Cities Weathering the COVID-19 Storm: Q&A

Nuveen’s Jayanth Ganesan sheds light on the coronavirus-resilient cities better positioned to combat the pandemic.

Jayanth Ganesan, Research Analyst, Nuveen. Image courtesy of Nuveen

The effects of the coronavirus have been felt all across the nation, regardless of the size of a city or metro. Some areas were hit harder, while others were better prepared to resurface in a post-pandemic scenario, according to a new report by Nuveen. The winners are health care and tech-centered cities such as San Jose, Calif., Nashville, Tenn., Raleigh, N.C., and Washington, D.C. On the other side of the spectrum, cities with an industrial past or that are highly dependent on energy production, such as Detroit, Louisville, Ky., Buffalo, N.Y., and Oklahoma City, are most at risk.

Jayanth Ganesan, a real estate research analyst at Nuveen Americas, discusses the cities that will lead during the pandemic and in the post-coronavirus era. He also talks about the less prepared urban conglomerations, as well as investment opportunities arising in a post-pandemic world.

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What factors make cities resilient in the face of the current pandemic?

Ganesan: Even though the coronavirus pandemic is a unique circumstance, the factors that make a city resilient during the current pandemic are the same factors that would make a city more resilient during any economic crisis. These include having a diversified and well-positioned economy, having favorable workforce demographics and exhibiting a history of sustainable economic growth.

Cities that have a higher exposure to growing sectors of the economy such as technology, information and health care, a young and well-educated workforce and lower exposures to cyclical sectors including energy, retail, lodging and entertainment will likely be more resilient. Additional factors include being located in a state with strong fiscal health and having a higher percentage of large, well-capitalized businesses as employers.

In what ways will cities like San Jose, Raleigh, N.C., and Washington, D.C., change as they absorb the migration from San Francisco and the Northeast?

Ganesan: We believe that urban areas in the Sun Belt and Mountain West markets may expand to accommodate the influx of young talent. Coastal to noncoastal market migration had already become a common trend before this pandemic, especially among older Millennials—born between 1981 and 1989.

Older Millennials, who had previously lived in major coastal markets, were choosing to move to Sun Belt and Mountain West cities such as Dallas and Denver, rather than the suburbs of expensive coastal markets—i.e. San Francisco—because Sun Belt cities offered similarly lucrative employment opportunities for a much lower cost of living. We expect this trend to continue, but with younger Millennials—born between 1990 and 1996—and with Gen Z graduates, who will move to urban cores of the noncoastal market metros rather than suburban areas.

Cities like New Orleans, Miami and New York have been incubators for small tech businesses. Do you think those small companies can survive the crisis?

Ganesan: We expect that the success of technology companies during the pandemic will be determined by the nature of the business. Technology companies that provide services related to lodging, transportation and coworking will struggle regardless of size.

In contrast, companies that provide data management, cybersecurity and logistics services will benefit. In this sense, tech unicorns that are underperforming may attempt to acquire startups that are outperforming. For example, Uber, which until recently was interested in acquiring Grubhub—subsequently acquired by Just Eat Takeaway—may try to acquire a smaller startup that provides similar delivery services.

Cities that lack a diversified economy such as Detroit, Louisville, Ky., and Buffalo, N.Y., are at the bottom of the ‘quick recovery’ list. What else causes these cities to struggle?

Ganesan: The issue with these cities is not simply that their economies are not diversified, but that they are overexposed to cyclical or low-growth sectors of the economy, which negatively affects all other measures of economic and demographic health. Detroit, Louisville, Ky., and Buffalo, N.Y., are all examples of cities that rely heavily on the manufacturing sector—a sector that has struggled to recover from recessions since the 1970s. Cities that are over-reliant on manufacturing employment tend to have a higher proportion of low wage workers, poor fiscal health, an older workforce and underfunded health systems. Therefore, they are in a position to suffer disproportionately from the pandemic.

Cities that rely heavily on cyclical sectors such as lodging, tourism and retail, including Miami, Las Vegas and New Orleans, will suffer disproportionately not just due to lower demand but also because—much like manufacturing—those sectors rely heavily on low-wage employment. Oklahoma City’s economy relies very heavily on energy sector employment—more so than Houston’s economy—and is therefore not well-positioned for a prolonged period of low energy prices.

Despite their dense populations, cities such as Washington, D.C., and Los Angeles are expected to weather the pandemic well, due to their longstanding height limit on buildings. What are some other cities that share similar “pandemic-proof” characteristics?

Ganesan: Metros with a low proportion of elderly residents, specifically metros with less than 12.5 percent of the population aged 65 or older, will be in a better position to avoid higher mortality and hospitalization rates from the coronavirus pandemic. Specifically, these metros include Austin, Salt Lake City, Dallas and Raleigh, N.C.

