Reimagining Cities-Disrupting the Urban Doom Loop

REAL ESTATE PERFORMANCE: ECONOMIC ANALYSIS OF RENTS, VALUES AND PRODUCT

DIVERSITYMIX A city’s real estate portfolio can be likened to a financial portfolio wherein there’s exposure to several major asset categories: stocks, bonds, real estate and cash. “Portfolio Theory” has taught the financial markets that a diverse portfolio—not putting all your eggs in one basket—is the optimal approach, allowing investors to maximize returns for a given level of risk tolerance. 60 Cities and WalkUPs feature a diverse real estate product portfolio, including office, multifamily, retail, for-sale housing, sports and entertainment and a host of other products. This product mix is neither random nor beyond the influence of market forces or policymakers. In fact, local real estate product mixes are precisely driven by a mix of market decisions, which in turn are influenced by policy choices in the form of infrastructure, zoning, tax systems and subsidies. In this section, we explore our findings, which reveal that, much like a financial portfolio, the performance of real estate benefits from the diversification of product offerings in cities and WalkUPs. The pandemic and its impact on cities brought attention to the fact that some WalkUPs, especially Downtowns, violated portfolio theory. More specifically, too much emphasis was put on office. While a disproportionate amount of office product served WalkUPs

and cities well during the 20th and early 21st centuries, the recent changes in office fundamentals—exacerbated by the pandemic and the shift toward hybrid work—revealed the negative consequences of violating portfolio theory. Cities must reconsider how they use their land and create a more balanced portfolio that benefits all products, thereby maximizing overall real estate values. Though it’s en vogue to harken the demise of office, 61 it continues to play a vital role as a hub for employment and commerce. In fact, WalkUPs remain the most efficient locations in many cities to draw workers from around the metro area, and as such, should have substantial—even a plurality of—office product. Our analysis will reveal that WalkUPs can have too much of a good thing. There is pent-up demand for walkable urban housing today and it is correctly believed that office to-residential conversion 62 is often a good thing. Portfolio theory, however, also applies to over-production of housing. This research shows that there is a Goldilocks balance of just the right range of Live (multifamily rental, student housing and for-sale), Work (office, GSA, owner-occupied and university), and Play (retail, hotel, sports and entertainment, museums, convention centers, etc.) to optimize valuations per square foot and GDP .

60 Markowitz, Harry. 1952. “Portfolio Selection.” The Journal of Finance 7 (1): 77–91 61 Gupta, Arpit, Vrinda Mittal, and Stijn Van Nieuwerburgh. 2022. “Work from Home and the Office Real Estate Apocalypse.” National Bureau of Economic Research. September 1, 2022 62 Commercial-To-Residential Conversion: Addressing Office Vacancies | CEA.” 2023. The White House. October 27, 2023.

32 Cushman & Wakefield