Reimagining Cities with Rebecca Rockey and Chris Leinberger
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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and this is a special bonus podcast. And to help me with this podcast, I've got a few friends and colleagues and outside guests and a lot of introductions to do. But let me begin with the co-hosts, Chris DeReedes and Marissa DiNatale. How are you guys? Hey, Mark. Hi, Mark. How was your Thanksgiving?

I tell you, I'm so sore, brutally sore. So we have Thanksgiving dinner on Thursday, and then the next day is just games. And believe it or not, we played pickleball tournament for a long time, long time. And I'm sore. I'm like still recovering. Oh, wow. Yeah. Yeah.

A lot of Advil. A lot of Advil. I recommend it. How about you? How was your thing? No more volleyball? Volleyball's off the table? Yeah. Interesting you should ask that. A lot of debate about that, what we're going to do next year. Because the pickleball, the men kind of take over. It's harder for the women to hang.

But volleyball, everyone hangs, you know, it's a, it's a, it equalizes everybody. And so we're debating what to do there for next year. So if you've got a view, I'm all ears. I've never heard of volleyball.

You never heard? Really? Never heard of walleye? As you do all these foo-foo sports in Southern California, that's why. Like you do this weird boating thing. Dragons or something. What's that boating thing you do? I do outrigger canoeing. Outrigger canoeing. Yeah. That's foo-foo sports in my view. Come and try it and see if you think it's foo-foo.

I know. I'm sure I'd be- No, I've never heard of Wally. What did you call it? Oh, you go into a racquetball, basically a racquetball court, and you string up a net, and you play volleyball in the racquetball court, and you can use the walls, and thus Wallyball, and it's very equalizing. Just as long as everyone is respectful of everyone's space, which is pretty hard to do in the Zandy clan, but it's

If you do that, then everyone can play. So it's a lot of fun. Chris, you know what I'm talking about, right? You know Wally Ball. I think it's a Zany invention. I've heard you mention it before, but I've never heard before you.

Anyway, sports. And we got our dear colleague, Adam Kamens. Hey, Adam, how are you doing? Hey, Mark, how are you? Good, good. And I know the listener can't see, many of you who aren't on YouTube can't see this, but Adam hangs out in his Dr. Seuss office is what I call it. He's got these like doors.

everywhere and no one knows what's on the other side of those adam can you just one day no don't do it i was going to say open the door but that would really break be careful maybe we'll do it on halloween or something see what pops out all right all right well thanks for joining and we got two guests rebecca rocky rebecca how are you i am well mark i'm good you are you didn't say that with much gusto i mean uh

Oh, no. Everything's wonderful. Everything's wonderful. Good. We got this study published, which was a good chunk of my year. So I think Chris and I have felt pretty wonderful since September 19th. And you're referring to your colleague right next to you, Chris Leinberger. Chris, how are you? I'm doing very well. Had a lovely Thanksgiving with family and friends. Well, that's as it should be. I'm glad to hear that. We did not play...

A pickleball. You did not? No. Yeah. Well, wise move, Chris. Wise move. Wise move. You should see, you can't see, but I've got this heating pad down here on my knee. My knee's swollen. Anyway, Rebecca, Deputy Chief Economist at Cushman Wakefield. You've been on the podcast before. I'm surprised you came back on. You know, me too, Mark. That's right. Yeah.

Actually, I think that we had to beg you to come back on. Thank you for coming back on.

I think the first time I was on the podcast, well, I guess the only other time is the episode where you found out that Marissa does the outrigger canoeing. Oh, is that right? I remember a lot of discussion about the canoes. Oh, really? Okay. That's what we're going to talk about every time. It always comes back around. Right. And I know you're kind of an athlete too, right? You're a big athlete. You know foo-foo sports for you. You know what I'm talking about, right? Yeah, we...

I like to stay active. So we did some cycling over the holiday, mainly on Thanksgiving, not the day after. So we took it easy on Friday. Very, very good. And I know you were talking, you're a Penn State fan. Congratulations. Looks like a big game coming up. When's that game with Oregon? It's coming up. I think it's this Saturday at eight o'clock. Okay. All right. Yeah. I'm going to watch that.

And Chris, I know you were just saying you're from Philly and you're an Eagles fan. That's good because otherwise we'd have a real problem on this. Yeah, I understand that. Having been raised there, you have got to bow down before the Eagles. Exactly. So tell us a little bit about you, Chris, your background.

So I've been involved with real estate forever. And I got involved because my mother would always take me to Center City, Philadelphia, to go see my father down at Penn Center. And I asked the question, why are all these people here on Market Street? And three blocks over, there's nobody there. And I didn't realize that that was basically urban economics.

And my entire career has been trying to hunt the answer for why do people go one place and not someplace else? Oh, so cool. That's so cool. And you have a firm. The name of the firm is? Places Platform. It basically quantifies the old trope of location, location, location. How do you quantify it?

Got it. And are you still teaching? I saw on your bio, George Washington University. Is that- I'm now emeritus at George Washington. And prior to that, I started the real estate program at Michigan. So thank you for what Michigan did for you guys. Yeah. Very cool. Very cool. It was good to have you on. And of course, we are going to talk about this study you did

on re-imagining cities. And can I ask, that came out a few months ago now, right? Or yeah. I remember, yeah. When did it come out? September 19th. Oh, September, not that long ago. Right, right, right. And before we go there, it's about kind of my notebook LLM summary, not quite as good as notebook LLM, but

This takes the discussion around the so-called doom loop, the CRE, commercial real estate CRE doom loop, which was really kind of top of mind maybe a year or two ago as a major threat.

not only to CRE, but to cities, but also to the macro economy, to the broader economy. That's kind of faded to the background, but you took the conversation a big step further and said, okay, we've got this problem with CRE and urban centers and what should be done about it? How should we address that? Is that roughly, did I get that roughly right, Rebecca? Yeah. Yeah. Okay. Very good. But before we get to the solutions to the problem, as you-

laid them out in the paper. Let's talk about the CRE doom loop. Could you just take a minute and describe, how would you describe what that risk was? And my sense of it is it's less of a threat today, but am I right? Is it less of a threat to the broader economy?

