Hot off the Press: An Analysis of CBRE's New American Cities Report

 The urban landscape is evolving, responding to societal changes, economic pressures, and the global pandemic. Insights from leaders like Julie Whelan of CBRE are invaluable. CBRE's new report reveals the intricacies of urban transformation and growth, offering a future roadmap for U.S. cities. In this episode, we interview Whelan for a deep dive into these findings. Learn about essential elements for a thriving city, and gain a comprehensive guide for vibrant, resilient, and inclusive urban development.

Check out CBRE's report on the future of US cities here.

Transcript

Future of Cities in Real Estate

Rachel Oh 0:04

Welcome to Peaks and Portfolios presented by PEG Companies , your go-to podcast for all things commercial real estate investment . I'm Rachel oh , and together we're diving into current events , trends , issues and opportunities impacting the CRE investment space , From dissecting the latest market moves to sharing insights on today's commercial real estate landscape . It's time to maximize portfolios here in the peaks of the Mountain West and beyond . Okay , welcome everybody from the peaks of the Mountain West high up here on the Wasatch Front . We are excited to once again talk about real estate , especially some shifts in real estate and anything else that may come about . So thank you all for joining us today for this week's episode of Peaks and Portfolios by PEG Companies .

Rachel Oh 0:53

In this post-pandemic era , we are seeing shifts in where people choose to live in the United States , With remote work now the norm and not the exception .

Rachel Oh 1:02

Today's workers are not tethered to their physical office spaces as they once were , and the factors that impact where they choose to live have changed . There is a recent study hot off the presses by CBRE . That have pointed out further that cities now have an opportunity to evolve into more desirable places to live , work and play for future generations . Demographers are also now predicting that the US population growth will slow and cities will need to compete to attract an increasing share of people who want to be in them . The next generation to sustain the success of cities will be the children of the millennials , who contributed to the urban renaissance of the early 21st century , which I'm going to tap into Julie more about and , additionally , there is an aging population that will play a big role in shaping cities as well . So , with all these factors in mind , we wanted to hear from , I believe , the mastermind behind the recent study , and we are delighted to have as our guest today Julie Whelan , Global Occupier of Thought Leadership for CBRE . Welcome , Julie .

Julie Whelan 2:03

Thanks , rachel . Good to be here , and there is a strong team behind me who delivered this report alongside , so certainly not the only mastermind .

Rachel Oh 2:11

Okay , Well , I will tell you . Global Occupier of Thought Leadership sounds like a mastermind role to me .

Julie Whelan 2:18

It's a very fun role . It's a very fun role that allows me to study the things that I think are important and interesting in driving the trends that are impacting our built environment .

Rachel Oh 2:28

Yeah , no , absolutely I , you know . Again , I was only able to read through a bit of the study , so I'm hoping that you can , you know , glean further about it . But I am just kind of amazed at the volume of information you folks have gathered and thorough analysis , but also the trends that you predict . So before we get into that , let me just tell folks a little bit more about you , julie . You mentioned a big team , so you've got a global team of researchers that do identify the major trends impacting commercial real estate occupiers across all industries . You are an expert on the future of work , so we really want to dive into that more , and Julie is particularly interested in how the fundamental shifts towards sustainability and flexibility are reshaping the strategy and utilization of space , and I imagine that wasn't even a thought a few years ago . She's also a public speaker , so she's appeared on the Wall Street Journal , usa Today , forbes , business Insider , bloomberg , cnbc and more , and so we are so honored that you are joining our humble podcast today , julie , excited to be here .

Rachel Oh 3:29

So , julie , let's dive right in . This whole study is around shaping tomorrow's cities . Tell me why your team has decided to approach it in this manner . What was the genesis of how this report came about ? Great ?

Julie Whelan 3:41

first question , so about nine months ago now , if we recall back , the media was all about the urban doom loop .