Houston also falls into this category, but may see a disproportionate economic impact due to its exposure to the energy sector. In general, cities with lower population densities such as Nashville, Tenn., Virginia Beach, Va., and Jacksonville, Fla., had lower mortality rates, though these metros may be more severely impacted by a second wave of the virus if the Centers for Disease Control and Prevention’s guidelines are not adhered to in those areas.

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The Northeast was hit hard by the pandemic due to a large share of residents living and working in big cities. Do you think large cities will experience counter urbanization?

Ganesan: There could be some counter urbanization among older Millennials, especially married couples and families with young children who live in large urban areas. For example, residential real estate listings in suburban areas outside of New York City such as Bergen County, N.J., Westchester County, N.Y., and Fairfield County, Conn., have drawn greater interest since the onset of the coronavirus.

With that said, we don’t expect this counter-urbanization trend to be very widespread. The U.S. fertility rate is at a 30-year low and the marriage rates are at an all-time low, meaning that there are clear limits to the size of the target demographic that would otherwise be enticed to migrate from urban to suburban areas within large metros. Instead, we expect many to migrate regionally.

What do you think returning to work will look like in these cities?

Ganesan: Urban office spaces will have to adapt to comply with CDC guidelines by reorganizing floor space to accommodate larger workspaces, spaced out desk arrangements and lower conference room density. Office spaces post-coronavirus may serve a purpose that closely resembles that of a modern college library, where certain employees report to work at certain times to minimize density, and only to join meetings and collaborative projects.

The net result is that urban office rents in large metros will decline significantly, especially for coworking office buildings or those built to include live-work-play amenities. The office spaces that could command higher demand after COVID-19 are cheaper low-rise office space and urban office spaces in Sun Belt cities.

Is this the Midwest’s big chance to thrive due to its low-density urban areas?

Ganesan: Some metros in the Midwest may benefit, but not because of density. Many cities in the Midwest such as Chicago, St. Louis, Minneapolis and Milwaukee have relatively high population densities within city limits—greater than 5,000 persons per square mile.

The cities in the Midwest that will stand to benefit are cities that are well-positioned to add workers in growing sectors of the economy. Cities that meet these criteria include Milwaukee, Columbus, Ohio, and Kansas City, Mo. Capitals in states with strong fiscal health such as Columbus and Minneapolis may benefit as well. However, cities and towns in the Midwest that still rely on manufacturing, comprising major cities like Detroit and small towns in Ohio, Illinois and Indiana, will still be negatively impacted.

How will the COVID-19 outbreak influence urban dynamics going forward?

Ganesan: Cities with overpriced housing and large budgets—New York City, San Diego, Miami, Los Angeles and Chicago—could be disproportionately impacted by outward migration and budget shortfalls. However, businesses will likely remain in these metros to attract young talent, meaning that these budget shortfalls will be temporary.

In contrast, cities that rely heavily on “elastic sources of income” such as manufacturing and oil revenues, as well as those that fund local services—New Orleans, Birmingham, Ala., Louisville, Ky., Cincinnati and Cleveland—could have their budgets permanently impacted. If not managed carefully, these shortfalls could lead to long-term outward migration and economic stagnation.

The crisis also provides an opportunity to build better. What will the post-pandemic city of the future look like?

Ganesan: Cities may invest heavily in making sure strong infrastructure and public services are available throughout a city rather than in select areas. This will be in response to both the coronavirus pandemic and the recent protests against police violence. While many cities will experience budget shortfalls in the short term, there are many policy changes that cities can implement to fund these investments.

These include shifting some funds away from police and corrections officers, experimenting with innovative methods of providing social welfare such as universal basic income, and shifting revenue sources from elastic sources of income to more stable sources including income, payroll or excise taxes.

Additionally, given that commuting will no longer be necessary for certain types of work, suburban towns may attempt to become more community-oriented, meaning they will start to boast more attractive amenities and events for those living in the area.

Which markets do you think will provide opportunities to investors going forward?

Ganesan: For the remainder of this year and possibly next year, underpriced and well-positioned markets such as Columbus, Ohio, Milwaukee, Raleigh, N.C., Nashville, Tenn., San Antonio and Salt Lake City will likely provide the best opportunity. These markets will not see price corrections that are as pronounced as they are in gateway markets, but they are well-positioned for strong and sustainable post-coronavirus growth.

Gateway markets well-positioned to perform post-coronavirus such as San Jose, Calif., Boston and Washington, D.C., will provide the best opportunities—only after prices have fully corrected and the U.S. economy as a whole begins to recover.

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