54x that of suburb bedrooms.
San Francisco, despite being very expensive, doesn’t place a huge relative premium on being near the city center, at 1.15x, falling from 1.24x in January. It’s just expensive everywhere.
Also, people really are leaving SF. Both the city center and the outside apartments have experienced a decline in rent prices.
That makes sense, as more people are seeking out suburban / rural areas so they don’t have to be around people. The thesis of the ‘Big City Exodus’ holds true, at least according to this data.
This is another visual of the same story as above — blue bar is city rent, orange bar is suburb rent. Lots of people appear to be moving to the suburbs of Portland, Chicago and San Diego. On the flip-side, San Diego, Las Vegas, and Dallas are all experiencing growth in their city centers, relative to the beginning of this year.
But these are just the big cities.
What’s going on in the rest of the U.S.?
It’s the same story across the entire country. Rent has broadly remained relatively stagnant, due to the dire circumstances we are all currently experiencing.
However, people are still on the move.
Zumper published this rental report on ‘Pandemic Pricing’ comparing rent in March to early July 2020. Laredo, Texas and Newark, New Jersey top the list.
The table below is from Zumper, and it shows which cities have experienced the highest % change in rent from August 2019 to August 2020.
The Midwest appears to have quite the surge in rent prices, particularly in Ohio. New York and Wisconsin are leading the decline in the table below.
What’s the velocity of this movement? This can be determined by the M/M % or the month-over-month changes. Henderson, Nevada has had a 5.4% increase in rent in the past month — followed by Sacramento, Memphis, and Tulsa.
DC and Providence, RI experienced a 4.8% decline in rent prices in the last month.
All-in-all, a probable move to the Midwest, and a move away from some of the bigger cities.
But what’s going on with home-ownership?
This graph has been circulating for the past few weeks, with all sorts of speculation about why home prices are on a very nearly exponential rise, despite the ongoing meltdown all around us.
Zillow has several really excellent datasets on this, and you can see the drastic change in the SF market, with a large increase in inventory.
According to Zillow, “Columbus, Cincinnati, and Kansas City are the hottest large markets” with the “slowest-moving for-sale markets in New York, Miami, and Atlanta”. They have an extremely comprehensive report here that I encourage all to read.
People are moving out of the cities, and into cities like Charlotte, Indianapolis, and San Antonio. The ‘micro-cities’ are experiencing a substantial amount of growth as people seek out cheaper living options and less densely populated areas.
Conclusion: The Contraction in Value of the U.S. City Premium
With the 3 cities in Texas experiencing the most increase in child care costs, as well as increase in rent and homeownership, it would make sense to think that more people are probably moving to the South and the West. The numbers for San Francisco are devastating. I do recognize that correlation is not causation, but many of the signs are pointing in that direction —
The U.S. City Premium is disappearing.
There are still a lot of questions that need to be answered. Not everyone has the mobility to up and move to the suburbs, whether that be due to lease terms, mortgages, or economic circumstances.
I want to underscore again that this movement is not accessible for everyone. Not everyone can choose to leave the city, and having that choice is a privilege.
But there is a fundamental shift occurring, and with remote work becoming an option for some of the workforce, the big cities could experience further declines in the future. The benefits of big-city living in a non-pandemic world are undeniable-but it seems that the Big City Exodus is truly happening, at least for now.
Note: This post was inspired by Ben Carlson’s The Economics of Home Ownership, and a countless number of tweets speculating on the impact that WFH has had on rent prices.