This story originally appeared on Business Insider.
As telecommuters fled major cities during the first wave of the COVID-19 pandemic, the country’s most expensive places were suddenly shaken by a dramatic increase in the number of empty apartments. From New York to San Francisco, rents were in free fall. Deals that might have been unthinkable just a few months earlier — $1,000 plus discounts on luxury apartments, for example – became a reality. moving companies were slammed with customers looking to get out of crowded urban centers. While some landlords slashed rents by more than half, others were gloomy held onto vacant units.
However, almost as quickly as rents fell, they started to rise again. Tenants who had a taste of the good life paid attention to their rents double the following yearthe lines to view apartments swelled 80 people, at least one squirms around a city block, and landlords prevailed again. While rental growth has slowed in recent months, tenants in major cities are still feeling the effects of the 2021-22 rental boom. In Manhattan, the average rent is just right reached an all-time highand rent for New York City overall remains nearly 19% above 2019 levels, according to data from Zillow. Rents increased 17% in Chicago, 13% in Seattle and 10% in Washington, DC during the same period. Even in San Francisco, one of the cities hardest hit by mass migration, prices were remarkably resilient, only 2% lower than before the pandemic. Residents of these places are now asking themselves: if so many people leave, why is my rent still so expensive?
The answer is not that more people are moving back to the big cities. While places like New York City have seen a rebound from the lows of the pandemic, there has not been a stream of people return to urban centers. And the idea of landlords conspiring to keep rents high, while partially true, does not provide a complete explanation. Instead of, new research suggests one driving factor: people grew tired of living together.
It’s not surprising that when people are forced to convert their homes into home-office gym-bars, they feel a noticeable urge for more space. The widespread adoption of remote work gave many people the opportunity to leave expensive, densely populated places for less expensive locations in the suburbs or other parts of the country. But this shift also led to profound changes within major cities: people broke through on their own or broke into smaller units. Recent college graduates decided to move out of their parents’ homes, roommates moved from cramped rooms to their own living quarters, and couples split up and got separate living quarters. In total, decisions like this created thousands of house hunters, all competing for a relatively fixed number of units.
The significant increase in household formation counterbalanced the pandemic exodus, a new analysis of the bipartisan Economic Innovation Group found, and ensured that the demand for housing in major cities such as New York or San Francisco did not fall off a cliff. It also underlined the need for more construction in these areas: with more people jostling for housing, the only way for cities to continue to grow and lower the cost of living is to find a place to accommodate everyone.
But it takes a while for cranes to spawn new towers. In the meantime, if you’re wondering why your rent is still so damn high, maybe you should just look at all the people who now have spacious one-bedroom homes all to themselves.
The competitive forces in the housing markets in major cities
When millions of workers went remote earlier in the pandemic, it opened up a world of possibilities — and life-changing decisions. Many people who lived in big cities decided this was their chance to move to cheaper, less crowded markets where they could get more bang for their buck. Others decided to stay in town, but split up from roommates and started hunting for a studio. Any others used their stimulus checks and pandemic savings to upgrade from a single bedroom to a double room. When millions of people across the country are weighing these kinds of options, a shock to the housing market is inevitable.
“Every time I write a paper on remote work, I say, ‘Okay, that’s the last one. It’s time to move on to other topics,'” Adam Ozimek, chief economist at the Economic Innovation Group and co-author of the latest paper, told me. “And every time I do it, I come up with something new.”
In this case, Ozimek and his co-author, Eric Carlson, used masses of 2021 census data to illustrate how major city housing markets were caught between two powerful, competing forces. The first was outward migration, which led to weaker demand for housing in city centres. Earlier work by Stanford researchers Arjun Ramani and Nicholas Bloom found that there is a “donut effectearlier in the pandemic, in which demand for housing in densely populated urban areas fell as people moved into surrounding residential areas and suburbs. Between July 2021 and June 2022, New York City lost a net 194,000 residents to migration, while Los Angeles lost 109,000, Chicago lost 109,000. 88,000 and San Francisco lost about 20,000 analysis of census data found by John Burns Research and Consulting. In the case of New York City, EIG’s latest analysis of US Postal Service data confirmed that no been the next wave in people moving back to the city.
