Guest Feature

The Death of the City?

By Scot Eisendrath, Managing Director

Scot EisendrathPre-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.

U.S. Urban-Suburban Performance

Fourth Quarter 2020

Effective Rent ($) $1,668 $2,189 $1,502
Change Y-o-Y (%) -4.6% -12.1% -0.4%
Vacancy (%) 4.5% 6.1% 4.2%
Change Y-o-Y (bps) 40 190 0

Source: CBRE Research

The question has become whether residents who left would ever return to the cities?  As I get older, and hopefully somewhat wiser, I realize that history does repeat itself, and that we all have seen this movie before.  Maybe it is a sequel, not quite the same story, but the ending is usually somewhat similar to the original.

I read a recent Forbes multi-part series that addressed this issue.  Throughout history, our cities have dealt with far worse circumstances, and each time bounced back stronger than before.  We have dealt with pandemics, natural disasters, war, and economic crashes.  While Covid-19 is terrible, in the early 1900’s the Spanish Flu killed as many as 50 million people in a three-year period, and that’s on a world population of under two billion people.  Each time, cities have bounced back stronger than before.  As we of course know, past disasters did not lead to the downfall of our world’s greatest cities, such as Paris, London, San Francisco, and New York – following devastating wars, floods, fires and terrorist attacks.

Although we are far from being out of the woods yet, there are the beginning signs of stabilization and the early indications of recovery in our cities.  The CBRE report referenced above noted that an analysis of 36 urban submarkets in January 2021 saw stabilizing rents in 50% of the markets, while 19% experienced some rent growth.  Furthermore, 22% had a declining percentage of properties offering concessions to lure new residents or keep existing ones, and 28% of the submarkets analyzed showed lower average rent discounts, as defined as both the dollar amount and percentage of the rent discount (as compared to the total rent).  These “green shoots” at the beginning of the recovery, as CBRE defines rising rents, fewer properties offering concessions and lower discounts, are signs that we may be on the brink of a comeback for our cities.  As of mid-February, the office utilization rate in the country’s ten largest markets was still only about 25%.  As workers return to the office and businesses return to something approaching normal, this should begin to draw people back to urban areas and points to continued improvement in the apartment fundamentals in urban submarkets.

Summary of Recent Movement in Key Metrics in 36 Urban Submarkets

Effective Rents 19 50 31
Properties Offering Concessions 22 39 39
Average Discount 28 39 33

Source: CBRE Research

Opportunistic investing is never easy, whether you are talking about stocks or real estate.  To borrow a saying from hockey great Wayne Gretzky, to be successful you need to “skate to where the puck is going to be, not where it has been.”  It is important to have the foresight that urban areas will come back as the vaccine gets distributed, and our lives get back to normal.

At Pathfinder, we are excited to be in escrow with our first acquisition for Pathfinder Partners Opportunity Fund VIII.  It is a newly constructed apartment project located near downtown Portland, OR.  The property has struggled with lease up after being completed in late 2019 (terrible time to be leasing up a new project!), and we are excited to own it at what we believe is a significant discount to the cost to replace today.  We are currently underwriting several similar acquisition targets – great properties, close to or in urban core markets, that have suffered because of the issues we have encountered over the past year.  We feel that these assets will have bright prospects as the world gets back to a new normal.

Scot Eisendrath is Managing Director of Pathfinder Partners, LLC.  He is actively involved with the firm’s financial analysis and underwriting and has spent 20 years in the commercial real estate industry with leading firms.  He can be reached at

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