Pre-pandemic, the urban core of our cities was all the rage and the place to be. That is where the cool people hung out. If you did not live there, you may have been going there on nights or weekends for business functions, to see a play or concert, or enjoy a new restaurant. There was nightlife, bars, restaurants, shopping, entertainment, arts and culture, not to mention the proximity to major employers and all the small businesses and ancillary services that support them. The combination created an attraction and buzz that enticed those young and old.

Millennials found the attributes of these areas so appealing that they would push off age-old life milestones such as marriage, having children and buying their first home. Recent college graduates aspired to live in the dense urban core submarkets even if it was a challenge to afford the nose-bleed rents. Many would sacrifice to make it affordable, doubling or tripling up with roommates, foregoing luxuries found in larger apartments in the suburbs, like open spaces, and common area amenities, such as a pool, clubhouse or fitness center. Forget conveniently parking your own car, that could run you an extra $200 to $300 per month, or more.

It was not that uncommon for Baby Boomers to sell their suburban homes and rent or buy a residence closer to the entertainment and cultural attractions that the cities offered. Residential developers tried to meet the off-the-chart demand by building higher-end, luxury product with astronomical rents. These class-A properties were the only type that could “pencil” as economically feasible in an environment with skyrocketing land prices and building material costs, not to mention long and costly entitlement processes and regulations in NIMBYism (not in my backyard) areas.

Then came the pandemic in the spring of 2020, followed by an ugly summer and fall filled with social and political fallout. The epicenters of these crises were found in urban areas around the country. As bars, restaurants and small business were shut down, and the work from home phenomenon took hold, many people were rethinking their attraction to inner city areas and what brought them there in the first place. Avoiding density and things such as crowded offices, elevators and mass transit became a priority, as opposed to placing a premium on being close to the office and being able to walk to nearby restaurants and bars. In response, many flocked to the suburbs for cheaper housing and more space. Others chose the opportunity to relocate to smaller, secondary, or tertiary cities, or even resort towns.

As residents fled, many urban submarkets in dense cities became the hardest hit multifamily segment due to the pandemic. The mass exodus from cities is showing up in key apartment market metrics. According to a recent CBRE report, in 2020, rents in urban submarkets declined 12.1% year-over-year, and vacancy increased 190 basis points from 4.2% to 6.1%, while in suburban submarkets rents were generally flat year-over-year and vacancy held steady at 4.2%. While those are the averages, some urban markets have been decimated – such as San Francisco, where rents have dropped 25.5% and vacancy has risen 630 basis points, from 4.4% to 10.7%. In these hard-hit areas, as owners battle for occupancy, it is not uncommon for landlords to be offering two, three, maybe even four months free rent on a 12-month lease as a concession to attract or retain residents. As property revenues declined precipitously, transaction activity also fell, as the bid/ask gap between buyers and sellers widened. The lack of liquidity is an issue for those without staying power and facing other financial pressures, such as a looming debt maturity.