Much publicity has been given to the population exodus from “the big six” cities of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C. These so-called 24-hour cities once offered the best investment opportunities in commercial real estate.
Today, however, the conversation has changed. Real estate prices have soared in 24-hour cities due to CAP rate compression. Also, the cost of living in the big six cities is out of control. For a city to thrive, you need population growth. This means jobs and affordable housing. A demographic shift is underway fueled by millennials, at 76 million strong, surpassing the baby boomers. Millennials have come of age and they are starting families and looking to the suburbs to settle down.
What the millennials are looking for is a relatively new buzzword in commercial real estate called the 18-hour city. In contrast to the gateway cities that operate 24/7, they are “second tier” cities without operating on a 24-hour basis. These cities also have strong infrastructure, widespread urban development, a robust economy, and a lower cost of living.
Affordable housing is a key factor. Consider that a one-bedroom apartment in NY goes for $3,500 a month and the median home value in San Francisco is $1.3 million. These prices are out of reach for most millennials. In contrast, the median home sales prices in 18-hour cities like Charlotte, Nashville, Atlanta and Tampa are in the $350,000 to $400,000 range, making them relatively affordable. Millennials also value an urban lifestyle which can be increasingly found in 18-hour cities. These cities have vibrant downtowns with exciting dining and entertainment options.
A robust and growing job market is the other arm of 18-hour cities. Investing in jobs is easy to say, but far more challenging to do. Cities must balance funding between recruiting outside businesses and investing in homegrown start-ups. Both are vital to a thriving city. Companies of all sizes need large, reliable, diverse tech infrastructure. This not only means Wi-Fi and cellular, but technology incubators, research labs and collaborations with local universities.
The best example of this is the “Research Triangle” in North Carolina. The metro area consisting of Raleigh, Durham, Cary and Chapel hill has just 2.1 million residents but has grown over 20% in the last decade. Its tech infrastructure includes Research Triangle Park, the largest research park in the U.S. in addition to three world-class research universities in Duke, UNC, and NC State.
The boom of 18-hour cities is not slowing down anytime soon. These cities are benefiting from a more stable and diversified economic base. Previously, employment was concentrated in one or two major industries. Now, there is more industry diversification which should help a city weather economic downturns.
The 18-hour cities faired relatively well during the pandemic recession, a testament to their enduring appeal. Though growing less affordable over time – partly due from transplants from more expensive establishment markets – these cities nonetheless continue to attract in migration due to lifestyle, workforce quality, and development opportunities according the 2022 “Emerging Trends in Real Estate” published by PwC and the Urban Land Institute.