CBD Survival Means Getting Retail, Multifamily, and Office to Pull Together

In a new analysis, Moody’s Analytics made a point about metro downtowns that is generally good advice whenever looking at data. That is, don’t be satisfied with the simple and obvious story until you’ve checked further, because situations are usually more complicated than easy answers.

Part of that is understanding that two sets of data may not be proxies for one another, even though it seems like they should be. Cell phone data and the figures of CRE markets in central business districts might seem via basic logic to be similar to one another. If the people, who probably carry cell phones, are there, then so must the real estate aspect, because otherwise you have a bunch of people who must be walking around in circles, doing nothing. Conversely, if the real estate data is strong, you know people are there—whether living in apartments, going to work, or at restaurants, shops, and entertainment.

“Potentially surprising, the relationship between the two respective datapoints is weak at best,” they wrote. “Metros with strong downtown multifamily and/or office performance have not necessarily ‘recovered’ as far as the cell phone data is concerned. The reverse scenario is also true.  Further, while the national level aggregate occupancy data shows multifamily and office trending in their typical cyclical manner (albeit at much different magnitudes), the relationship is not as clear at the metro level. Some metros have had astounding multifamily performance in spite of below average office performance.”

In addition to the recognition that two sets of data might not correlate the way people assume, there is a second cognitive bias. People often expect that averages are rules governing details rather than the other way around. The average is a product of the collection of those details that don’t all behave the same way or suddenly change their characteristics because someone calculated an overall view.

At the national level, multifamily and office performed in similar cyclical fashions, and this continued through the start of the pandemic. “As the economy gradually reopened, downtowns gained some business momentum again, as tech firms, in particular, took down a good deal of space,” Moody’s wrote. “As for residents, they came back to downtowns with a vengeance, prompting incredible gains to rent and occupied stock. This rebound continued for both office and multifamily, albeit at vastly different magnitudes, until elevated inflation and rising interest rate began decreasing economic activity late last year.” The multifamily rebound was driven more by “household formation, migration, affordability, and lifestyle preferences.”

While office continues through big changes, “multifamily performance in some markets boomed regardless.” Hence, there can be high cell phone use but low office occupancy. Office deterioration seems to depend more on high concentration of industries that are using large levels of hybrid work as well as challenging commuting conditions.

One lesson is that cities combining residential, office, and leisure as soon as possible into mixed use will have more compelling offerings for people and companies that are looking for a new location.

Another lesson, if you’re making investment decisions, get beyond averages and look deep into local areas.