Julie Whelan 3:49

It was so much of what was discussed and I found that on a daily basis . I was trying to help to mitigate that narrative that was out in the market , because we wholeheartedly believed at that time , and obviously still do , that that is not the truth . We are not in an urban doom loop . And so it set us out to say , although the future of work has been of utmost importance over the last couple of years , now we really need to start to shift our thinking around how our cities that have been the centers of business for so long need to shift to not be part of that urban doom loop . And so we did that , and that's what we set out to do . And we now , more so even than nine months ago , know that cities are going to remain centers of economic power and of demographic growth and places that people want to be . They're just on a bit of an evolution , which which , by the way , they've been on for since the existence of cities started right , so hundreds and hundreds of years .

Rachel Oh 4:49

I think you guys did an excellent job of kind of walking people through the whole process . So I want to go through each chapter just kind of briefly and kind of highlight , maybe delve into deeper . But I was so impressed the way you categorize the different cities and the growth from I believe it was 1970 to 2020 .

Julie Whelan 5:09

And .

Rachel Oh 5:09

I mean , and there were super cities , mixed majors , sprawling darlings and the developing destinations . Yes , and I , by the way , spent a lot of my life in Los Angeles , so I totally get it . But tell me a little bit about that . It sounds like all the growth from that period happened all in the urban centers .

Julie Whelan 5:27

Well , not all of it , certainly , but a greater share of it than than ever before

City Archetypes and Urban Evolution

Julie Whelan 5:32

. So , basically , the reason that we first of all broke our city down into archetypes what we're calling archetypes is because we felt that when the general narrative was being discussed around cities , everybody was probably thinking New York and LA , and the reality is that those two cities are extremely different from each other and they're extremely different from any other city in the US . And so what it caused us to do was say , all right , for the 19 cities in our study , let's first level set with what type of city they are and what larger market they're part of . What does the landscape of that market look like ? And so LA and New York are in there . They are our global cities , they're our coastal cities , they are our major gateway cities and they more resemble international cities than really any other place in the US . They're different from each other , different from all the other cities in the US . Then we looked at the mixed majors , and these are , especially from a real estate investment standpoint , what we consider to be our primary gateway markets . They're Boston , where I am from . Chicago , philadelphia , san Francisco , seattle and Washington DC were the ones that we brought in . They are really characterized by dense urban centers that have really , especially in the decade leading up to the pandemic , had a lot of job growth in them , had a lot of millennials that were moving into them highly educated workforces . They have very dense urban populations and they have very extensive public transit networks .

Julie Whelan 7:02

Usually Then we get into some of our fastest growing markets that we have seen especially over the last 30 years , and they tended to be what we considered sprawling darlings . These are markets of Atlanta , dallas , houston , phoenix , denver . They are markets that really are able to sprawl outward with their growth . So , although they've been great recipients of population growth , of job growth , some headquarters moves , in some cases they don't have just one natural CBD that's the force of power in their market . They have a lot of nodes of activity because of the lack of restriction that they have in where they build and how they build . Because there's no land restriction , they're able to really build as they see fit and in some cases abandon the places that weren't working so well and go build new , which is introducing a whole set of challenges for them .

Julie Whelan 7:54

And then we broke the last archetype down into what we call developing destinations .

Julie Whelan 8:00

These are the ones that did grow alongside those sprawling darlings , but they have almost hit like hyper acceleration mode since the pandemic and they do tend to be smaller markets in general , but they resemble what many of these markets looked like 30 years ago .

Julie Whelan 8:16

They are the markets of Austin , nashville , tampa , miami , orlando and Charlotte .

Julie Whelan 8:20

So out of those six , three of them in the Florida markets , a very , very fast-growing market right now , and these are areas that do have more land restrictions . They can't necessarily in all cases sprawl outward , but they have been huge recipients of population growth and they've grown so fast that we feel that there is a need to really sit back and think about the infrastructure around that growth in order to make sure that it can be sustained for the next 30 years . So that's how we identified the shape and when you look at not just the geographic landscape but also what we call the urban density , so how many people live in pockets of you know square mile radiuses and dense areas ? We consider to be 7,000 people per square mile and the reality is sprawling darlings and developing destinations are really not as dense as the mixed majors , which is no surprise , but we do think that they can build on density and then , of course , even the mixed majors don't hold a candle to the density that exists in New York and LA .