I think well I'll start with sort of an observation about the second part of what you said then I'll try to go into how we think about doom loops and then of course Chris a few comments to add I think one element of doom loops that we highlighted is something that's episodic versus structural and we indicated that we saw signs in many of the markets that we studied that

The challenges that they were experiencing, which in some cases I think can be classified as a doom loop, are more episodic in nature. And that is really an observation that came out of data, whether it's looking at foot traffic, population inflows, all of the things that might indicate, hey, the nadir has been reached.

in terms of the economic downturn that has happened. And so that's sort of, I think one important distinction that we make upfront is this notion of it doesn't become entrenched and embedded, or is there a signal that it's sort of bottomed and we're in early stages of recovery, but the challenge here is, of course, we've gone through a paradigm shift. The built environment was structured in a way that accommodated affordability

of course, the way that we worked and kind of behaved in the office market before the pandemic. And it's not necessarily suited, at least in its current proportions, for where we are. And that creates a sort of tail risk as we move forward in the sense that what happens to that space and how long does it remain there, at least the parts of it that we don't need. And the reason that I think that's important is because

Whether it, you know, you go back to SVB and the bank crises, well, crises, we could debate if that was a crisis or not, but all the bank issues or doom loops and what they mean for cities. And I think there can be a false impression that they're cliff events where, well,

What we've seen in prior episodes or even in the data, particularly on the fiscal revenue side that we analyzed, is that there's kind of a slow burn and it just really takes time for certain things to filter through. And that's true within the capital markets when you think about where are we with distress, right, within CRE. That's true within how public financial revenues are holding up on the property tax side. So...

We're still concerned that there's an imbalance for today's economy, not yesterday's, and that if left unaddressed, this is going to create elements of a sort of doom loop, if you will, but one that we think is more episodic in nature. And again, that there are kind of already signs that some of it is reversing, but of course,

you can kind of have challenges in one pocket of the economy and other pockets doing okay. I know we'll talk about the specific parts of cities that we studied and those particular areas, especially downtowns are where we're most concerned about this risk. - Because it all comes back to a portfolio theory. And we found that our downtowns in particular, but there's also other kinds of downtown like places

in our center cities, downtown adjacent, urban commercial, urban university. But just focusing on downtowns, their portfolios are out of whack, that they basically have violated portfolio theory, and they put too many of their eggs in one basket, the office basket. And we keep on thinking that downtown is a central business district. It's got to be just business.

And so our downtowns are about 70% work, i.e. office. We optimized what would yield the highest real estate valuations and the highest GDP for these downtowns. And we figured out that it should be 42% work, not 70. So you're talking about 40, 50% overbuild of the office market.

So that's tens of millions, hundreds of millions of square feet that need to find another purpose in life. And that takes time. And there's going to be haircuts as far as the people that hold those existing office buildings. Sometimes they're going to be decapitations of those asset holders. But it's going to take a lot of time to get those office buildings repositioned, whether it be residential,

Or the surprising finding, and I'm jumping ahead here, is we need a lot more play in our downtowns. We are hardworking Americans, but we know that great urban spaces, you've got to have, our estimate was 26% of the space should be devoted to museums and pro sports and restaurants and convention centers and hotels.

And it's much lower than that. So it's a matter of shifting from work to more live. Didn't mention that, but that's critical. And more play. There's like a lot to unpack there. So, I mean, the person listening to this says, what's going on? What are you guys talking about? So let's just take it one step at a time.

And I find it, I do really want to dig into those percentages. I mean, that sounds very precise. And, you know, I'd like to talk about that in the context of- You all know about precision. Okay. Okay, fine. Okay. Just context. Let me though-

Chris Dorides. Let me turn it back. Let's go back. Let's go back a year or two ago because the paper's title, and I highly recommend it, is called Reimagining Cities, Disrupting the Urban Doom Loop. So this came out of this –

what we felt like a crisis not too long ago. But Chris Drees, can you explain what the so-called doom loop is and how are you thinking about it now? I mean, a year or two ago, correct me if I'm wrong, there was kind of the top of the list of concerns about the macro economy. If the economy was going to go down in a recession, this was going to be

one of the reasons why it did because the CRE market imploded and took the banking system with it. So maybe you can just take a step back and walk us through that. Sure. I'll take a stab. Maybe Rebecca can correct me if I misstate anything here. But the way I think about it is as a supply demand imbalance, right? So you have a city, it's got a variety of different property types, whether it's residential, commercial, retail, et cetera.

Um, and let's, let's assume that it starts at equilibrium. Then something happens. There's some type of shock that causes the supply demand imbalance. Either there's too much supply or demand shifts in something happens. And in this case, I think we can trace it back to the pandemic in terms of the most recent.

And certainly in the early days of the pandemic, there was this fear that cities were dead, offices were dead. Nobody's going to want to travel or use public transportation. Everyone's going to be spread out. Everyone's going to move to the suburbs. And so the office market in particular is going to be under severe stress, massive oversupply of that type of asset.

