27 / 04 / 23 - 4 minute read
The COVID-19 pandemic sparked an exodus from cities as urban dwellers, tired of the expense and pressures of city life, fled to the more comfortable and healthier lifestyles of the suburbs, satellite towns or rural idylls.
All of a sudden, everyone wanted large homes with gardens big enough for the puppy bought in lockdown and an organic vegetable plot, on quiet and safe streets with good schools nearby. Apartment or multifamily living was out, balconies were no longer sufficient, outdoor space was in, and cities themselves faced decline.
Or so the story went. Except, it was never really true. While there was certainly an uptick in demand for larger homes away from cities centres – a narrative eagerly inflated by estate agents keen to stoke demand for bigger homes – subsequent data shows this was a temporary blip rather than a trend. Indeed, in the UK, where talk about city exoduses was particularly noisy, especially around London, data shows that the number of people living in the centre of key cities – Liverpool, Manchester, Leeds and London – actually increased during 2020 at the height of the pandemic, with many of these new residents opting to rent apartments.
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Dr Marcus Cieleback, PATRIZIA Chief Urban Economist
The reality, of course, is that cities have long experienced the trend of recently married couples and those with young families choosing to move to the commuter belt or beyond. Like many aspects of life, COVID-19 accelerated this trend. However, those leavers have always been replaced by younger people arriving, along with immigrants and, increasingly, retirees and downsizers, returning to the city to enjoy the culture and vibrancy of urban life.
The pandemic was no more than an interruption in the ongoing rise of urbanisation rather than a termination of the trend. In 1950, the share of people living in urban areas in Europe was 51.5%. Today, it is 75% and it is projected to rise to 84% by 2050. Globally, 56% of the world’s 8 billion people live in cities and this is expected to rise to 70% by 2050, when the global population is forecast to be 9.9 billion.
Therefore, while the pandemic might have slowed urbanisation, the long-term trend is towards the continued growth of cities. It is no surprise that cities are so attractive. Many are economic powerhouses that dwarf most nation-states in terms of their gross domestic product, productivity and population. And with economic strength comes more employment, better education and more cultural and social opportunities that attract the young, bright and ambitious.
PATRIZIA’s recent European Residential Markets report showed that, despite the economic impact of the war in Ukraine, as well as rising inflation and interest rates, increasing urbanisation is still driving housing demand in the economically thriving metropolises in Europe. Alongside this increased demand, there is the question of supply, particularly in terms of higher density multifamily housing.
While in places like Spain, Germany, Switzerland and the Baltics, multifamily housing is the dominant residential building type, in countries like the UK, the Netherlands and Ireland, the share of multifamily housing in big cities is below 20%, despite the level of urbanisation being similar.
This means single-family housing is not just the dominant building type in rural areas, but also in big cities, where demand is most acute. This has huge consequences for institutional investors, as it limits the availability of multifamily as an investment product and curtails the development of multifamily at scale in key markets, exacerbating the demand and supply imbalance.
The provision of institutional-grade multifamily housing will be increasingly vital in meeting demand. Importantly, this demand spans generations. For the young, the attraction of cities remains clear, and millennials and subsequent generations are far more open to renting apartments than their parents’ generation. This is especially so after their professional careers have been established, as they prefer the flexibility that renting offers, allowing people to change locations when new job opportunities arise or when other reasons dictate moves.
This trend is supported by the fact that millennials are delaying marriage and when they start families, traditional trigger points for buying a home. As a consequence, they are moving into home ownership much more slowly. In addition, home ownership is increasingly financially out of reach for many multifamily residents. Although interest rates have remained relatively low from a long-term perspective, despite their strong increase since spring 2022, the cost of home ownership has risen as home values have been steadily climbing in recent years.
Now, with further rising interest rates, this becomes an even more pressing issue for many first-time homebuyers. The rising demand from older households will likely drive design changes to new products with new communities offering larger units and amenities catering to former homeowners.
But alongside the young, demand for multifamily housing from older people is also expected to continue to grow. European societies are ageing, with life expectancy in the EU projected to be 88.2 years in 2070, while the old age dependency ratio (those aged 65+ compared to those of working age) will rise from 19% to 29%, and people aged 80+ will increase from 5% to 13%. With asset-rich baby boomers retiring and downsizing in increasing numbers, there is growing demand for apartments among retirees, as well as new types of later-living in central cities.
The appeal of urban living and better access to social infrastructure is now increasingly attractive to asset-rich older generations, meaning the proportion of elderly people living in cities is increasing. The pace at which these changes are happening differs significantly across Europe. While in Italian cities the share of elderly people is already relatively high, in UK cities this share is still comparatively low. But this is changing and the gap between the bottom and top cities in the demographic distribution matrix of European cities has already narrowed clearly in the past few years.
This will create new pressures on cities and there will need to be changes to healthcare, public infrastructure, housing and social policy. It will also increase the need for genuinely mixed-use, sustainable urban neighbourhoods, with a range of multifamily housing types that cater for a range of generations – the elderly, families and the young – and provide the necessary social infrastructure to support the community.
This growth means cities will continuously be challenged to maintain and improve upon the conditions that made them attractive in the first place. The urban renaissance is never complete and only ever a work in progress, so the onus is on the real asset industry to anticipate this evolution and provide the right product to meet changing demands.
This article first appeared on Institutional Real Estate, Inc here.