Rachel Oh 9:22

Right . Right , I need to point out that the last census count from 2010 to 2020 ranked Utah as the fastest growing state . So I'm a little disappointed that Salt Lake City is not on here , but I also know that we are land constrained and I mean , listen , we're only three and a half million statewide . So I get it , but I just had to point out to our listeners that the fastest growing state we didn't make the cut . I'm just curious Is it just because because I do think post pandemic , you're seeing an even ? But I mean , for a decade we were the fastest growing ?

Rachel Oh 9:55

I know it's hard to include every city , but I just kind of had to point that out .

Julie Whelan 9:58

That's more of a because of the sheer size we tried to really focus on . What we basically did is looked at the 30 largest markets and then identified from there which were the true largest and which were the growing . But this , the beauty of this , is that the framework exists and now we're going to be able to put it on any market that's interested as we go forward . But we had to , you know you have to make choices .

Rachel Oh 10:21

I get it . Constrain our interest , yes , that's fine , so okay . So then from that , you identify , you sort of like identify the different cities and categorize them , and then you go into this urban renaissance . So tell me , tell us a little bit about that . Just , it looks like , again , this is the time period that you guys were focusing on initially was 1970 to 2020 . So there's a huge urban renaissance . It sounds like .

Julie Whelan 10:44

Yeah , so the 70s to the 90s were really all about suburban growth , right . Cities were centers of business . People communed into cities , given the extensive highway infrastructure that had been put in place from the 1950s onward , and that's just kind of how people lived place from the 1950s onward , and that's just kind of how people lived . The story of the American dream of moving outward , getting land , getting a big house and commuting the nine to five was a necessity . It's just how society was built at that time .

Julie Whelan 11:11

However , in 1990 , then there seemed to be a shift , at least in the data that we were looking at , where there was a greater preponderance of people moving into urban areas , which was disrupted a little bit during the 9-11 era because there was so much of that metric that's really driven by New York .

Julie Whelan 11:28

But then , certainly from 2000 to 2020 , there was just this really big increase especially 2010 to 2020 , of people living in urban areas and the growth of these urban areas , which really can be synonymous with cities . It really was more than the suburban areas , and when you looked at who was adding to that growth , it was that generation that we talked so much about at that time , which was the millennial generation , those young , highly educated people that were moving into the cities , and so it was a real thing , and at that time , what happened is companies saw this happening and they then concentrated their jobs even more so in city centers , and what I find fascinating about this is this was really all in hyperspeed in the decade leading up to the pandemic , so it's almost like we were building around something that then the pandemic . So it's almost like we were building around something that then the pandemic disrupted .

Rachel Oh 12:22

Just completely disrupted which is really interesting .

Julie Whelan 12:26

And then , as the jobs went , the development came of more office , especially prime trophy office , and then even more apartments . But , as we know , the multifamily development was not enough and , as a result , housing prices in these urban areas have really gone sky high , which is a detriment to the further growth in some of these areas , which you know is one of the main findings of this report that we need to do something about Right .

Rachel Oh 12:51

And then of course we know everything post-pandemic rising costs , interest rates , all of that . So that just added fuel to this fire . That was boiling Correct . So urban renaissance I was part of that . I moved to LA at that time , so I certainly contributed to that . Then we now move into what's called the disruption in the pandemic era . So the pandemic hits and then I mean I think we all sort of know , but it looks like there's now that inward migration to the urban areas is slowed down significantly or stopped . Now you're seeing tell us what we're now seeing . It looks like they're flowing now back to suburban areas . You've got remote work . Tell us what happened , yeah .

Julie Whelan 13:32

So , certainly , starting in 2020 , in the years following , there was a huge exodus outside of urban areas , right , and that was across all markets , whether you're talking about the super cities of New York and LA , or the mixed majors and even the sprawling darlings and the developing destinations . It was just more push to get away from people , away from density , and so there was this big push . Now , what I will say is , when you look at the numbers , they have moderated right . So there is still what we call domestic out-migration of urban areas right now , because and that's really being driven by the sustained trend towards remote work . And so now , although that public health concern isn't there anymore , obviously there is now a whole structural shift in the way that we work , so that out migration isn't as deep as it was , especially in the mixed majors and super cities , and it's not in the sprawling darlings and developing destinations , but it is still there , and what that means is that it's the suburban , less dense areas that are taking a share of the people that are migrating right now , and we believe that , in order to really sustain the health of cities , we need to change that .