Instead, the sudden flight to the suburbs was countered, Ozimek and Carlson said, by an equally surprising wave of family formation. A household refers to any group of people living together in one unit – a family of five living in a suburban home counts as one household, as does a group of three roommates living in an urban apartment. If those three roommates move out and each get a one-bedroom unit, the net effect is two more households. Before the pandemic, family formation in the US was declining. Between 2010 and 2020, the increase in the number of households was the lowest ever recorded, according to an analysis of Pew research center found it. Slow population growth and an increase in the number of adults living with their parents, perhaps due to the economy’s choppy recovery, meant fewer people were striking out on their own. That changed shortly after the pandemic hit: household formation rose 2.5% nationally in 2021, more than double the highest rate since the Great Recession.
This increase in household formation caused an increase in the “expanded demand margin” – essentially the total number of housing units desired by a given population. But EIG’s latest paper goes a step further, saying there was also an increase in “intensive margin,” or the size and quality of units people demand. Put another way, remote working led to an increase in the number of people wanting not only a place of their own, but also a bigger home. A couple may want to upgrade from a one bedroom to a twin bedroom, or they may be looking for a bedroom with more square footage. This desire to trade off is reflected in the rent payments of people who have moved to remote working: Becoming a remote working family in 2021 has been associated with a 20% increase in rent payments, or about $500 per month, the EIG researchers discovered.
With more and more people looking for a place to live, the only way for cities to keep growing and lower the cost of living is to find a place to accommodate everyone
Of course, those effects were not equally felt everywhere. To return to the “doughnut” analogy, the downtown hole — the most populous, most expensive part of a metropolitan area — would likely lose residents as a result of more people working remotely. But it was also more likely that household formation would increase.
“Part of that is probably because housing markets in those areas are becoming relatively more affordable,” Ozimek told me. “People are leaving and so you have job openings, and people are taking the opportunity created by the job openings to form new households. So it’s one of the ways the housing market is responding to the opportunity created by population loss.”
While outbound migration helped people land some early pandemic deals, the surge in family formation caused rents to fall rapidly in many of these city centers. Take San Francisco, where the average rent within the city limits rose to just over $3,500 in September, down just 2% from the same point in 2019, according to Zillow’s data. Or look at New York City, that as Ozimek and Carlson assign, lost 2.9% of its population between 2019 and 2021, but saw real rents rise since early 2021. Washington, D.C., lost 20,000 people, or nearly 3% of its population, between April 2020 and July 2021, according to census data. But by the third quarter of 2021, apartment vacancy rates, excluding new construction, had fallen below pre-pandemic levels, according to data from Delta partners.
The next phase for the rental market
The rental market is now in the middle of another shift as higher interest rates squeeze consumers at every turn. Demand for apartments has been sluggish this spring, the latest report from Apartments list said, and an influx of newly built units is keep rental growth in check. In 40 of the nation’s 100 largest cities, including Austin, Texas and Washington, D.C., median rents were lower in April than last year.
“High house prices, high rents and rising interest rates are likely to work against household formation,” Ozimek told me. A recent report from Redfin acknowledged that, pointing to slower household formation as one of the reasons median rents hit a 13-month low. Unlike the early months of the pandemic, housemates may now be looking at the rental market and deciding it makes more financial sense to stay together rather than test the waters alone.
But even if more people go back to sleep, it will not change the fact that we will need more homes to meet the growing demand. More than 971,000 apartment units were under construction by the end of 2022 in the US, the second largest number on record. About 575,000 will be completed this year, according to RealPage, a real estate software company. That’s encouraging, but it won’t be enough. Households, EIG’s research found, are likely to demand more space per person as remote working becomes mainstream or even expands. If more employees continue to work remotely – which, I admit, is a big “if” – which indicates that the demand for housing will undoubtedly increase.
In this case, however, Ozimek is optimistic. The instantaneous shocks we’ve seen in recent years will no doubt subside, he told me, once supply has time to catch up with these rapid changes in demand.
“In the short term, we are dealing with a lot of imbalance between supply and demand,” Ozimek told me. “Household formation is one of the things that increases demand. But in the long run, we need to help supply to bring things back into balance.”