In the second of our four-part series, we focus on population shifts towards urban areas and the resulting effect on real estate values.
The Great Migration (Back) to Cities
As we mentioned in our post last week, there’s a renaissance taking place in the American city as more and more Americans opt for urban living over suburban options. In 2013, over 2.3 million people migrated into metropolitan areas, bringing the total metro population to a remarkable 270 million people. This unprecedented level of growth in cities presents a tremendous opportunity for new real estate development projects.
Two groups are in large part responsible for this migration: millennials (i.e. young professionals) and baby boomers. Young professionals today are drawn to cities for the job opportunities and general walkable lifestyle. There’s also a strong trend of delaying getting married and having families, events that had traditionally served as catalysts for moving to the suburbs.
Baby boomers, on the other hand, left cities decades ago for the suburbs, which was billed as the place to raise kids and achieve the American Dream. Now, droves of baby boomers who have retired or become empty nesters are moving back to cities looking for the variety of activities and entertainment that suburban communities cannot provide. The cities they are coming back to don’t look like the ones they left 30 years ago; instead they are cleaner, livelier, and more dynamic than ever before.
Increase in Real Estate Values
This larger generational shift has driven population growth in cities not seen since the early 20th century and with it demand for urban real estate has risen dramatically. The fact that these newcomers, particularly the retired baby boomers, tend to be more affluent, has only served to further fuel this demand. Logically, investments in urban real estate and new development has spiked.
The S&P/Case-Shiller Indices below show that residential real estate has seen more than a 10% return in the top 20 cities in the past year alone. Some cities, such as San Francisco, have seen average returns above 18%.
In the near term, it seems clear that residential real estate in metropolitan areas will continue to see impressive growth due to the increasing demand in markets that are naturally supply constrained (given that most desired urban locations have already been built up).
On top of that, properties located in walkable urban environments tend to see a large rent premium over comparable properties in suburban locations. According to Chris Leinberger, chair of the George Washington Center for Real Estate and Urban Analysis and a participant in our recent webinar (link to webinar), “walkable urban office space in the 30 largest metros commands a 74% rent-per-square-foot premium over rents in drivable suburban areas.” As migration into cities continues, this price premium will continue to grow.
At Fundrise, we are believe this migration to cities is not a flash in the pan, but a long-term shift as people fundamentally change the way in which they choose to live. Our core focus on offering investments in the top metropolitan areas is driven by this very thesis. With so much continued momentum and growth in cities, we believe real estate investors are in a great position to earn attractive returns from city-focused real estate investments relative to the level of risk.