Memo: Sanitized Urbanization

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There are accelerations. There are inventions. There are interruptions. Today, we are navigating all three at once.

The digitization of the American economy is moving consumer preference towards online retail. That’s an acceleration of a trend. Inventions like Zoom, a niche product that captured the attention of workplaces, families, and social groups alike, became the tech that defined the pandemic. And there are the interruptions of macroeconomic trends. The Atlantic’s Derek Thompson predicted the effects of urban retail and dining interruption.

We are entering a new evolutionary stage of retail, in which big companies will get bigger, many mom-and-pop dreams will burst, chains will proliferate and flatten the idiosyncrasies of many neighborhoods, more economic activity will flow into e-commerce, and restaurants will undergo a transformation unlike anything the industry has experienced since Prohibition. [1]

Written in May of 2020, at the height of retail closures in America, his report painted a grim picture, one that I disagreed with at the time. Derek Thompson was right. Some cities, companies, and organizations have managed to adapt. Williamsburg, Brooklyn mastered outdoor seating, for instance. Companies like Lululemon and Apple have strictly enforce social distancing mandates. And the National Basketball Association has shown that managing a viral disease in a contact sport is possible.

But there is a larger interruption to consider, where the short-term gives way to long-term implications. The characteristics that once defined rural, suburban and city spaces are changing, and the lines across them are blurring. This will result in long-term changes to how we live and shop. In a 2PM conversation for Polymathic Audio No. 8, Thompson began:

I walked down the street and looked to my left and right and what I saw were a line of darkened windows. I wondered aloud to myself, “which of these stores will be back in six months or twelve months?” [2PM, 2]

It depends on where you live. Buoyed by the mystique of life in a second-tier city (think Nashville, Columbus, Charlotte, or Pittsburgh) with a “big city” urban experience, commercial real estate developers have bet heavily on urban renewal, a softer term for systematized gentrification.

A recent study of the largest 30 U.S. metros by the George Washington University School of Business and Smart Growth America in conjunction with Yardi Matrix found that walkable neighborhoods encompassing office, housing, retail and entertainment grew faster and produced higher absorption and rent growth over the last decade than counterparts without that combination. During that time, 70 percent of the jobs created were in the top 50 U.S. metros. [6]

In these scenarios, developers raze existing properties, deemed lower value, and build luxury multi-use properties. In the Midwest, areas that were once filled with $600 apartments or single-family homes were redeveloped into living spaces that appeal to younger millennials and Generation Z consumers. The influx of human capital now supports a commercial renewal (think: audience before product). Coveted restaurants, nicer bars, and finer stores emerge. These retail investors and owners are betting on liquid interest and qualified traffic, to use eCommerce designations. With increased law enforcement in the area, the city then protects these new pockets of investments from the remaining elements that existed just a year prior.

As the process continues, commercial developers grow bolder. They have maximized areas of city centers that were already in transition. But with local, state, and national momentum shifting towards urban renewal (with a jobs market to match), bigger bets are placed. They then build luxury, multi-use properties in areas that have yet to begin transition. These are the at-risk urban pockets that are more difficult to develop, but the reward of earlier development is greater. It’s both a virtuous cycle and a high-stakes gamble.

There are three supply side considerations that have contributed to the previous years of urban renewal:

  • human capital (population density)
  • low unemployment
  • retail brick-and-mortar demand (brand and dining investment interest)

Cities are beginning to experience a supply side demand shortage from each category. It will manifest in a costly interruption to America’s urbanization trend. If that interruption lasts long enough, the textbook definition of urbanization will grind to a halt.

Human capital

The acceleration of the remote work industry is set to contribute to the interruption in urbanization. A recent J.D. Power pulse survey found that one-third (35%) of respondents planned for a home improvement project over the next three months. Of those polls, 40% cite “unexpected additional time at home” as the reason for the project. For those who are capable, the incentive to live in urban areas with leased properties has begun to shift towards exurban investment. In 14 of 31 tracked metropolitan areas, suburban residential investment has begun to outpace the fruits of urban renewal.

Sale prices nationally decelerated 6 percentage points more in urban areas than in the suburbs. Pre-coronavirus, the suburban median sale price was up 6.4% year over year and urban median sale price was up 9.3% year over year. By the end of June, that price growth had fallen to 3.3% and 0%, respectively. Across the entire country median sale price growth has slowed to roughly 2% year over year. [5]

This trend has been influenced by remote work at large. Salesforce announced that workers will be allowed to work from home through August 21st.