And the doom loop part of this starts with that type of imbalance and then starts to feed on itself, right? So if you have too much supply in this market, nobody's or very few people are traveling in, it starts to lead to properties that are abandoned or in...

in ill use, maybe the state gets dirtier and you suddenly have fewer and fewer people who actually want to go to the city or access the amenities. Tax revenues fall because the property values are falling. And so you suddenly have this downward spiral in terms of the supply demand imbalance. So the demand shrinks even further, the supply is even more out of whack because you can't rapidly adjust.

and you start to continue to spiral down until you hit some other type of equilibrium or something else comes along in order to jumpstart or move the city back into a more positive direction. So that's how I think about it. Of course, it metastasizes in a broader macro sense. If the problems in the CRE market result in defaults on the loans that are backing those CRE properties and mortgage loans,

And then the banking system that made those loans or other investors who made those loans start choking because they're suffering with those losses. They pull back on credit and availability of credit. They jack up interest rates. It becomes very difficult for anyone with a property that has a mortgage loan that's coming due to roll that over and get another mortgage loan. And you can see how this thing can become a real mess. And that's the concern that was...

I think prevalent, certainly a couple of years ago, maybe even a year ago was still, but today, not so much. Rebecca, is that roughly right? Is that, we characterize that roughly right? Would you add anything to that characterization?

No, I think you've hit it right, especially when you brought into Chris's explanation some of the elements around losses and credit tightening and all of these challenges. I think my observation was this notion of doom loop has sort of ebbed and flowed from public consciousness. It kind of...

it comes and goes, if you will, from kind of what the media is focused on. And the reality is, I think, you know, some parts of cities are actually thriving and we, we highlight some of those areas and not every market in our study also had the same outcome. So we saw huge differences as we went from gateway cities to smaller markets. Um,

But there's also a reality of, you know, if you track what's going on with the office market, vacancy is still rising, you know, and the challenges that we face around distress have not yet materialized. Right.

And there are a lot of reasons for that, I think. So I know Adam and I do some work with some public sector folks, and just the way that valuations are done for the assessment of property tax purposes is a very lagging indicator. So, you know, public finances do not fully encapsulate valuations.

what has happened. And that's, you know, again, each city kind of has its own fingerprint in terms of its tax profile or the way that they assess values. But these are challenges that cities will continue to face for a number of years, if not many more years, as they try to adjust to what has become this oversupply, in particular of the office market. I think one of the things we're arguing is

look, there are signs this is episodic, right? We're seeing that there's pent-up demand still for urban living. People want to live in these places. It's just that the way that we've worked has changed and we've built the world around us for that world. So I sometimes, when I talk about this study, I talk about it through two angles. One is if you're an investor, right, you can

prune your portfolio as needed through dispositions and acquisitions. If you're a city, you have a certain built environment around you and it takes a lot longer to shift and prune that portfolio, if you will. And we're really just in the early stages of trying to adjust to that. I think I would agree. I spoke with Chris, I think last, was it this February of 2024 on, on doom loops here in DC and he,

Is it a macro risk that is going to take down the U.S. economy? No, I don't think so. But I do think these are important issues at a local level. And as I think we've tried to highlight in the study, they're very important for downtowns of U.S. cities, which we show are economically critical parts of each of the cities that we studied.

So just to paraphrase, you're saying, look, the macroeconomic threat, that dark scenario we construct with the banking system going down because it's choking on its CRE debt,

Not so much. That feels like that's less of an issue, less of a risk. But look, but still, despite that, there are significant issues with regard to urban centers and downtowns. They still are very imbalanced in the sense that they have, as Chris said, the wrong portfolio. They're not optimizing their portfolio. Is that fair? Yeah. Okay. Okay.

Before we move again to move on, I just want to complete the conversation around the kind of the macro threat.

And we construct CRE price indices based on actual transactions, repeat sales, and we clean the data to make sure that there's no outliers in the data, all that kind of stuff. And of course, there is a big caveat that the number of transactions are way down. Therefore, these indices become a little more difficult to move. What's noise, what's signal, so forth and so on. But the one thing I have noticed, and we have now data through Q3 2024 quarterly data, is

CRE prices are actually rising. They hit bottom in the first quarter of 2024 and they're rising. Now, they're still across all property types, still down about 10% from the peak. The peak was back in early 2022 and they're down surprisingly to me,

More for multifamily. They're down 25%, 30%. For office, they're down 10% to 15%. For other property types, on the margin, retail's down a little bit, industrial's down a little bit. But we are starting to see some price increases here.

Do you think, and this is to both you, Rebecca, and Chris, do you think the worst is now over in terms of pricing? Or as you kind of alluded, this is still a process. Vacancy rates are still high. We still haven't solved this issue, particularly in the office market, and that we could see another round of price weakness. Are we done with that, Rebecca?

I think for most asset types, yes. Now we look at a variety of indices. So I can say some of the ones that we look at for office in particular, maybe down 30, 40% compared to- You're saying that in your data, down 30, 40. Or just industry benchmarks. So for example, looking at things like Green Street or MSCI Real Capital Analytics, also use a repeat price index. And when you look at

For example, their CBD office index, it's going to be down about 30%. I think Green Street is closer to 40. And the second derivative for the audience here, that means they're declining still, but at a slower rate than they were before. So that's a positive inflection point that we've seen. Some indices, whether it's for apartment or especially industrial companies,

You know, we've seen values stabilize, if not start to rise. So I think it's uneven a bit by property type and then, of course, by market as well. One thing that I like to emphasize, because I think some folks who aren't in CRE might conflate the two, is you can have a pricing cycle where

Prices reach their bottom. They start to rise again. And that is a very different thing than the credit distress cycle. So I'll use the GFC as an example. Pricing, for the most part, bottomed around 2011. GFC, great.