Julie Whelan 14:46

Now , that is only domestic migration . That's important to note . That really doesn't have to do with natural change although we know that birth rates are down , which makes natural change hard to increase . But it also doesn't take into account immigration , and I think that that's a really important thing to note about , especially our larger cities that we define as New York , la and the mixed majors , is that that immigration story is a big part of their health going forward and a big part about really upholding their labor force that they have in those markets . So it's less of a story really in the sprawling , darlings and developing destinations and that's why we think that really focusing on building that urban density is important in those markets and furthering it is important in the larger markets .

Rachel Oh 15:34

So what is the immigration trend now ? I mean , we've got different government heads and they view immigration differently . What is the influx recently ? I guess I should know better , but I'm just curious how open are we to immigration ?

Julie Whelan 15:50

Yeah , so the authorized immigration is the numbers that we looked at is back up above where it was pre-pandemic , and so that's a very healthy thing for our labor force in general that that authorized immigration in the forms of white collar and blue collar work are up and really sustaining that labor force involvement .

Rachel Oh 16:08

Interesting , interesting yeah .

Rachel Oh 16:10

I mean , in Salt Lake City we have we actually surprisingly have quite a bit of immigration , we have a lot of refugees from different countries and they've definitely added to sort of the landscape , so it's been really fun to see .

Cities and Urban Development Trends

Rachel Oh 16:21

Okay , so in the report then you kind of identify the impact of the pandemic and how things have shifted a bit . Then you go on to what's called building on success and I believe that's what you're trying to like help cities understand what they need to do in order to compete , if you will , or to attract . So tell us a little bit about what factors that may be .

Julie Whelan 16:42

Yeah . So the premise of that whole section , which is the real meat of this argument , is that cities are more bifurcated than ever , just like the built environment , landscape , especially from an office standpoint , that we talk about all the time . We talk about this flight to quality and this bifurcation in the office market , and what we did is basically take that thinking and say let's really look at it from a location standpoint in the cities that we're studying , and so what we did was actually be able to see how not all foot traffic in cities is down right . So we know at a holistic level whether you're talking about any archetype that we're looking at in this study that foot traffic in cities is down right . So we know at a holistic level whether you're talking about any archetype that we're looking at in this study that foot traffic in those cities , versus what it was before the pandemic , is down . That's a sliding scale with obviously the smaller cities , less dense cities that have more foot traffic , and the larger cities that have less versus what it was pre-pandemic . But the reality is none of them are back , and so what we tried to say is but is that happening everywhere , or is there actually pockets of the city that we know are doing really well , because we had heard that actually some of these more residential areas and cities were actually thriving and doing very well because people were displaced and not working as much from those cities central business districts and moving , you know , to spend more of their time in these more residential areas that were then creating a lot of traffic around retail and entertainment during hours of the day and days of the week that it wouldn't have typically . And so we took that thought and we really just expanded it a little bit .

Julie Whelan 18:20

And we have a wonderful talent at CBRE who works for our America's Consulting Team by the name of John Stevens , who does really great locational mapping , and he was able to help us take our research data and put it into a tool that we were able to look at , what we called hexagons of districts . So there are these little hexagons on the map in this report that represent five block radiuses , and so that's about five 10 minute walk within our cities , and each of those hexagons in cities we were able to put a naming convention on and we either said that they were residential areas or they were business areas or they were mixed use areas . So there were three major groupings , but then within those groupings you could have areas that were residential and vibrant , or areas that were office and that were more vibrant because they had really good trophy buildings in them , trophy buildings in them , or mixed-use places that had great residential , were walkable , had prime office in them . It sort of was the gold standard , had everything in it .

Julie Whelan 19:34

And what we tried to do was understand , in each of these groupings on this map , per each of the cities that we looked at , were real estate fundamentals , looking differently from one district to another , and what we were able to find was that in what we call the vibrant mixed-use districts , these on the map , when you're looking at them , are the bright , green areas . They actually have fundamentals from an office perspective and a multifamily perspective that are doing , in some cases , much , much better than the overall market that they're in . And this is what is leading us to this thinking , to say cities are no longer fit for the purpose of future generations because of the structural change that was accelerated during the pandemic and we need to change it a little bit .

