The most recent RentCafe year-end report has shown that during 2021 renters preferred smaller metros, with access to outdoor amenities. Should this trend continue, the impact of increased in-migration and demand for housing in these metros could have an effect on the broader development of the area, beyond the financial evolution of the housing market.
So, we want to know what the long-term implications are for renters flocking to mid-sized markets on these communities’ development? We asked professors and experts to discuss the impact of a potential growth in in-migration and demand for these metros in terms of business development, demographic makeup, market growth, and gentrification.
- Miguel Delgado Helleseter – Associate Professor of Economics California State University
“While it is difficult to predict what will happen in the long-term in small metros, I believe that larger cities have shown long-term resilience in the past, and I imagine they will continue to do so, meaning that as we get through the pandemic, and employers will perhaps land on a new normal in the way they operate, and large cities will return to being the large centers of employment. I believe large metros have much to offer both to employers as well as employees. I’ve also seen evidence that employees perceive they may be missing out (on promotions, etc.) if they are not in the office, which I think will further reinforce the need to be somewhat close to the place of employment. For employers, large cities with a large pool of potential employees means more options and potential for growth.
Having said that, covid forced many workers to work from home, and this I am sure has proved feasible for a number of companies and their employees. I suspect, however, that before covid, firms already knew if allowing employees to work from home made sense. After all, the technology to do so has been around for quite some time. That being said, in the long run, I would expect the share of workers who work remotely to increase relative to what it was before covid, but I don’t expect it to be dramatically higher. When you consider that hybrid work arrangements (a few days in the office and a few days working from home) do not really allow people to relocate far from their office, this will make a stronger case for workers returning to larger cities—or nearby suburbs—if that is where their work is.
Considering all of the above, I would expect that in the long run, small metros that became popular during the pandemic may see many of the renters that flocked in similarly flock out. From what I gather, many of the places that gained popularity with renters working from home were popular due to a combination of small size and outdoor friendliness. I therefore don’t imagine such places would go on an outrageous building spree in response to the increased demand for rentals. Accordingly, I would envision many small metro areas returning to conditions not very different from those before the pandemic.
I would expect market growth to be slow in many of these areas, after all, the appeal that made them popular probably hinged on being relatively small. It’s likely that the people who relocated and can work remotely are perhaps part of the wealthier renters category, I can imagine that some businesses that cater to this demographic may remain in the long run. Some gentrification has surely already taken place, and in my experience, that is not something that is reversed easily. If most of those who will be able to continue to work from home most of the time are generally wealthier workers, some demand for permanent rentals in these small metros may remain in the long run, keeping rents relatively higher than they were before the pandemic, and this will likely lead to further gentrification of areas in these cities.”
- James Lytle, MBA, MS Lecturer – Finance College of Business Texas Woman’s University
“Residential housing demand (whether rental or purchase) usually follows employment prospects. Normally those in smaller metropolitan or rural locales will move toward larger metropolitan areas to obtain employment.
However, the pandemic has had an impact on “where” employees physically have to be. As many employees were not allowed back into the office, they started working remotely. Both employers and employees have enjoyed the benefits of such, however. For employers, it means more worker productivity as well as reduced office place expense. For employees, it means less required commuting costs, living expenses, and a reduction in stress.
A 2018 study by office provider, IWG, revealed that seventy percent of professionals worked remotely at least one time per week while fifty-three percent worked remotely at least half-time. Thus, this remote work trend was present at least two years before the pandemic began. Remote working has only increased since then.
The IWG study also reflected that many working remotely are mostly “white collar” workers, with corresponding higher average incomes and credit scores. So, with the increase in remote working, we can expect to see increased future demand for rentals in smaller locales. In the short-term, this will put pressure on rental demand on smaller and mid-sized market rental rates. In the long-term, an increase in apartment construction will usually moderate price increases as housing demand and housing supply reach an equilibrium.