Salesforce is also expanding remote-work benefits for its employees, giving each person $250 to purchase office supplies for their homes, which adds to the $250 it gave employees earlier this year. Parents also have the option to take six additional weeks of paid time off. [3]

Companies like Facebook, Microsoft, Amazon, Google, and other large corporations that traditionally set the pace for the global technology workforce have followed suit. Historically, these jobs have increased sources of human capital throughout first and second-tier cities and their urban centers.

Low unemployment

The IRS recently forecasted a 37.2 million decline in W-2 based “employee-classified” jobs in 2021 [4]. They’ve also forecasted lower W-2 filings through 2027. For those who have maintained their jobs, the intent to pivot to exurban has led a number of companies to divest in physical retail, restaurants, and other consumer-oriented investments. And economists have suggested that temporary layoffs would become permanent.

“[O]ur analysis suggests almost a quarter of temporary layoffs will become permanent, implying scope for roughly 2mn (or 1.25% of the labor force) of these individuals to remain unemployed well into next year,” Briggs concluded. [8]

Retail brick-and-mortar demand

In recent news, fashion retail platform Rent the Runway permanently closed four retail stores. Each of the physical storefronts were located in urban areas. After a decade-long trend accelerated by retailers like Bonobos and Warby Parker, direct-to-consumer brands (alongside coffee shops and independent bars) became a reliable source of signaling. As they entered newly revitalized neighborhoods, traditional retailers, restaurants, and soon followed.

Like many cities that spent heavily to incentivize this transformation, the cracks are beginning to show in Test City, Ohio where urban hotel development has been constructed at a record-setting pace.

In the Columbus metropolitan area, nearly 40% of the region’s 17 CMBS hotel loans were delinquent as of July, representing $87 million in debt, according to data analytics firm Trepp. Across the U.S., that delinquency figure was 23.4%, the highest percentage ever on record, according to Trepp. [7]

This is a great deal of information to consider. But there seems to be one clear beneficiary where these trends intersect. With car ownership decreasing and remote work on the rise, the suburbs that will benefit have developed their areas to resemble the urban requirements of the city’s center.

Sanitized Urbanization

Polycentric development is a pattern of transport connectivity, urban planning, mixed use development, and progressive design concepts. Opinion columnist Noah Smith recently wrote the following for Bloomberg:

“The suburbs” won’t mean exactly what it meant in the 1970s. Then, the term conjured visions of malls, single-family houses separated by broad lawns, and homogeneous White populations. In order to attract today’s urbanites, suburbs will have to offer something a bit different. [8]

The result of these accelerations, interruptions, and inventions is a new classification of suburban development that will become more commonplace as younger earners continue to flee cities. In kinder terms, sanitized urbanization takes the best parts of urban renewal and imports them to upper-middle class and wealthy exurbs. Dublin, Ohio’s Bridge Park is a great example of a polycentric development, featuring a member club, modern hotels, and top restaurants:

We built a neighborhood that focuses on giving you — the residents, the visitors, and the go-getters — the ability to easily walk and have access to restaurants, retail services, amenities, a park, bike paths, a bridge, a fitness center and so much more. [10]

In more visceral terms, the concept is the juxtaposition of urban living with the benefit of suburban “exclusivity.” Sanitized urbanization removes the perceived risks of living in urban areas while adding the value of – what’s often – upgraded infrastructure, improved schools, and lower tax bases. It is likely to become a politicized issue once urban municipalities begin to suffer the full force of the migration away from city centers. Early signs of this are showing: streets and walkways have been poorly maintained since the pandemic began. The majority of independent restaurant and retails closures have occurred in these areas, reducing the area’s appeal. And many large cities like Columbus have been slow to recover from a 1-2-3 punch: the pandemic, social unrest, and elevated joblessness and homelessness – all within eight months.

The result may be a generational flight back to suburbs that resemble urban developments: areas that are now-equipped with the multi-use condominiums, exterior landmarks, shopping, dining, and walkability commonly associated with large bustling cities. This suburban Ringstrasse was the original vision of America’ mall architect. Victor Gruen proposed these all-encompassing developments in 1950’s Minnesota.

[Victor Gruen] inspired and futuristic idealism for the town center-styled retail center (inspired by Vienna’s Ringstrasse) was overshadowed by socio-economic turmoil that he couldn’t have envisioned. [2PM, 9]

Retailers, now capable of delivery across larger swaths of metropolitan areas, can concentrate physical presences in new areas without the need for big box stores or the malls that house them. In a way, the American suburbs are finally capable of developing the format that Gruen envisioned when developing his ideals for the original American mall in the 1950s. With eCommerce infrastructure available and polycentric development a priority, the suburbs will look more like cities. And the retailers will follow suit.

Report by Web Smith | Editor: Hilary Milnes | About 2PM

 

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