Why urban commercial real estate isn’t going anywhere

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Despite some predictions to the contrary, the urban walking lifestyle is alive and well.

While COVID-19 has presented cities with many challenges, these markets are incredibly resilient and always seem to be recovering from the crisis. For example, migration to New York is now growing twice as fast as in 2019 and that translates to more workers return to the office… In fact, only 25 percent of managers and professional workers worked remotely during July, according to the Bureau of Labor Statistics, the lowest since May 2020. And despite concerns about the new Delta variant, many companies still plan to return most of their employees to the office in September.

In truth, while many secondary and commuter markets are finding their following after COVID-19, cities continue to attract attention– especially for young people who thrive in this active, diverse and accessible life / work / play environment.

As cities recover more strongly, urban commercial real estate is generating renewed investor interest. As an investor, KBS sees this happening in cities across the country where we invest in real estate, including Dallas, San Diego, Denver and more. We believe that urban commercial real estate is not going anywhere.

This is why we are so optimistic in this sector:

Generation Z is keen on cities

In the past few years, young people are increasingly attracted to cities because of the lifestyle they offer. Bloomberg reports that this movement is not going anywhere, citing a study that called the trend “rejuvenation,” a new kind of age-adjusted gentrification.

Generation Z, which is moving to cities, represents a new talent pool for companies. This indicates that employers across the country will seek or remain in urban office space to attract and retain the best talent from this demographic. In fact, tech companies rented 3.4 million sq. feet of office space in the second quarter of 2021 – far more than any other tenant sector in the country. Financial technology firms (fintech), in particular, seek to attract young people under 23 to keep growing and staying competitive. In doing so, other urban real estate sectors, including multi-family, industrial and retail, will benefit.

While some investors are waiting on the sidelines before investing in urban real estate in light of the pandemic, others acknowledge the great potential of the ‘rejuvenation’ trend. This demand bodes well for investors in urban assets.

People crave an urban environment

There is strong evidence that many employees want to return to the office after having worked from home for over a year. According to a recent interview by Eden Workplace, 85 percent of office workers are looking forward to returning to the office. Moreover, many employees lack the office work elements inherent in an urban office environment.

For example, a recent employee survey by Indeed.com disclosed that 73 percent miss meeting in person in the office. City offices are generally easily accessible on foot, with excellent transport options, giving employees easy and quick access to places where they can socialize with colleagues and friends, such as restaurants, bars, entertainment and shopping venues, without the need for a drive.

Besides, new team members report that it is difficult for them to find their footing, as they do not go through the personal adaptation, networking and learning that they would expect in a typical year.

City office buildings are a convenient hub for companies.

The centralized nature of cities attracts many companies. Everything these firms want and need to be successful – amenities for their teams, talent pool, business travel airports, convention centers and customer entertainment venues – can be easily accessed from an office building in the city.

For these and other reasons, companies are attracted to urban office space time and again. While office sectors in some cities, such as New York and San Francisco, were more affected than others during COVID-19 and may take longer to recover from the crisis, they are clearly beginning to do so. New York Business Magazine reported in April that demand for office space in New York is recovering, and in the second quarter of San Francisco saw the largest number of office deals signed since the start of the pandemic, according to San Francisco Business Times

We expect that the conditions for safe return to offices in cities will continue to improve and that the quality of urban office space will increasingly appeal to companies as vaccinations rise and the pandemic weaken.

The popularity of cities is growing, especially among the younger population. As Gen Z continues to embrace this lifestyle, the demand for urban office space is also growing as people crave an urban office environment after more than a year of working from home, and companies are realizing the value of being in the center. All of these factors benefit urban commercial real estate as a whole and point to a promising future for investment in this sector in the months and years to come.

Gio Cordovez is President of the West Region at KBs, a private real estate investment firm and investment advisor registered with the Securities and Exchange Commission.

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