Americans Are Leaving Big Cities—Will It Affect Real Estate?

You’ve heard it repeatedly since the pandemic began: with more Americans telecommuting, more of them will move farther away from their employer. But just how many Americans plan to move?

A lot, as it turns out. According to a new study by Upwork, between 14 and 23 million Americans plan to move as a result of their new remote work policies. Those moving are more than twice as likely to move somewhere more affordable, with lower population density.

That has enormous implications for real estate investors, who have already seen rents and property values seesaw around the country. As you plan your next moves as an investor, keep the following trends in mind, because the real estate deck is being reshuffled before our very eyes.

The meteoric rise in telecommuting

In most cases, the pandemic didn’t reverse trends—it threw existing trends into warp speed.

Telecommuting has risen steadily over the last 15 years. In 2019, the Bureau of Labor Statistics reported that roughly 24% of U.S. workers telecommuted. That number skyrocketed in 2020, and while the BLS hasn’t reported official data yet, a study by Gartner Inc. found 88% of employers asked their workers to start telecommuting once the pandemic took hold in spring 2020.

But will it last after the pandemic passes into memory?

Now that employers know they can continue operating without requiring workers to physically assemble in the same office space, many find the cost savings enticing. One survey of small and medium-size businesses by Intermedia found that 57% of them plan to continue allowing remote work indefinitely, regardless of the status of the pandemic. Another survey by Gartner Inc. found that 74% of businesses will allow at least some of their workforce to keep telecommuting after the pandemic.

Yes, some workers will return to their physical offices or headquarters after the pandemic ends. But a huge percentage of workers will never go back and continue working remotely forever—a trend that is already reshaping real estate markets around the country.

Changing demand for housing

People live in major cities for two reasons: their work and entertainment like nightlife, restaurants, and cultural amenities. With the pandemic, both of those draws disappeared.

Entertainment has gradually reopened, if hesitantly and at reduced capacity. It will re-emerge after the pandemic.

But as outlined above, many workers will never need to return to work physically. In those cases, the attraction of a short commute disappears in favor of no commute at all.

It’s playing out exactly how you might expect: Knowledge workers are leaving the largest, most expensive cities in droves. Which in turn is causing rents there to plummet.

Rents have fallen year-over-year in all of the eight most expensive cities in the country, according to Zumper’s November rent report. In San Francisco, rents for a two-bedroom apartment fell roughly 21% since this time last year. New York saw rents fall 17%. In Los Angeles they fell almost 15%. And rents in these cities continue falling, with no bottom in sight.

So where are people moving, and what do real estate investors need to know?

Implications for residential investors

Americans are fleeing expensive metro areas toward a mix of smaller cities, suburban markets, and rural areas.

For example, rents for one-bedroom apartments are up 15.1% in Cleveland, 15.5% in St. Louis, 13.3% in Chattanooga, 11.3% in Spokane, and 7.8% in Bakersfield, per Zumper. Meanwhile, Realtor Magazine reports that suburban areas saw home prices rise 9.2% as of August 2020 and rural home values leap by 11.3%.

Buyers report wanting a larger home with a home office, more private land, and access to outdoor amenities like hiking and lakes. Most of all, they want to pay less for it.

The Upwork study found that Americans planning to move are more than twice as likely to move to a lower-cost home than to a more expensive one. As for where these people currently live, the largest group currently live in expensive major cities—and plan to leave.

The majority of these soon-to-be movers plan on moving more than two hours away, well outside commuting distance. It truly does represent a migration—not just a move from downtown to the ‘burbs.

And like telecommuting, the trend was already happening before the pandemic; the pandemic simply catalyzed it. Research from the Brookings Institute shows that the largest, most expensive cities had already started seeing an outflow of residents in 2018 and 2019, long before COVID-19 sent world economies tumbling.

Tax impacts

Likewise, the U.S. was already seeing a migration away from the highest taxed states and cities even before the pandemic. With millions more Americans able to work from anywhere, and 14 to 23 million Americans planning to move—most more than two hours away—expect that trend to accelerate too.

Higher earners are more likely to be able to telecommute and most likely to move long-distance. As many flee expensive cities like San Francisco and New York, they leave these cities with a lower tax base and a fiscal crisis. They could cut spending of course, but the largest, most expensive cities in the country tend toward high spending and high taxes. They’ll likely respond by raising taxes even higher, making them even less attractive to the remaining residents and pushing even more people away.

It’s a takeaway from the 2008 recession that applies today: In a revenue crisis, some local and state governments cut spending, while others raise taxes. The key difference, however, is not cutting versus taxing, it’s whether the change is temporary versus permanent. Governments who cut spending do so temporarily. But once a government raises taxes, it’s loath to relinquish the extra revenue. I saw it play out in my tax-heavy home state of Maryland in 2008, when the government raised the corporate income tax rate, raised the state sales tax, raised the cigarette tax, and created a new “millionaire tax” on high earners.

After a mass exodus of higher earners from the state in 2009, Maryland reluctantly repealed the tax on high earners, but the damage was already done. The state lost over $1 billion in personal income tax revenue by losing those high earners, and they never moved back to Maryland. The other three Great Recession-spurred tax hikes remain in place, long after the original pinch has ended.

Americans were already moving to smaller cities with lower housing costs and lower taxes before the pandemic, a trend rapidly accelerating post-COVID. If local and state governments try to staunch their fiscal bleeding by raising taxes, they may send even more high-earning residents packing.

Implications for commercial investors

On the commercial side, investors should beware of office buildings, particularly in expensive large metro areas. Much of the demand for in-person office space has evaporated as employers realize they can save on overhead by letting their workers telecommute.

Even so, not every remote worker likes to work from home. With more workers telecommuting, many will look to coworking spaces for their new office. Consider investing in coworking spaces rather than traditional offices.

Indeed, many traditional office buildings will likely see conversion to coworking spaces, at least in part. Parts of the building may be converted to condominiums or apartments, while ground floor offices convert to restaurants or retail space.

But conversions only prove profitable if there’s demand for the new space. With so many Americans leaving the most expensive cities, demand and rents have collapsed. There will be money to be made here, but existing owners should expect bruising losses, and it’s not yet clear where rents and demand will stabilize.

Final thoughts

The world has changed irrevocably, and one lasting change will be the rise of remote work. Work that doesn’t require employees to live in any one location.

So they’re leaving expensive cities with high housing costs and high taxes, in search of more bang for their buck. Consider it a leveling of the real estate playing field.

Look to affordable cities with low crime, low taxes, good schools, and natural amenities that make them attractive. Those amenities could include waterfronts, warm year-round weather, great hiking and skiing, or any number of other traits, so apply a simple litmus test: Would you want to live there, at the current cost of living?

Are you considering Americans’ post-COVID-19 moves in your real estate investment plans?

Tell us below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.