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6.4.2021

The Post-COVID Comeback in Urban Midwest Cities

If you’ve spent much weekend time in any of the Midwest’s biggest cities recently, you might have noticed something surprising: downtown areas are bustling. This familiar activity, so conspicuously absent over the last 12-14 months of pandemic shutdowns and slowdowns, is a welcome reminder of the urban renaissance that has transformed huge swathes of the region.

The big question, of course, is what this means—both for the broader post-COVID comeback generally, and the Midwest commercial real estate market specifically.

The combination of warmer weather, successful vaccine distribution, and lower numbers of new COVID cases hasn’t just brought people out of their quarantine, its infused them with a newfound sense of energy and freedom. There has been a lot of pent-up energy and social isolation, and a sizable percentage of the population is seizing their first chance to get back to normal with enthusiasm. That social and civic reemergence has been fueled by many folks finding that the enforced frugality of quarantine has left them with more disposable income than they have had in some time. The result is that, from the standpoint of entertainment and socialization, we are either close to fully back to normal—or at least headed in that direction.

As heartening as this is to witness, the question that has yet to be answered is what implications—if any—these signs of a city getting back to normal socially might mean for the Midwest office market. What bearing does the way we play have on the way we work?

There is no escaping the speculation and conversations that have taken place throughout the pandemic. Questions about whether the office is “dead,” and to what extent mobile and remote work solutions and concerns about health and safety will impact office space needs, workplace designs, and the operational contours of the professional environments of tomorrow. There is no denying the reality that the office sector is moving slower than other commercial real estate segments. In Detroit, Governor Whitmer’s decision to allow in-person office work to resume as of May 24th was a big step in the right direction, but a conservative estimate would probably put current in-person office activity still sitting somewhere around 50-60% of pre-pandemic levels. Unsurprisingly, the symbiotic ecosystems surrounding office space are still struggling. Across the region, fast-casual dining concepts and daycare services, for example, have been understandably slow to recover. Some of that sluggishness can be attributed to the beginning of summertime slowness, but the lion’s share of the problem is obviously a lingering pandemic hangover. It may be September or later before we know the full impact of the flex work week and the true state of the Midwest’s office landscape.

If the encouraging surge of social activity is any indication, the direst predictions and sensationalistic headlines about the Death of the Downtown are way overstated. Business activity will likely continue to grow into the fall, and it’s reasonable to expect that by then, it will be back close to pre-pandemic norms. Continued job growth and the annual infusion of young people moving downtown after college graduation will replenish many (if not all) of the losses from those who moved away over the course of the last year.

There is no question that the investment sector still believes in office. Some aggressive players clearly view this as an opportunity. With many corporations in a good liquidity position with their balance sheets after a year of smarter and more efficient operation, it would not be surprising to see a genuine surge in new investment. Supporting that notion is the fact that Farbman Group’s construction business is currently running at full capacity—and many residential and commercial builders are in the same position.

The strength of Farbman Group’s suburban infill real estate portfolio is a sign that both individuals and institutions still value proximity and access to downtown areas. While it remains to be seen how quickly and to what extent activity filters back to downtown proper, the upshot is that there are real reasons for optimism and signs that the current downtown lull might not be nearly as dramatic or long-lasting as some initially feared.

It would also be a mistake to underestimate the preference of many workers to get back into creative and collaborative workplace environments—and businesses’ corresponding desire to get their people back in the office. It’s inevitable that something as significant as a global pandemic would inspire change and evolution. We are likely to see some layout changes, and, while bullpens and large groups of cubicles may be less popular, better amenities for in-office workers are almost certainly going to be on the docket.

Amenities like cool kitchens and eating areas, comfortable “huddle” areas, and luxury extras like espresso machines or even baristas will become more popular. In other words, it won’t just be new spaces, but new priorities, with a greater focus on work-life balance and the need for experience-driven amenities. Just as we see a spike in interest in the higher-end dining options that have been off limits for so many for so long, we could see something similar with a “flight to quality” in workers and employers alike pushing for increasingly extravagant amenities and experiences.

We are already seeing signs of a “war for talent,” as employers find new ways to make office work more appealing. Employers are looking to inspire loyalty and find new and creative ways to making spending time in the office more convenient and desirable. Where that all leads to from a footprint standpoint remains to be seen, but with hiring activity already picking up dramatically, we could see some surprisingly robust growth over the next 4-5 months—perhaps even enough to absorb much of the newly vacant office space.

The bottom line is that downtown areas in the Midwest are not nearly as vibrant as they were pre-COVID—but things are turning around, and there are real reasons for genuine optimism in the mid- and long-term outlooks. In the long run, I wouldn’t bet against Chicago, Milwaukee, Detroit—or any Midwest city with a vibrant downtown environment. There’s just too much going for them. If there’s one thing that COVID isolation has taught us, it’s that people crave connection and community—and the energy and lifestyle options of living, working and playing in dense mixed-use urban environments is one of the very best places to make that happen.

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