Great financial crisis. Is it the great financial crisis? Great financial crisis, yeah. So pricing, for the most part, bottomed in either second half of 2010, early 2011. It's on the upswing. Distressed trades as a share of the total market peaked in 2013. So it's just they happen at different paces for a lot of different reasons. So-

it's not mutually exclusive to say, oh, prices are rising and we haven't hit peak distress yet. So, and I think that's the world that we're in now. Most pricing is showing signs of having stabilized and

And, you know, even in the office market, we see new signs of life in the debt market. So that's reassuring given where we are. And it shows there's some conviction, particularly around the higher end part of the office market. Right, right. I think maybe the our office index is different, not better, different.

Because it's the entire office market. If you look on CBD office, Central Business District office and big urban centers, that's what you're suggesting is down 30% or 40% from the peak. But what you're saying is, okay, look, prices, they may be stabilizing up a little bit, but we still are not through this thing in terms of what it actually means for distress defaults, because that just takes time for that to kind of work through the banking system and everything. Okay.

Creditors are trying to figure out how not to default. Regulators, I assume, are trying to figure out a way not to push banks to push these properties into default. But over time, you're going to figure out, oh, this just isn't working. It's uneconomic to keep these loans. They're going to default. And that's something we have to work through. Therefore, the doom loop is overstating the threat, but it's still a process underway. It's still not over. Yeah.

Yeah. Okay. Okay. Okay. All right. So let's turn to the paper and maybe you can kind of take a step back and say, you know, talk about portfolio. What are the assets in the portfolio and how you're thinking about it and how you kind of measured it? You know, what data sources did you use and how'd you kind of get kind of a grip around these things? Does that sound reasonable? Yeah.

Yeah, so I think there's the property data that we looked at, and then there's sort of how we organized that data spatially. And so I'll talk a bit about the property data that we looked at, and then, Chris, maybe you can walk through the geographic breakdown. So we made an attempt, and we think it was a very great attempt, to quantify 100% of

of the full real estate market. Right. And if there's something that your audience doesn't know about CRE, it's that we tend to look at things in silos. So you're a retail client or owner and you just look at retail or the apartment market or industrial. And we tend to look at them right in this very siloed manner. So we wanted to say, well, one, what is the full universe? Because we do track some property types regularly.

in our industry very carefully. And then others actually not so much, but they are part of technically the commercial real estate and the built environment around us. So the first data source that we used were data from Cushman and Wakefield on the office space

industrial life sciences market. Industrial includes a lot of different subtypes for your audience's awareness, manufacturing, warehouse distribution space, data centers, etc.

We then also looked at the for-sale housing market, which is very atypical for a study in our sector. And the idea here was, right, you don't really know the residential market unless if you actually know what the for-sale market looks like. And so we leveraged data from CoreLogic for the purpose of for-sale. We leveraged some third-party data from CodeCore,

and other industry vendors around hotel in particular, as well as multifamily. And then we actually created proprietary estimates using a variety of different data sources from the public sector to various industry databases around

around things like GSA footprint. So the federal government has about 90 million square feet of owned real estate. We estimated university real estate footprints across the universities that were in the sample in our analysis.

And we also looked at owner occupied, which tends to be excluded from analysis, right? This is a company that maybe buys its own office building and then occupies that office building. And typically in the brokerage community, you tend to not track that. It's just not part of the competitive market. And so you don't track it properly.

And so we kind of mashed all of this together and got our first read on what we thought 100% of the real estate footprint looked like. I should caveat, though, we looked at 15 cities, not metro areas, the city within the metro. And we looked at very specific parts of the city that we call walk-ups. And so I think maybe Chris can walk through what those are. Sure. There's only two ways to build the built environment.

There's the one that most people know of called drivable sub-urban. It's low density, isolated land uses, residentials over here and offices over here and retails here. And the only way that you can get around is by cars and trucks. And that's the vast majority of how we built this country over the last hundred years. We invented drivable suburban development in this country. It's now, of course, worldwide.

Prior to that, you know, in the 19th century, early 20th century, how we built cities was the second way is walkable urban, high density mixed use. And you jam everything together. Many ways to get to a place. You can walk there, you can bike there, you can take transit there, you take your car there, take your truck there. But once you're there, everything's walkable.

walkability is about a half mile until people start looking for an alternative transportation source. So that going back to high school geography. Not Adam. Adam gives up after, you know, a quarter of a mile. You're looking for it. Yeah. We got to work on his endurance. So it kind of limits the size of these places. Thank goodness, because we in real estate overbuild all the time. But this puts a governor on the market.

So these places that are walkable urban are about 300 acres in size. And they can range from 200 to 500, but roughly on average, the work we've done, they're about 300 acres in size. And in a city, these, what we call walk-ups, technically it's regionally significant walkable urban place

and we shortened it to walk-up, that these places are 3% of the landmass of these cities, but 57% of the GDP of those cities. One could argue these walk-ups, this 3% of the land is why the city exists. This is where all the export and base jobs locate, which then ripple through the economy for school teachers and grocery clerks.

So this is a very important part of the city tax base, of course, and it really drives the economy. But these walkable urban places, to be attractive, need to have a diversity of uses. And again, here in this country, not in Europe, but in this country, we've invented central business districts, and the emphasis is on business. And that's why we got our portfolio out of whack.

That's 70%. So just to stop. So you got all this space, you got all this data for all these different types of space and use cases for the space. And you said, okay, look, what percent of the space is used for work, office? What's used for what you call a play, the music hall or the stadium or whatever it may be?

And then you said live, and I guess that's just to live, housing. It's residential, but it's also rental residential and for sale. And keep in mind, residential is about 60% of the built environment. Right. And then across all these 15 cities that you looked at, Philly being one of them, you said 70%-ish residential.

is work and that fundamentally is a problem because it's a lack of diversity of use and that's okay when people are going into work, no big deal. And people have jobs, no big deal. But in the world we now live in with remote work and given demographic trends and the demand for office space,

for space, that becomes a problem. And that's contributing to the underlying issues that these cities are now facing. 30, 40% of the office market in most downtowns need to find another purpose. And that's driving the economy. It's driving the tax base. But to me, a crisis is a terrible thing to waste.

