Before the pandemic, everyone wanted to invest in the largest coastal cities that were thriving, thanks to easy access to work and play — but things have changed.
The open question that managers and investors are having to answer now, without the benefit of transaction data or across-the-board write-downs, is how to position real estate portfolios for the long term.
At the moment, few real estate managers want a high rise in a big coastal city. Some are following millennials to the suburbs from the cities or grabbing smaller buildings, such as garden-style apartments and low-rise office buildings located adjacent to cities. The once-hot cities of San Francisco and New York are being replaced by less expensive cities such as Phoenix, Boston, Denver and Austin, Texas, where people and companies can get more space for their money as telework becomes normalized and social distancing, air filtration and other health requirements are incorporated into office design.
These trends are driving investors to reconsider their core real estate portfolios.
"Core used to be cities, and cities are not going to recover for a long time," said Molly A. Murphy, CIO of the $17.1 billion Orange County Employees Retirement System, Santa Ana, Calif., during its July 29 board meeting.
Core, open-end real estate funds historically leaned toward major coastal city markets, Ms. Murphy said. However, it was those urban centers that came back much quicker in the last financial crisis, she added. During the pandemic, it will take longer for people to feel comfortable using crowded public transportation systems and stepping into an elevator.