Rachel Oh 20:15

So just to put some context around how you apply these hexagons and whatnot , what is a good city that we can kind of look at , that's more general and doesn't have a concentration of you know one industry or whatever that might skew the results ? What's a good one like ?

Julie Whelan 20:31

Yeah . So in the Mountain West I mean we can talk about Denver , right , okay ? And so across archetypes , whether we're talking about any of the cities in this study , there are examples of this outperformance . In the vibrant mixed-use districts that exist In the mixed majors , the difference isn't as stark , simply because of the overall challenge that those markets are having , mostly due to congestion and long commute times and the amount of people that do commute into these cities to work , that are dependent on public transit to do so .

Julie Whelan 21:09

However , in the sprawling darlings , there is quite a difference in vacancy between the overall market and some of these vibrant mixed-use districts that we can see . I think Denver is a really good example of it , where the overall market vacancy is in the 30% range . Yet when you look at the Union Station area , which is a vibrant mixed-use district that I think started to be built in the 2015 timeframe , that office vacancy is in the 14% range , and so it's really a testament to this idea that occupiers and residents are enjoying being in these more vibrant areas that have access to the leisure and the entertainment and the restaurant options and , in Union Station area , you know example , the sporting venues that really give themselves or give them a well-rounded experience when they're living and working and playing in those areas .

Rachel Oh 22:07

Yeah , yeah , no , no , that's true . I think that . So , for example , we do a lot of multifamily development and when we're looking at locations or the amenities around , I mean we try to build amenity , rich multifamily , because that does tend to attract tenants . And then we're seeing , as you've just substantiated it , there is that having those amenities and being able to live , work and play is what then grows the community , and I think that's what today's renters and tenants are really looking for , Whereas I think in previous generations , like you know , build something nice , build it solid , you know , make sure there's enough space , but now you have to think so much more around what amenities there it's close to , what amenities are within . You know what's the access ? It's less about being close to an office space , but being close to where they really want to live , work and play Right . I think you've mentioned that before to live , work and play Right . I think you've mentioned that before . So I think that's so interesting how that small , not small the pandemic was so life changing , but how that blip in time is now impacting future generations and making or changing decisions that groups like PEG and other folks need to consider when they're doing their developments and investments . So okay , so we've . Then we've got this whole thing which I think cities are going to want to focus on as they look to build their urban centers .

Office Building Conversions and Opportunities

Rachel Oh 23:28

Then we go into your next section , which is the conversion potential , which I find really fascinating . Because just a little bit about what PEG has done . We've done quite a bit of conversions . Started off with one office to multifamily , so we did that . It was challenging , by the way , it was hard , but we have done that . It's worked out well . It was in a suburban market , but we did take an older office building and convert it into multifamily , learned a lot of lessons . We also have done a lot of hotel to multifamily conversions , so aging former extended stay hotels branded typically at Montgomery residence in , and we would acquire those and convert them into class B workforce housing and that's been tremendously successful . And then I know now , with all the vacancies going on , there's just a tremendous opportunity and tons of conversion going on . And I can't remember you're going to tell me which was the number one state Texas , yeah .

Julie Whelan 24:22

Which I thought it would be New .

Rachel Oh 24:23

York . But anyway , tell me about conversions Like what are we seeing now ?

Julie Whelan 24:27

Yeah , so we've been studying conversions now for a couple of years and the reality is that they are ticking up . In other words , conversions are becoming more of a story across really all of our markets . However , they're still not happening to the extent that they're going to do much to impact the landscape of our cities . Now , there are some markets that that is a different story and , in terms of the 19 that we're studying , dallas is that one . Now , keep in mind that that graph that you're referring to is actually a percent of office inventory that's under conversion . So there still may be a greater absolute amount happening in other markets , but as a percent of inventory under conversion , dallas is the highest . Now , what I find interesting about that is part of that reason is because , because there is quite a bit of their inventory , especially downtown , that is under conversion , that we should start to see a difference in that market very soon .