I mean, these cities, you know, Center City, Philadelphia, there's a real core around City Hall and particularly to the west of these office towers. And they're basically sterile, nine to five, five day a week places. Well, if you want to attract residential, you want to attract restaurants,

You need to have a mix of uses to have traffic on the sidewalks for 18 hours per day, seven days per week. I think there's an important distinction here, too, in that when we say walk-ups, right, we're talking about it's earthworks.

urban, it's walkable. It's also regionally significant, as Chris mentioned, which just means important to GDP production. But there are actually subtypes. And so we found that, for example, downtowns, which is sort of the densest and sort of the epicenter of the city, right, that those are the most

over-officed, if you will, overworked, if you will. However, there are other subtypes of walk-ups, downtown adjacent, urban commercial, urban university, and they were much less out of balance. Now, some still were relative to this optimization that I know we'll talk about. But that downtown is, you know, it's important to kind of recognize that's a finite part of the city, right?

It tends to be actually just a very small percentage of the landmass in the city. But that's the part of the city that was most likely to have gone all in on office. And so 70% was across all 15 cities, the share of downtown real estate that was some form of office. But we had a range from Miami at around 40%.

which is kind of right around where we think is optimal. And actually Miami's market, if you track it, is doing very, very well. On the flip side, you have cities like DC, which is where we are today. You have San Francisco. 85% of the downtown real estate is downtown.

basically some form of office. So you do have some variation around that total, but there are other forms of walk-ups and we think there are things to learn from them and their imbalance, if you will, if it exists is much less extreme. Adam, let me bring you into the conversation.

Because I know you look at migration data based on credit file information, so very anonymized data. Are you seeing changes in migration patterns that are consistent with

what Rebecca and Chris are talking about here? Absolutely. I think one of the things that really jumps out that I've been talking about for years now from this Equifax data that we look at is that within cities, right, we know this is, you know,

well-established 2020 into 2021, just an exodus of residents across the board. But what we saw starting in 21 and kind of picking up the last few years has been that the people that are coming back to cities are young adults. We have these different age cohort cuts, and particularly it was 18 to 24-year-olds. Now it's more 18 to 34-year-olds that are on net, either neutral or moving back in to the large gateway areas. While

while the rest of the population is still migrating out more than they're moving in. And what I've sort of hypothesized looking at that is that people are generally moving in to cities because they want to be there for the amenities, for the lifestyle, for all of these sort of play factors that Rebecca and Chris are talking about. It's not

the way it was a generation ago where people might be moving in and one of the benefits to moving into a city is being close to the office, cutting down your commute time. And so I think clearly we've seen that in some of the Equifax data. We also have looked at for a number of cities data on how many people are using public transportation.

on weekdays versus weekends, and it's striking, right? If you compare it to 2019 to right before the pandemic in 2020, that

Weekday volumes, it depends on the city. Obviously, San Francisco is down maybe 70%, but even like a New York, DC down 30, 40% on a typical weekday, whereas weekends are generally either even with or even above where they were prior to the pandemic. So all of that sort of supports the idea. I think that cities are a place where people want to go and have fun as opposed to where they want to work. So I think that

ties in really closely with what they're saying. We've got our own example in our world. We went fully remote. The economics unit of Moody's Analytics went fully remote. We've been remote since the pandemic hit, but officially fully remote, I don't know, a couple of years ago now. And what's happening is young people who would, because we're now, we're about 20 miles, I'm

people that's too far to commute. So we had young people that would come out and live in the Westchester, the town where the office was. But now that we're fully remote, they're moving back into the city, right? Because they want the amenities of the city. They're not there for work because they're remote. So this whole remote dynamic may actually, in an ironic, I guess, somewhat ironic way, help out these bigger downtown areas. So does that resonate with you guys? Yeah.

It does. I would kind of add two things. One, we've observed for the first time pretty much ever in our data that CBD multifamily vacancy rates are lower than suburban vacancy rates. Interesting. And that inflection has just happened in the last few years. So this demand for walkable urbanism is very real and we're undersupplied, not just broadly speaking in the housing market, which I think we all know, but in these particular areas, we're undersupplied.

The other thing that I found interesting was some of the findings from the mobile phone data analysis that we did.

And in that way, we found that about 70% of people coming to these parts of the city, the walk-ups, were visitors. They weren't commuters. They weren't residents. They were people, whether they're coming from abroad or another metro area, or even just, for example, I live in Arlington coming into D.C., maybe on the weekend to go out to the wharf or whatever, and

70% of foot traffic are from visitors. And that was true pre-COVID, and it's still true today. And it, I think, maybe foreshadowed some of the findings around we don't have enough of the play concept, but...

These are vital parts of the economic drivers of these parts of cities, what we call the experience economy. And it's been a little bit in the shadows of the knowledge economy because I think of the attention on the office sector and return to office and tech.

and tech and here we are finding, oh my gosh, we're not spending enough time paying attention to the role that visitors play in what I would consider to be the hearts of cities, which are these walk-ups. And so play has to address that experience economy, which is layering on top of the knowledge economy. Just as the knowledge economy layered on top of the industrial and the industrial layer on top of the agriculture, that they're all here today

But the agricultural is, you know, 1% of all jobs and manufacturing is 8%. And knowledge is at 52% and flat. And so the new job growth is going to be with the experience economy. Much of that is going to be in these walkable urban places. Now, walkable urban doesn't just take place in center cities.

