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Urban Exodus Fears Are ‘Overblown,’ Says KKR

“Covid has only accelerated the growth of medium-sized cities,” says KKR’s director of global macro and asset allocation.

Cities aren’t going out of vogue because of Covid-19, with some areas of real estate poised to benefit from an expected acceleration in migration to medium-sized ones, according to KKR & Co.

“Rhetoric around the ‘great urban exodus’ is likely overblown,” Paula Campbell Roberts, KKR’s director of global macro and asset allocation, wrote in a paper released Thursday. Multifamily and industrial real estate will be among the “secular winners.”

Roberts remains bullish on the U.S. as investors question the fate of cities and economic growth amid the shifting nature of work and consumer behavior in the Covid-19 pandemic, according to the paper. She expects continued migration to the Sunbelt region as well as growth in cities with population densities between 2,000 to 5,000 people per square mile.

“Covid has only accelerated the growth of medium-sized cities, as well as exurbs and suburbs near gateway cities,” she wrote in the paper. “Amid growth in southern and medium-sized cities nationally, the locus of economic activity should disperse among multiple metropolitan nodes beyond gateway cities.”

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The value of multifamily real estate is holding up in cities of medium size, while apartment rentals have been under pressure in areas like New York and San Francisco, according to the paper. Such big cities have a population density of at least 5,000 people per square mile, Roberts noted, while medium-sized ones include Atlanta, Dallas, Charlotte, and Phoenix.

As consumer spending moves online and migration to mid-sized cities picks up, industrial real estate will be a “real growth lever,” according to the paper. E-commerce needs three times as much logistics space compared with brick-and-mortar stores, Roberts explained. 

This year, Amazon.com has leased more than 5 million square feet in industrial and warehouse space in the Atlanta market, she said, citing commercial estate data provider CoStar Realty Information.

Cities are resilient, according to Roberts, who expects retail and older offices in larger central business districts to be “short-term losers” due to the pandemic. Gateway cities may overcome related challenges through “longer-term budget reconciliation” that serves as a “foundation for rebirth,” she wrote in the paper. 

“From the Black Plague, to the Spanish flu, there are several examples of global cities not only rebounding from pandemics, but also thriving thereafter,” she said. While the prevalence of working from home will likely persist, with many doing so one or two days a week, KKR’s research has found that physical offices and big cities will remain important.

“Large cities are likely to face short-term headwinds,” she said. But “corporate investment and demographic trends suggest that large cities can recover in the medium-to-long term.” 

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