Overlooked among all the incendiary headlines and “expert” analysis on social media concerning the “mass exodus” out of dominant gateway markets lies an important story regarding metro areas in the U.S. that many people have missed. Thorough analysis shows that people are not moving en masse out of dominant metros. Interstate migration in the U.S. continues its structural decline, including during 2020. Most migration, even in metros like New York and San Francisco, occurred on an intra-metro basis, not inter-metro. This is a trend that I first highlighted for Multifamily Executive six years ago when I warned of the coming relocation of millennials out of city centers into suburbs.
What about the death of dominant metros?
Commentators continue to greatly exaggerate the death of dominant metros based on superficial analysis. These myths have existed for the last 40 years. Yet, over that time, dominant metros continued to grow ever larger, both in terms of population and economy, as measured by gross metro product (GMP). Remember when crime was supposed to kill dominant metros? Or the dot-com bubble? Or 9/11? Or the financial crisis? Or the limitations on deducting state and local taxes from federal income taxes (SALT)? Spoiler alert: None of them did.
The inter-metro migration flows that many cite as evidence of dominant-metro demise are not new, nor have they substantially accelerated during the pandemic. These patterns have existed for decades. Of course, one or two relocations by billionaires or a press release from a company supposedly tracking movement of people creates headlines. As Victor Calanog, head of CRE economics at Moody’s, recently noted, much of the data driving incendiary headlines comes not from official sources, but often from unproven and sometimes new sources. That data frequently says nothing about the permanency of such migration “trends.” Yet the metro hierarchy in the U.S. has not substantially changed. This of course raises the question, “Why not?” The short answer is that the decision of where to live is complex and does not easily boil down to some pithy heuristic, such as “people move away from higher tax rates.” Do some? Sure. But this kind of “expert” analysis fails to account for the myriad factors that go into such a decision—employment, culture, family, quality of school systems, climate, etc. People choose where to live based on a broad set of benefits and costs.
Demographics and Economics
Moreover, this kind of simplistic analysis ignores the characteristics of the people moving. Detailed analysis of domestic migration shows that people moving into dominant metros like New York, San Francisco, Los Angeles, Chicago, Boston, and Washington, D.C., are increasingly younger and better educated. People moving out are older and less educated, important because younger and better educated people power a modern economy. Unsurprisingly, these dominant metros tend to have some of the highest productivity in the country, as measured by output per capita, especially among the largest metro economies. These demographic changes will only reinforce that dominance. And people massively underestimate the size of these metro economies and the abundance of opportunities they offer. If somehow the GMP of the New York metro area declined by half, it would still be larger than the economy of every other metro area in the U.S. except Los Angeles. The combined economies of the Houston and Dallas metro areas together comprise only about 60% of New York’s GMP and slightly less than that of Los Angeles. At this size, even relatively low growth rates generate more economic activity than faster growth rates in many smaller metros.
Wait, isn’t this time different?
To believe that these metros are still going to implode, one must believe that the compelling reasons that draw people to dominant metros will diminish. This assumption runs against hundreds, if not thousands, of years of evidence in urban economics that continue to explain why the population is not uniformly distributed and instead clusters in ever larger metro areas. The benefits to living in dominant metros outweigh the costs, continuing to attract and retain residents. The major constraint on living in these areas, the cost of living (particularly housing), holds implications for the growth rates, sizes, and socioeconomic compositions of these areas, but rising costs reflect the continued desire of people to live in these areas, not an exodus. Even with increased prevalence of work from home (WFH), migration patterns didn’t change substantially because most people still expect to go into an office part of the time. WFH does not equal work from anywhere (WFA) for most workers.
The future could see these metros become even more dominant. The top 10 largest metros by GMP have changed very little over the last 40 years. Why? Because they continue to attract people. What advantages do they boast? Too many to list. But in a world that will continue to increasingly rely on research, development, and innovation, these metros boast many structural advantages. Dominant metros consistently occupy most of the top 10 rankings for both the top technology-oriented markets and the top life-sciences markets, across a variety of methodologies. Of the top 10 ranked hospitals in the U.S., most are in or near these dominant metros. Among the top 10 ranked research universities in the U.S., all 10 are in or near dominant metros. Moreover, research shows that most high-tech inventors in the U.S. cluster in just a few metros such as Boston, New York, Los Angeles, and San Francisco.
Migration to non-dominant metros is still occurring. Such metros will continue to benefit from migration, especially if they can attract higher-productivity talent. And growth is not a zero-sum game. But they also carry a hidden risk—many of the lower-productivity jobs that dominate these metro areas are more prone to being eliminated by improved technology and automation to a degree that high-productivity jobs that concentrate in dominant metros are not. High-productivity jobs often benefit from improved technology and innovation.
What does this mean for real estate markets?
In real estate markets, many participants are overselling (literally and figuratively) dominant metros. Their populations and economies continue to grow over time, even with ongoing relocations. Major employers, especially in technology, continue to expand their operations in them. And temporarily cheaper rents and house prices (to the extent they exist) only lower the barrier to entry for new residents. The argument against dominant metros is still unmoving.