Over the course of 2021-2022, growth escalated in the smaller rental markets mostly from the migration of larger city renters. Despite the increase in rental rates in smaller and mid-sized markets, there are still a plethora of benefits to be had living in these markets. Rents may still be quite cheaper than rents in more expensive larger metropolitan areas. The stress of commuting will often be less due to the reduction in commute times. Plus, renters in smaller markets are able to escape the “concrete jungles” and enjoy being closer to nature.
Due to the economic and living benefits of moving to a smaller market and as long as remote working ability stays constant or increases, we can expect to see greater demand for rentals in smaller and mid-sized markets.”
- Fynnwin Prager, Ph.D. – Associate Professor, Public Administration School of Public Service and Justice
“RentCafe’s research findings add weight to the idea that a “zoom boom” has significantly impacted mid-sized markets. There is strong evidence that telework increased substantially during the COVID-19 pandemic—from 5-15% up to 45-55% of workers. This appears to have enabled households to move and say goodbye to dense and expensive urban areas that were close to workplaces but no longer offered the same amenities due to pandemic-related closures. Mid-sized markets offered more space, cheaper rents, or maybe the opportunity to purchase a home.
It is important to note that many renters will have moved within metropolitan regions. Some took advantage of the drop in rent prices during the pandemic, while others moved to suburban or peripheral locations to stay within commutable distances should they be required to attend workplaces in person again. For example, the markets of Orange County, East Los Angeles County, and Inland Empire all reflect this trend, as renters may have turned away from Los Angeles Westside, beach cities and downtown areas that ordinarily command the highest rents. These communities will likely face some of the same changes mid-sized metros experience.
In the short-run, mid-size markets are likely to have experienced increased rent prices, and no doubt investors and developers will have seen opportunities around apartment buildings. There are concerns in some areas that gentrification might occur, that rising rents would price out long term residents or change the nature of the place. There will no doubt be some winners and losers from these changes.
Renters are likely to subtly shift the demographics make-up of these markets and their consumer preferences could create new opportunities for local businesses. However, it is likely that previously urban renters would choose locations that accommodate their political viewpoints, consumer demands, and personal characteristics. For example, most of the top markets in RentCafe’s ranking are liberal-leaning politically, and so may be similar to urban renters’ prior locations. These regions also have no shortage of innovative businesses, “hip” hospitality, or cultural amenities. All this may mean the impact on many mid-size markets in terms of non-housing business development is less stark than in more remote areas.”
- James Refalo – Professor Finance, Law & Real Estate Cal State LA
“In businesses terms, there are always substantial network effects when development successfully occurs. At a minimum, there will be opportunities for growth in service industries, restaurants, stores, grocery, then the myriad of other supporting services, as well as entertainment. Those will be brick and mortar — ultimately, there will be demand to create a sustainable ecosystem. These are all development opportunities for the savvy investor/developer, and this trend is likely to continue given the housing shortage in many markets, the ability to work remotely, and the increasing number of entrepreneurs creating businesses that are no-longer limited by proximity or physical location, because of the internet.
As for the demographic makeup, I think we’re going to see these markets become increasingly diverse. This growth is likely to attract the more technology savvy and intellectually creative individuals, those with the ability to sell intellectual services, or entrepreneurs who have designed business that can be controlled remotely. The other group is retirees. Given the increased housing costs in many areas, and congestion in many metropolitan areas or near metropolitan suburbs, these alternative localities might provide and attractive lower cost and lower crime option.
Concerning market growth, there is potential for expansion. Five years ago, there was a rush to urban areas, turning many of them into less affordable options. Now those same areas are crowded and less desirable, and rents and property values have gone up. As such, you now have people seeking an alternative where you can safely raise a family and get closer to nature. Likewise, these smaller cities provide an attractive alternative for retirees seeking a good quality of living, access to services, and lower living costs.
The level of gentrification depends on the community and demographic makeup. If the properties are older construction, in neglect, the changes will be pronounced. If the communities are well maintained, more affluent areas, probably not so much. There will probably be some updating of the culture, but truthfully, nothing is ever permanent.”