Real Estate Values in the Time of COVID.

• Author: Nieuwerburgh, Stijn Van

Real estate values capture the agglomeration benefits tied to the area where properties are located. Improvements to these locations, for example infrastructure investments, increase real estate values. Conversely, these values are vulnerable to reductions in local economic activity. My recent research uses changes in real estate values to measure the location-specific impact of the pandemic and to evaluate location-improving policies.

One branch of this work focuses on how the pandemic has affected residential real estate markets in US metropolitan areas. Arpit Gupta, Vrinda Mittal, Jonas Peeters, and I document the exodus from urban centers to suburban locations at the start of the pandemic. (1) Using cellphone ping data to determine location of residence, we find large outmigration from urban centers into suburban locations between late February and late March 2020. While cellphone data are suitable for measuring higher-frequency mobility, change-of-address data may be more appropriate for tracking persistent relocation. Data from Infutor confirm that outmigration rates were high from urban cores and low in the suburbs.

Not only did households move within metropolitan areas, they also moved between them. Data from the US Census Bureau, the Postal Service, and interstate moving companies reveal migration from large coastal metropolitan areas to smaller, lower-density cities and to nonmetropolitan areas. For example, cities with population above 1 million lost 0.16 percent of their population between July 2020 and July 2021, while smaller metropolitan areas grew 0.6 percent faster than before the pandemic and nonmetropolitan areas grew 0.25 percent faster, reversing a decade of shrinkage. (2)

Outmigration rates from a city rose with the share of its jobs that could be done remotely, as measured by a teleworkability score as well as the initial level of rents and house prices. (3)

Before the pandemic, there was a higher price and rent premium for properties closer to the central business district (CBD) of a metropolitan area. However, over the course of 2020, this pattern was attenuated: rents and house prices increased substantially more in suburban than in urban areas. For rents, the premium for proximity to the CBD disappeared. The urban land gradient for rents, the difference between suburban and center-city rents, is plotted in Figure 1. It changed from negative--lower prices farther from the center--to zero. The gradient also increased for house prices, but not by as much as for rents.

To identify the determinants of these changes in the rent and price gradients, we used the cross-section of metropolitan statistical areas and ZIP codes. We find that the ability to work from home was the key driver of this change, more so than the restrictions COVID policies placed on the use of urban amenities.

What do the relative changes in urban-minus-suburban house prices and rents over the course of 2020 imply for the future evolution of rents? We use a present-value model inspired...