Julie Whelan 25:48

Now , what I think is interesting about conversions is that there is so much space right now that could be looked at for conversion right . So if we just look at the amount of vacancy that has been added to markets , just since 2020 , when the pandemic hit it's , 136 million square feet of vacancy has been added to markets that's the size of downtown DC . So that is a lot of space , and it's still incrementally increasing right now , and we don't expect that vacancy is going to hit a peak until later this year , early next year , when it should start to come down . But we don't think that it's going to come back down in the long range to historical averages , which means something needs to be done with this space , and there's so much of it , and it's in such disparate areas of cities that we really do believe that especially state and local governments are well served to be putting focus areas in place . And so what we tried to do with this study is actually say okay , if we know that vibrant mixed-use districts are doing better and they're generally either outperforming today or have the potential to outperform when the market does turn , then how can we use that effect to impact office buildings that are highly vacant that are either in or near that area ?

Julie Whelan 27:08

And so what we were able to do is identify about 43 million square feet of space . That's either in vibrant mixed-use districts or just in the ring outside of vibrant mixed-use districts that are more than 50% vacant , and the idea there is not that every single one of those could be converted because , as you said , conversion is hard . It's dependent on the characteristics of the building and the values and the zoning and the structure of the building . There's so much that goes into the conversion , but at least it gives a manageable pie to look at to say maybe these are the ones that we should look at , either converting to a better use , something that the market is really gonna be able to drive its highest use of , or even could it be upgraded in its current form to become a better office that's more attractive to the tenants that might want to , you know , be tenanted in it .

Julie Whelan 28:05

So there are a lot of different , you know , things that these buildings can be turned into . It just doesn't have to be multifamily . There could be mixed use , it could be upgraded office . In some cases they could be demolished and we could make space for green areas that are so important in our cities . But the idea is to size the prize and try to really focus development in areas that we think it could count most , because there is already a bit of a movement being started .

Rachel Oh 28:35

No , I super appreciate that , julie , because you know I had a previous episode with Steven Painter of Gensler and he also pointed out so he's an architect and they have a whole algorithm where they analyze a building and they're able to determine the feasibility of conversion into multifamily , for example . I think that's specifically what they were looking at and what he pointed out is that , as much as it might be the right location and the right size , and there's a need that , even if you wanted to , it's not a , it's not the right office building to convert . So I think there's so many things , and I know that there was the initiative by the Biden administration where they released funds to help with the conversions , but it was tied to like a transportation initiative or something , and so there is government funding out there , but only for those office buildings that are close to some sort of transit , and if it's close to transit , it may not necessarily be close to the vibrant centers that you're talking about . So it is so complicated , because what I have learned , and your report point out too , in order to do the conversions , because it's so expensive , and we learned that there needs to be some sort of assistance in order for it to work , and that assistance isn't straightforward either .

Rachel Oh 29:50

I will say , though , that you were saying that it's not just multifamily . So , for example , we did one in downtown Phoenix . We converted an office building into a hotel . That also wasn't easy , by the way , but it is in a vibrant , it's next to the arena . There , it's very livable , walkable , like it's . It's amazing and the hotel is doing awesome Right , but it wasn't easy .

Julie Whelan 30:10

It's not easy and you know you're hitting the nail on the head with with incentives , and not only having the incentive and making it available for the type of conversion that you might deem to be , you know , needed , but also it's just making it easy to engage with and even find right , because it's just not a streamlined process .

Julie Whelan 30:29

I did talk to one developer who had a really interesting take on it . He said I can convert anything that you want if it comes to me at the right price , and I think what it speaks to is just that this idea of incentivizing this redevelopment is one of the bedrocks of what our local governments really need to lean into is incentivizing it , making it easy , focusing the areas that they want to see the redevelopment in , because the only way that we're going to get private developers to do this really hard work is to remove its highest and best use . Then that is going to be a drag that is far more expensive on that entire city , because this isn't about building new right . We have done all the building . This is about now converting to a better use that is going to be fit for the new purpose .

Rachel Oh 31:33

Yeah , it'll be . I think this will be an evolving conversation . I think it'll be an evolving space . It will be really interesting to see what really does happen , because I do think too , there are those that believe that office will come back , right . So there are people who are going to hold on , to be like , hey , we're just going to hold on to when office comes back and we're going to I don't know .

