Reimagining Cities-Disrupting the Urban Doom Loop

An examination of Work’s role in PPSF declines indicates that Work exposure is the major driver in WalkUPs. Across all WalkUPs, Work accounted for 63% of the decline in total PPSF. For Downtown WalkUPs, Work accounted for 70% of the PPSF value declines, and those declines were sharper. Downtown WalkUP PPSF declined by about 25% over the 2019 to 2023 period, of which we can attribute 7.8% to Work net operating income (NOI) fundamentals, and 9.7% is due to expansion in Work cap rates. This illustrates the staggering impact that Work real estate is having on broader measures of pricing. 67 In fact, our analysis shows that for every 1% increase in Work’s share of stock, total PPSF growth declines by 30 bps more than the market average. A few summary statistics illustrate this effect clearly: WalkUPs with less than 40% of inventory in Work averaged a total PPSF increase of 1.2% and a decrease of -6.8% for core CRE PPSF. 68 For those WalkUPs with Work inventory greater than 40%, the average total PPSF change was -12.6%; for core CRE, it was -18.7%. A product-level view reveals that, with the exception of industrial and for-sale housing, all product types saw decreases in PPSF from 2019 to 2023 and that this decline was most notable in office product. Specifically, Urban Commercial office and related GSA and owner-occupied products saw the greatest declines. While multifamily rents and even hotel daily rates may have seen positive growth, PPSF declines occurred due to deteriorating fundamentals in NOI (including increases in vacancies and/or expense ratios), and unfavorable (rising) cap rates. Capital market conditions have begun reflecting, depending on the subtype, a combination of post-pandemic realities (i.e., new risk premia) and the new interest rate regime, commonly dubbed higher for longer after a near 15-year period of the federal funds rate hovering near the zero lower bound.

ATTRIBUTION OF VALUE CHANGE BY WALKUP TYPE PCP* to 2019 vs 2023 % change

ALL CITIES

20%

10%

0%

-10%

-20%

-30%

Total City

Downtown

Rest of City

Urban University

Urban Commercial

Downtown Adjacent

Office

Multifamily Other

For-Sale Total

Source: Places Platform, LLC and Cushman & Wakefield Research estimates based on data from CoStar, CoreLogic, Cushman & Wakefield, U.S. General Services Administration, U.S. Department of Education IPEDS, U.S. Census Bureau, Property Shark, NCREIF and MSCI Real Capital Analytics Note: *Percentage point contribution based on total % change, not on annualized growth rates.

Valuation per Square Foot Normalizing valuations by square footage, we still see Downtown valuations declining as PPSF values decreased by 25% from 2019 to 2023, compared to 18% in Downtown Adjacent and 20% in Urban Commercial areas.

67 This isn’t necessarily a permanent trend. Office/Work has declined more over the past few years than other product types. That is, of course, impacting our analysis that only looks at the last four years. However, even with secular shifts, it is possible (maybe even probable given that office/Work will be coming off of a lower starting point) that office/Work PSF value growth will outperform some other property types over the next 4 (or 10) years. Similarly, there is no guarantee that for-sale housing will continue to outperform to the degree it has over the past four years. We are describing a moment in time amidst today’s portfolio mix, but that doesn’t mean that these trends will be consistent or persistent. What our analysis is revealing is that regardless of time, diverse

product mixes with optimal balance will make neighborhoods and cities more resilient to ups and downs in the market. 68 CRE excludes for-sale housing. Core CRE excludes for-sale housing, industrial and sports/entertainment real estate.

40 Cushman & Wakefield