One of the, now, this is outside of the scope of this study, but we know, and we're doing more and more research at Places Platform to understand about the urbanization of the suburbs. And you mentioned Westchester. I have a development company that's headquartered in Center City, Philadelphia. But all of our work is in Doylestown and Media and Havertown. So we are...

urbanizing these suburban places to create these high density walkable urban places, both for office, but for residential and for play. And we're bringing the center city to Westchester, which is a great example of a place that's- Well, King of Prussia, where I played pickleball, you go King of Prussia, that's exactly what you're talking about. Did you go to the village at King of Prussia? Yeah. Yeah.

We developed it. Oh, that's a cool place. I like walking it. Well done. Yes. And by the way, it took us 12 years to get the entitlements, including the trip to the state Supreme Court for the largest upzoning decision in the history of the country. Really? And it shouldn't be that hard to give the market what it wants.

No, it's actually a fascinating area now because you've got a lot of stores. You've got, so retail, you got a lot of rental apartment, three, four story kind of thing, not these tall things, but three, four story. Then you got work because you got, CHOP is sitting right there. The Children's Hospital PA has got a huge facility right there. And then you got a pickleball place where I play.

So talk about live, work, play. Right there. Right there. And the thing is, it's where people go not just to play pickleball, but they take their kids there all the time because of all the water elements and the parks. And you go there on the date night.

And then walk up and down the street after dinner. People still have date nights? I don't know. Well, hopefully you do. Come on, guys. Get a little audience in your life. I think things have changed. I don't know about this whole date night thing. But anyway. Okay. So let's get to the optimization. So the actual shares are 70%. I'm rounding. 70% office.

or excuse me, a work that, then how does it break down in terms of live play in terms of the actual. So yeah, for, for downtowns, it was about 70% office, 16% live. And then I think for very little work play 14% play for the other kinds of walk-ups, it was 44% work, 42% live and 14% play. So play was very small and,

but there was a big difference between downtown and non-downtown walk-ups in terms of the live and the work ratios. So it's important to recognize that the return to the city movement, which really started late 90s into the 21st century, that much of the growth in our walkable urban places during that time period from say 2000 to 2019 was in downtown adjacent places.

So Northern Liberties in Philadelphia, just south of a society. No urban universities like, you know, where Penn is Penn and Drexel are the hottest real estate markets in Pennsylvania. And, you know, they have the highest values for land for rents. So these are these other, and so these other walk-ups are outside of downtown and they got developed in this century where the

Those developers knew you had to have a balance. It's the downtowns that are stuck with 70% office when the optimization model said it should be 42%. So this is a tale of two kinds of cities, one older, one brand new that did it right. And obviously, as we go out to the urbanization of the suburbs, I think we're going to do it very well as you do at the village of Valley Forge.

So how did you calculate the optimal shares?

Is it just basically returns? Go ahead and explain. Yeah, we looked at two things and we used a random forest optimization model and ran tens of thousands of simulations so that we could get some confidence intervals around the average estimate, which is the estimate that we're sharing today.

with the 42%. It's too precise. We know that that's the case. We optimize both the real estate price per square foot

And the GDP of that walkable urban place. So we did it at the walk-up level. So we were, we didn't have enough of a sample size to say what's optimal for just downtown because we only had 16 downtowns in the sample. And that's, that's just not enough to even with simulations have any kind of reasonable estimate with an air band that makes sense.

So when we did the simulations, what we found is on average across all 208 walk-ups that we studied, the share of real estate that optimized both the values and GDP at the same time were about 42%.

work, some kind of work, 32% live and 26% play. And again, those non-downtown walk-ups are much closer to that than, than downtowns. Can you say that again? What were the shares? What were they? 32% work. Yeah. 32% live. Okay. 26% play. And the biggest thing that was out of balance across the board was the play, right? Most walk-ups had maybe, you know,

I don't know, 10 to 20, 20 was a very high share to see. It was not very common, 10 to 15% play. And here we are finding on average, it should be more like 25 and it might range all the way up to the low 30s in some walk-ups. Now, we talk a bit about complementarity in terms of,

If you have one walk-up that's maybe a bit more work-centric, maybe it's actually 50% work, which is in the range that we provide when you look at the margin of error, you might

Think about, well, what's the profile next to it in surrounding neighborhoods? And maybe those are a bit lower, right? Below 40%. So that as you kind of look at it in a more aggregated sense, you come closer to that average. It's not to say every walk-up needs to be 42% work and 30, you know, we definitely don't want that to be the takeaway. But it does give us a bit of a North star for the first time of,

where to aim for ranges that might make more sense economically and for the purpose of maximizing values. That benefits us in real estate, you know, but it also benefits cities that derive tax revenues from property. And so it's important to note that we optimize real estate valuations on a value per square foot basis across all, you know, 100% of the real estate market.

which nobody's done before. And we also, we can do place-based GDP. GDP comes down to the metro level, comes down to the city level. We can take it down actually to the building level. And then we can aggregate it to a place. So center city of Philadelphia, we know what the GDP is. So we want to optimize both GDP and real estate valuations. Now you might argue that those aren't the right things to do.

to try to optimize. But if you want to build a better city, well, you can do it yourself and come up with other metrics. Those are the two that we happen to pick. Sounds like you've come under a bit of criticism for that. And talking about criticism, let me bring Marissa in because Marissa's really good at

at criticism. No, only kidding, only kidding. All right, shaking your head. So what do you think, Marissa? Any pushback here on the work that they're doing? No, I think it's pretty fascinating. So I'm wondering...

How would you propose using the results of the paper? You know, I mean, talk about city planning and it being useful for local governments to, you know, think about this. If you're a city and you already have, you know, you're an established city, you're kind of living with what you have right now. What can they do? There's so much that they can do. And it's primarily, you start with the business improvement district.