Julie Whelan 31:54

I think no one exactly knows , but I think there's a lot of thought out there .

Julie Whelan 31:56

Well , yes , and you know , I think that that's a very interesting point , because we do believe that office is going to come back .

Julie Whelan 32:00

I think that , right now , the softness that we're seeing in office is , yes , partially as a result of this structural change that happened that is not going to go back to the way that it was .

Julie Whelan 32:10

However , there's also an element of cyclical weakness that we're seeing right now because , although we're not in a recession , we've been talking about one for a very long time and nobody really does know what's around the corner until we do decidedly see inflation coming down and interest rates coming down .

Julie Whelan 32:26

So until then , we don't have occupiers that are willing to make big leasing moves and big relocation moves , and when they are ready and big relocation moves , and when they are ready , we will see the market turn back on , which is even more of a reason to use this time to reposition our buildings to be ready for that activity when it comes , because we track prime office space very closely and that vacancy overall is in the 14% range right now and we believe that by end of 2025 , even if demand just continues to trickle as it has been , that space will be depleted and so that means that that demand is going to go to that next level of space . And so really looking closely in this 12-month period of what needs to be upgraded to meet that prime office standard , I think is a really prudent thing for some of these owners to do .

Rachel Oh 33:23

Yeah , yeah . What is a healthy overall office occupancy rate ? Pre-pandemic maybe , or I don't know if you want to , where you want to gauge it , but what is a good target that we should be ? When we hit it , we're like , okay , office is back .

Julie Whelan 33:37

I mean that's very dependent on market . What I would say is before the pandemic we were at like a 12% vacancy nationally . Now that's with some markets like the Texas markets that were still doing well but had very high vacancy in other markets like San Francisco , that you couldn't even find contiguous large blocks of space because their vacancy was so low . Now that isn't healthy either , right . So that kind of 12% range felt okay . But important to note that even with those markets that had high vacancy that were still doing okay before the pandemic , like some of the Texas markets , it's because their market had adjusted to it . There was a certain amount of space that just was totally discounted and was never really looked at as being viable and in some cases probably should have been taken out of inventory . So the market as a whole really wasn't competing with that space . The question is , how much space are we competing on together and what's the vacancy within that space ? And we would argue that probably in the 10% , know 10 to 15 percent range is healthy .

Rachel Oh 34:40

So if we're at 14 , we're not so terrible ?

Julie Whelan 34:43

Well , that's just in the high quality space , which is only 10 percent of the market . The overall market is around 20 percent right now . Oh , OK .

Rachel Oh 34:51

Thank you for clarifying that . Yeah , ok , ok , yeah , and we , we converted some non high quality office space to get where we are , but it was , you know , ideally located , so it worked out well ,

Keys to a Thriving City

Rachel Oh 35:01

okay . So then the next piece of the report then I think you set it up really well is then what are you have identified the keys to a thriving city , and I think you've kind of hit on that . But can you summarize what are the keys to a thriving city ? What have you guys identified as , like these things in place , then the city is going to be thriving .

Julie Whelan 35:19

Yeah , and the reason that we went back to this kind of macro level is because we really did want to be clear about a lot of what we just talked about , which is that this is not necessarily a build it and they will come discussion , because you started out the discussion saying that demographers do believe that overall population growth is slowing , which means that there is a market share gain and game that a lot of these cities are going to be playing , where you are going to want to take the market share , especially of the younger demographic , and sustain and retain them in your market to ensure that you're going to thrive over the next 20 years .

Rachel Oh 35:56

So the young people are the key . Is that what you're saying ?

