Putting the FUN in Real Estate Fundamentals
Consider how (and more importantly, WHERE) you spent today, compared to one year ago. Very different, right? It is for most of us. By the numbers:
- People are moving from cities into less densely populated areas. Redfin data shows that prices in rural areas are up 11.3% yoy[1].
- According to CoStar, multifamily rents in mid-sized cities such as Kansas City and Huntsville are holding up better than those in larger urban areas. According to Apartmentlist.com, San Francisco has seen the greatest drop in inbound migration across the largest 50 markets[2].
- The demand for backyards, home renovation, accessory dwelling units (ADUs) are all increasing, as people attempt to create more livable (and workable) space.
- The homeownership rate has increased from 64% to 68%, putting demand on homebuilders, and upward pressure on lumber prices.
This pandemic has caused a change in behavior, often revealing a preference for affordability and livability that likely existed before, but remained inert. Many of us know somebody who has moved during this pandemic. When we learn of the move, does anybody say (or even think) “why move there?” Probably not. Instead, it is “Oh, that sounds nice”. I’ve talked to people moving to Charlottesville, Austin, the mountains of Western Massachusetts, and other places and each time, I think “Yeah, I get it”.
The Working From Home (WFH) movement untethers work from “place”, and creates more mobility, and this changes people’s location decision. When people moved to Armonk, New York in 1965 they ONLY did it because IBM was there. Now if people move to Armonk, they are doing it because they want to be there, the place offers a competitive advantage over other places. Cities, then, need to compete for people, not companies. Economic development folks should embrace this B2C strategy as a way to differentiate.
The thesis we are pursuing within Rise of the Rest (“ROTR”) Real Estate is based on a fundamental belief that people want to live in areas that are Affordable, Smart and Fun. That belief is even stronger now than it was prior to the pandemic. For years, many highly paid tech workers have been tethered to a place (e.g., the Bay Area) that many people would call a strong 2 out of 3. Now, Twitterers and Facebookers (and other newly WFH employees) could displace themselves across the country to places that hit all three, redistributing human capital across the country. This raises the question: Where will they go?
While we can define “affordable” and “smart,” “fun” is more challenging because it is different to all of us. For those who love music, Nashville is ideal, but for those who love surfing, Tennessee is less appealing. The pandemic — and the increase of WFH — increases the value of “fun” to a city, leading to a re-sorting of people based upon how they value their leisure time. The winning cities will likely be those that have specific leisure competitive advantages.
To help identify cities with these advantages, let’s attempt to quantify fun:
- Music. The number of musicians per capita, recording studios per capita, top venues, instrument stores per capita, top music schools and other metrics. For the Rise of the Rest markets (removing the largest markets), this analysis suggests the best music scenes are in Seattle and Nashville, but followed closely by Pittsburgh, Madison and Salt Lake City.
- Walking and Biking. People enjoy being outside, especially right now. Based upon citywide walk and bike scores, the most outdoor-friendly ROTR cities are Minneapolis, Portland, and Boulder.
- Food. A city’s food scene can be a strong competitive advantage, especially as (pre-Covid) people were cooking less and less. To analyze the “foodiest” areas, we examined restaurants per capita, ratio of full service to fast food, number of Michelin starred restaurants, cooking schools per capita, coffee shops and cooking schools per capita, and others. By these measures, the foodiest ROTR markets are Portland, Miami, San Diego, Seattle and Austin.
- Well-Being. Gallup and Sharecare put out a report called “State of American Well-Being” that compares cities across a number of social and economic factors. By these metrics, the most contented ROTR cities are Boulder, Ann Arbor, Durham and San Diego.
These five are a good start, but we could consider many other variables, such as natural amenities and professional sports teams. There is no one “right” answer, but the results below offer a guide on which areas have competitive advantages to lean into.
Rise of the Rest Real Estate Top 20 “Fun” Cities
Beyond being fun, those cities near the top of the list are relatively (for Rise of the Rest markets) expensive. This is not a coincidence, because fun places draw people. If you can make your city more fun, people will come. One lesson: if you plan to get more fun, build more housing!
We believe the places most likely to draw Facebookers (and hopefully the founder of the next Facebook) are both fun and affordable, in the upper right quadrant. The lower right quadrant has areas such as Seattle, Boulder and Austin (fun but pricey).
In our mind, the best bets coming out of the pandemic are those cities that affordable and making a strong effort to become more fun, and draw more smart people.
The Cultural District in Pittsburgh rivals the music of the major markets, Orlando has a national-level food scene, St. Louis is investing in a greenway and public market, Minneapolis has become amongst the most bikeable cities in the country and Huntsville will improve its music scene through a city investment in a new amphitheater. We think efforts such those will be more effective than a traditional economic development approach utilizing tax incentives to draw large employers.
