Urban Comeback

CBDs continue to lose population due to rising crime as businesses flee urban cores

In Reimagining Cities: Disrupting the Urban Doom Loop, our team extensively researched the driving forces in urban and CBD districts across 15 gateway and secondary cities, including population growth, foot traffic and crime. In the 15 cities studied, total population fell for just two years (2020-2021) and has already reversed, growing in 2022 and 2023. This data, extended across the U.S., shows that urban core counties across the U.S. grew in 2023 for the first time since the pandemic, as outmigration dwindled.

With the reversal in fortunes has come improvement in crime rates, which are down considerably over the past year. Both violent crime and property crime have decreased by 10.3% and 13.1%, respectively, between the first half of 2023 and the first half of 2024, according to the latest FBI data. Notably, the nation’s largest cities have experienced particularly significant drops in violent crime during this period.¹  

Population growth, declining crime rates and revitalized neighborhoods have pushed foot traffic into clear recovery mode. While Downtown foot traffic is still around 20% below pre-pandemic levels, it has recovered significantly from its nadir. According to the Reimagining Cities report, this recovery has been largely driven by residents and visitors. In fact, resident foot traffic in Downtowns is up 12% compared to 2019, while most of the decline in CBD foot traffic stems from fewer employees commuting to offices—employee foot traffic is down 37% compared to 2019. This trend highlights the resilience of walkable urban places (WalkUPs²), such as Downtown Adjacent and Urban Commercial neighborhoods, which rely less on office space. These areas have seen foot traffic recover 700 basis points (bps) faster than traditional Downtowns, underscoring their adaptability in a changing urban landscape.

Renters have shown a clear preference for suburban living

For three consecutive quarters in late 2020 and early 2021, suburban apartment demand surged significantly. However, in every other quarter since 2000, demand, as measured by the percentage change in occupied units, has been stronger for CBD apartments as compared to their suburban counterparts.

Some of this is inevitably a result of the much smaller inventory in CBDs compared to the suburbs. Indeed, the suburban inventory of roughly 8.4 million units is more than eight times larger than the CBD’s inventory. However, the data clearly demonstrates strong demand for Downtown living, and developers are responding. Since 2017, the CBD inventory has grown by nearly 60%—more than double the inventory growth rate of the suburbs. Multifamily’s share of inventory in the most walkable parts of cities (i.e., WalkUPs) has increased since 2019 while other space uses have largely declined or stayed put.³

In spite of the outsized supply growth and weak demand during the pandemic, fundamentals for CBD apartments have remained relatively healthy—at least by historical standards. Overall vacancy remains in line with the recent historical average, and stabilized vacancies are well below that rate, indicating that most vacancy today is a function of recently delivered product, rather than underlying weakness in the market.

Suburban apartment fundamentals are much healthier than those in the CBD

This myth is largely rooted in long-term data trends. Through most of the last decade, suburban apartment vacancy has been lower than the CBD. This gap widened out the most during the pandemic, when suburban vacancies were declining as CBD vacancies reached a new peak at north of 12%. However, the recovery for CBD occupancies was swift as cities reopened after the pandemic faded.  Since the midpoint of 2023, the CBD vacancy rate has been mostly in line with the suburbs, hovering in the high single digits.

Rent growth has outperformed in the suburbs for much of the past cycle as well. Once the building boom began in CBDs across the U.S., it sapped the ability to push rents at an outsized pace. But with the strong fundamentals of city centers recently, effective rent growth in CBDs has outperformed over the last year.

CBDs are too expensive for people to live in

Average apartment rents in CBDs are approaching $3,000 per month—a staggering figure that would comprise 45% of the monthly budget for a household earning the median income (roughly $80,000 annually)⁴. By contrast, average suburban rents of about $1,650 are much more affordable, representing about 25% of a monthly budget for that same household. At the surface level, it’s clear that Downtowns are becoming increasingly expensive for most residents.  

However, this math can be misleading. In today’s market, the number of affluent renters has grown substantially. Indeed, the nicest apartments are filled with residents who earn considerably more than the median income. RealPage data highlights this dichotomy: renters in high rise properties (a proxy for CBD properties) earned more than $150,000 per year in 2024, with an average rent-to-income ratio of about 21%. By contrast, renters in low-rise properties earned about $90,000 per year, with a slightly higher rent-to-income ratio of 23%. The relative lower rent-to-income ratios reflect a growing population of lifestyle renters who continue to seek out high-end amenitized urban apartments and have even more ability to pay that premium compared to their suburban counterparts.  

We can infer the premium that the amenities of a CBD offer by looking at the difference in rent between the CBD and the suburbs. Historically, this premium exceeded 100%, meaning renters were willing to pay double to live in the CBD compared to the suburbs. By the fourth quarter of 2024, however, this premium had narrowed to less than 80% (seen in the shaded area on the chart below)—the narrowest premium dating back to 2000. This narrowing is largely due to supply-side pressures from new construction in CBDs, which have tempered rent growth in urban cores. As a result, on a relative basis, renting in the CBD has never been a better deal compared to the suburbs.

The current narrow premium for CBD rents is unlikely to last. A simple reversion to the mean would suggest one of two outcomes must occur: either CBD rents will grow at an outsized pace, or suburban rents will stall or decline. If the U.S. economy continues to grow, the former scenario is more likely than the latter since rent growth has only turned meaningfully negative during recessions. Regardless of the outcome, CBD assets are poised to deliver better relative performance in the near term.

Capital markets will continue to favor suburban apartments over CBD

The belief that suburban apartments will consistently outperform CBD properties has driven an abundance of capital into suburban opportunities, narrowing the pricing gap between the two. The left chart below shows the percentage change in sales volume relative to the pre-pandemic average. As a reminder, suburban inventory is eight times the size of CBD, so suburban volume figures dwarf those in the CBD. At its peak in 2021, suburban transaction activity doubled pre-pandemic levels, reaching more than $155 billion. In contrast, CBD transaction activity peaked a year later, in 2022, roughly 60% higher than the pre-pandemic norm. While this represents a large jump, it still fell short of the suburban market’s peak. Last year, however, the tide began to shift. In a declining market, CBD properties demonstrated greater resilience. Both CBD and suburban volumes were lower, but the CBD was only down about 20% compared to closer to 40% in the suburbs.

Cap rates are also adjusting. Prior to the pandemic, the spread between the median cap rate for CBD and suburban apartments was between 80-120 bps. During the pandemic, cap rates remained steady as investors poured capital into suburban deals, responding to shifting renter preferences driven by the crisis. Last year, the spread widened again, but remains tight by recent historical standards. Such opportunities typically don’t last long. With improving fundamentals and many of these CBD apartments priced at relatively low levels—often below replacement costs—now appears to be an opportune time to invest in urban cores.