That is what I refer to as the fifth level of governance in our society. National, state, province, regional, city, town, and then place. And we have 1,500 business improvement districts throughout the country. And this is the property owners in these 300-acre places funding a $5 million, $10 million, $20 million place management organization to manage these places.

The first thing they do, of course, is clean and safe, make sure that they have safety ambassadors and that they do a better job cleaning up than what the city can afford to do. But then another major thing that they do is they get involved with economic development and how to convert office buildings to residential, for instance. They get involved with parks. So in Center City of Philadelphia, famous place manager, Paul Levy,

just a giant in the field of place management. And he built parks in Center City, Philadelphia, and he manages them all the time. And probably the best urban park that a bid does is Bryant Park up in Manhattan,

up in Midtown. Best park probably, certainly in this country, maybe on the planet. I always judge great parks by whether they have great restrooms. And this is the best restroom in the country. And so- They have a great hotel there, the Bryant Park Hotel. I don't know if you've ever stayed there, but it's a- I have not stayed there, but I've certainly- Yeah, I highly recommend. Yeah. Back before the bid was running Bryant Park,

It was run by the city for about $500,000 per year in 2024 dollars. It's now run by the private sector at Business Improvement District. It's got a budget of 16, 17 million. 85% is generated from the five-acre park.

And it went from, gee, how can I run a five acre park on 42nd Street for $500,000 to who can't make money on five acres on 42nd Street? It's jammed all the time. It's just a phenomenal experience. So we're learning how to make these places much more active,

and bring it, but what we need to do is how to measure them. So that's what this, you know, the whole purpose of this. - Chris though, I mean, your knowledge of Philly's great and impressive.

So you know that the city is trying to relocate the 76ers from down in South Philly to Center City, which is a direct application of what you're proposing. Four percent, they're going to go up to something much higher than that, I assume, if they get it. But you can see what's happening here. It's incredibly – because there's tradeoffs, right? Because the folks in Chinatown are pretty upset because they think this is going to disrupt their lifestyle. Yeah.

No. Okay. Fair enough. Okay. The city actually needs you to come in and resolve this then. That certainly with arenas, they must be downtown. Absolutely must be downtown. You can shoehorn them in. You don't have to build any parking. A, there's going to be a lot of transit because that's a major transit hub where they want to put it on the market street.

But also, you've got all these offices that have empty parking lots underneath those buildings at night and on weekends. When do you go to an arena? On nights and weekends. So you double use that parking, which adds to the valuation of the building, which adds to the property tax that the building's generating for the city. It's this upward spiral. So definitely arenas absolutely need to be downtown.

Baseball stadiums can be downtown. And I worked on Camden Yards when it came out of the ground. Phenomenal success story. And so that changed where baseball stadiums go.

football stadiums, and I played football in college, they don't belong downtown. They should be out in the burbs where you can tailgate to your heart's content on a surface parking lot. Interesting. Yeah. But particularly arenas, critical to be downtown. They not just generate lots of great economic impact in the region, and Chinatown is going to love it because there's going to be a lot more people there. That's what the Chinese merchants want, is traffic, foot traffic.

How can a city deliver? What can they do? I mean, my mind always goes to tax subsidy, you know, give them some kind of tax subsidy. But that's not it. So what I mean, what do you do? Get out of their way. Get out of their way. Get out of the way. Get built without, you know.

Taking 12 years to get permits. But isn't that, come on, you're swinging at windmills now, aren't you? I mean, come on. We can't even, as you pointed out, it took 10 years to get the zoning for this space out here in King of Pressure where there was nothing there but cow pastures and a place where you could go hit golf balls. So why do you think it's going to be any easier in a downtown area? Because we've been dominated in this country at the local level by NIMBYs.

and downzoning of our land. And everybody's, and basically it was we baby boomers who did this because we have our own and screw the rest of the folks. We don't want to have any more housing. So NIMBYs ruled the last 20, 30 years. Well, now there's the rise of the YIMBY movement. And you're beginning to see this throughout the country.

And California is now mandating from the state level, the governor is mandating local cities to build housing because we have an affordable housing crisis.

And so now we're beginning to understand that you can't let these NIMBYs dictate policy at the local level and strangle economic development and create the affordable housing problem that we have. And it contributes to the homelessness. You need to be careful because Adam is like a raging NIMBYs.

- Is that, aren't I right about that, Adam? Or do I have you wrong? - They want to build the development inside this closet. And I say, no. - In fact, it's in there right now. - Yeah, yeah, yeah. - Right, right, right.

Okay, so get out of the way. But that, I don't know, is that a policy though, Chris? I mean, just get out of the way? More and more. Okay, more and more you're saying that. It is. The groundswell is swinging in that direction. It is coming in that direction because the affordable housing crisis is so sad to see. Let me ask you though, okay, going back to office, you've got all these, take Philly. What was Philly? 70% is work, a bunch of that office, vacancy rates are very high, rents are weak, prices down.

Okay, what do you do with that?

Well, we found, I think, you know, the conversation around conversions is complicated in the sense it's obviously expensive. You need structural engineers to kind of make sure that basic things are met. So one issue that, for example, is a really difficult one in many buildings in New York that are on the streets, not the avenues, right? In between avenues is, can you even meet the fire codes? Are there enough windows available?

to be able to meet the fire code for a residential property and so on. So it does get very complicated, but here is what we know, right? We know we have too much office and we know it's particularly concentrated in these areas. Just back of the envelope math, okay? So if you were to look nationwide and say, let's target the most vacant buildings, right?