Julie Whelan 35:59

The young people are the key , because there's a huge generation of the older people . They do make up a lot of the mix in some of our larger cities and many of them are working longer , staying healthier later in life and really enjoying living in those expensive , large , mixed major cities , and they are making up a large percentage of the growth of that as they age . Right now , whereas some of these sprawling , darlings and developing destinations are taking a greater share , there is still an absolute numbers right in the mixed majors and in the super cities , larger cohorts of the younger , but a share of them are certainly increasing in these smaller and higher growing cities . And so what our belief is is that there are six what we call keys that really have to be in place and strived for in order for those vibrant urban neighborhoods to really sing and to really operate at their fullest potential . The first one is economic dynamism . Right , it's this idea of what makes up your city's economy . Do you have a diverse industry mix or do you have a culture of innovation ? Do you have capital inflows or people wanting to invest in your market , and do you have a large talent pool that's diverse ? The second one is the demographic potential right , and it's what we just talked about . So what's the age distribution of who's living in your city , what are their education levels , what are their skill sets ? All of that that really contributes to the development and the competitiveness of these cities .

Julie Whelan 37:31

The third is lifestyle vibrancy , of which you have a lot of it , right . It's that quality of life , it's those recreational opportunities , it's how much green space markets have that we know , like cities like London even are really making a big push for right now and just the general active lifestyle . It doesn't mean that it always has to be warm , right , but it's just these recreational opportunities and active lifestyles of which I know your market well can provide . The fourth is resilient infrastructure . So it's this idea that not just from a transportation perspective , although that is very important to connect our cities and to make sure that , especially in our mixed majors and our larger cities , that it's staying young and clean and it's progressing , which is , I know , a challenge in those cities young and clean and it's progressing , which is , I know , a challenge in those cities but it's also infrastructure around social things like education and medical facilities , because in some of our fastest growing areas and our developing destinations , that could be what is their Achilles heel that challenges people from staying and growing their families and aging in those markets ?

Julie Whelan 38:38

The fifth is what we call distinctive identity . So this is really what is the history of your market ? What are the natural resources ? What is the culture ? This is what the super cities do so unbelievably well that nobody can even come close to it's . What is the identity that's associated with those cities , and especially from a Smarling Darling standpoint , there are some that struggle with that identity that they're going to need to really focus on .

Julie Whelan 39:04

And then , lastly , it's responsive governance , which we just talked about , which is do you have the right zoning and permitting and incentive and immigration policies in place ? Are you worried about safety and cleanliness and are we figuring out how to make the perception of our cities better ? And what are the tax structures ? Are they business friendly ? Are you drawing or pushing business away from your city ? So our belief is that if those six things are in place , that then you will have really those vibrant areas that are truly going to outperform in the future . Now we don't have metrics to those yet , but we are working in our next iteration of this study to really identify metrics behind each of those and be able to track the resilience of how these cities perform going forward .

Rachel Oh 39:51

Yeah , no , I love it . I printed this out because I was going to ask you about it and then you launched into it , which is awesome . And I live in Salt Lake City and I feel like Salt Lake hits all six of these , even down to the distinctive identity , as you mentioned , because we've got the Olympics here at one point , We've got incredible natural resources . I think there's a really fun and it's a very young state . I also grew up in Seattle and I feel like Seattle hits all of these as well . So I do think that these are key to these vibrant cities , these thriving cities , as you mentioned , and both , I believe , are quite thriving . I am so privileged to have lived in both and have made Salt Lake City my home right now . So , of course , you know , we'll see , We'll see in the future , but all of these things are super helpful .

Rachel Oh 40:35

Okay so , Julie , the report . We're going to have the link here at the bottom of the podcast so people can vote , but I feel like this report has been incredibly insightful . I love the way you folks have identified , you know , the key driving factors , kind of given us some history . I know you've done a SWOT analysis of both Los Angeles and New York . I think that was fascinating . I love both cities and then you know , just some thoughts moving forward

Real Estate Podcast Interview With Julie

Rachel Oh 41:01

. So encourage everyone that's listening to this to download a copy to read it . It's incredibly insightful and I think that city leaders also will need to do that . So , Julie , super appreciate you taking time out of your day to join our humble podcast . You know we really appreciate it and we're hoping that maybe in as you , you mentioned some metrics that you're going to be publishing later on . Maybe once that's done , you can join us again and we can put some some numbers to this .

Rachel Oh 41:28

So anyway , Julie , thank you so much for joining us today . In the meantime , thank you to all who have listened in today . From the peaks of the Mountain West , I am Rachel oh , your host for Peaks and Portfolios presented by PEG Companies as we continue to dig into all things real estate . Have a fabulous day , everybody .