Reimagining Cities-Disrupting the Urban Doom Loop

it—but multifamily, specifically, is dominating the market share gains on an inventory basis. According to Rent Café/Yardi Matrix, both office and hotel conversions are the main incumbent property types for residential conversions. As of May 2024, there are 151,000 apartments across the U.S. underway (at various stages) from conversions with former offices accounting for the highest—38.5%—share of all, and hotels the second highest—22.5%. 65 RENTS AND VALUATION Rents One theory we tested is whether over exposure to office diminished performance on the key real estate indicator of rents. Our analysis of 208 WalkUPs indicates that the product most sensitive to office share is office itself. When we track the percent change in rents from 2019 to 2023 (on the y-axis) as compared to the starting share of office in 2019 (the x-axis), we see a downward trend. This suggests that WalkUPs with higher starting shares of office tended to have lower or negative rent growth over this four-year period. Further, we observe that the average inflection point, where rent growth flips from positive to negative, was around a share of 40% office in the product portfolio. By this same metric, we find little evidence correlating multifamily or retail rent growth from 2019 to 2023 with the (pre-pandemic, 2019) exposure to office. Trend lines tended to be flat, suggesting little correlation between office exposure and the rent trends of those other two key CRE products. As we will discuss further in this section, it does not suggest that office overexposure

doesn’t impact those products at all; only that we do not see a strong relationship on the single dimension of rent growth. Of course, aggregate trends sometimes mask individual asset performance; for example, some specific retail assets located near—or especially in, as is the case with ground floor retail—highly vacant office buildings are impacted if there is a corresponding drop in foot traffic due to remote work. Valuation Beyond rents, we calculated an estimate of total valuation for all product types at these 208 walkups for our 15 cities. Total value reflects both the value of the underlying property type and its relative importance (share of stock) in a given city or WalkUP. We estimate that the 15 cities collectively contain $5.6 trillion of real estate value or roughly 9% of the total value of all real estate in the country. Of the $5.6 trillion, $1.5 trillion is contained in their WalkUPs, underscoring their importance to these city and regional economies. This substantial component of aggregate city real estate value—26.7% of all value—is located on very little of the city land mass, anywhere from 0.5% to 4% of total city land mass. A breakdown by city tier shows that in gateway and large secondary cities, WalkUPs are 29% and 27% of real estate value, respectively. In moderate secondary cities, real estate value is distributed more throughout the rest of the city, with only 9% of value in WalkUPs.

65 Grecu, Veronica. 2024. Review of Adaptive Reuse Surges Again with 151K Upcoming Units; Hotel Conversions Overtake Offices in 2023. May 7, 2024.

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