Because when you look at building level data, what you find is actually only a small tranche of the office market. It continues to deteriorate. It dominates the headline statistics, but it's only about 20 to 30% of buildings that are still having rising vacancies. Actually, a huge chunk of the office market has low vacancies or they've been falling. So if you're strategic and targeted, right, with policy incentives, so you're not throwing good money out after bad,

And you start to incentivize the redevelopment of that space. It might require some creativity. So, for example, in D.C., there was a square building. It was basically cut to look like a big letter E so that you did have the natural light and all of the things that would have met the permitting standards and fire codes and all of that.

So I think there's a lot of opportunity for that. But if you just take the back of the envelope math and you said, OK, let's get rid of buildings that are 50 percent vacant or more. And these are the buildings I'm talking about where vacancy keeps going up. And it's not most of the market. You know, in many markets, that's just about 20 percent of the buildings that unlocks at the average rate.

you know, if you were to go seven to 800 square feet on average per unit, which is kind of the average of the last cycle, that's another 400, 450,000 housing units just from the conversion of the weakest parts of the office market. Now, not all of it will be

converted to multifamily, we see things get converted to medical office, right? Or some other kind of use. And in fact, outside of office, one of the biggest conversions into multifamily is the hotel sector, a bit easier to do for obvious reasons. But that's not a...

Sometimes people will say, well, it's a drop in the bucket, but actually 400 to 450,000 units, that's a decent amount. And that's just in the data in the markets we track at our firm. So that's about 95 cities around the country. I mean, there are 360 or sorry, 380, however many metro areas around.

So if you think even a fraction of that is possible, and I think so, the right price, especially with the right incentives, that there's real opportunity there. I would end by saying two observations I've had. One is most real estate data, when you look at the value on the multifamily side, it's reported as in units. So the price per unit.

And in all other CRE, it's price per square foot. When we convert the units to square feet, which we did in our study, there are huge value premiums to be unlocked by this conversion. So the upside is there. It's costly to get there, but the upside is still there. And the last thing I would say is,

You know, we're seeing the early signs in cities all over the country, whether it's many of the successful things that Denver is doing, the early things coming out of Seattle or San Francisco. Here in D.C., Chris is involved with the mayor's task force. So

I think there's a recognition that we need to expedite and move on from this problem. And we're seeing the public sector start to coalesce around that. So that does give me hope because the risk of doing nothing, I think, is too great. So going back to the concept that a crisis is a terrible thing to waste, that Becky just talked about,

two things that must be in place. One, and by far the most important, is that with office sales, as we're trading office buildings that are now basically obsolete, we're seeing sales of 10%, 20%, 30% of the most recent trade. You're seeing a 70% and 90%

uh discount from the last trade and in real estate you're only as good as how low you paid to get into the property everything's about the acquisition price and if you're coming in at 20 cents on the dollar you can do a whole lot of good as far as repositioning that building that's number one number two is the incentives

And I got to tell you that Philadelphia, again, once again, leads the way. They put in place incentives 20 years ago, and I believe he was deeply involved with this, in the conversion of office to residential. And also New York did it, Boston did it. But the Philadelphia model generated more production of units than any other city. And so we can learn from Philadelphia as far as how to incentivize

the developers to convert. And so the combination of low cost of entry and incentives from the city, you can make this happen much faster than you could make it otherwise. And if we don't move quickly, these office buildings just sit there.

And they look like hell and they just attract a bad element. And who would want to live next to that office building? So we have to move quickly. Yeah, so it's not just about getting out of the way. You're also advocating tax cuts.

That kind of thing. Right. You know, 10 year tax abatements. Right. Right. Right. Right. Good. Well, we've taken a lot of your time and just an open ended question because I've been kind of guiding the conversation. Is there anything that you'd like to point out that you didn't have an opportunity to do? Or do we cover all the ground you wanted to? Because, you know, that's that's a lot of ground. I just just want to give you a chance.

Yeah, I would say because I think a lot of the conversation does tend to focus in on the over office part of, you know, the challenge that these parts of cities face. You know, also remember that our findings were that it still should be.

the, on average, the greatest share of the inventory in these parts of cities, right? Because they're central, because people can commute in, you know, maximizing a workforce within a

given commuting distance and time amount, it's still sort of economically important to these parts of cities. So we do talk a bit about, yes, we're over office, but it doesn't mean we need no office. And in fact, it was our finding that for walkable urban places that are regionally significant,

it still should be on average the most. It's just, especially downtowns, there's too much. So I would just kind of temper maybe some of the emphasis to include that in the back of your mind when you think about our buildings. And then the other thing, break those silos and look at these places as a organic whole, because that's how the market views them. That when you lease an office or rent,

a rental apartment or you want to buy something there personally, that you look at the whole picture. You don't just look at the for sale housing market. You don't just look at the rental apartment market. You look at the whole thing, but we're not managing it that way.

So to us, it's important that we look at these places organically and we manage them. It's crucial to manage these places. And that's why we've come up with this portfolio theory of places, of real estate. And it's not just the 57% of the GDP of cities come out of this 3%, but also real estate happens to be

53% of the total assets in the economy. It's the largest asset class by far. If you added up all the capitalized value on the New York Stock Exchange or on the NASDAQ, the built environment's three, four times larger. So we're talking about how we invest in the largest asset class in our economy. And it makes a whole lot of sense to manage at the place level and manage it in this integrated fashion.

I think that's a great place to end. I mean, very upbeat, optimistic, feels good. I like ending on feels good. Yes. And great, great work. Great work. And again, folks can get to it. Just Google reimagining cities. Yeah. And they'll get right to it.

And I'm so glad that you went to the village at Valley Forge. Oh, are you kidding? My gym is very close. My pickleball court's very close. A lot going on there. Yeah. Yeah. Anyway, it was great to have you on and really enjoyed it. And I want to thank you. And with that, dear listener, we're going to call this a podcast. Take care.