Background/motivation: This Market Discussion will complement some of the key important topics that we have touched on in Lectures: bid-rent and bid-price gradients, how commuting costs shape urban form, and recent market trends for various property types, including office and multifamily. The focus of this market discussion is on (1) the immediate impact of COVID-19 induced workfrom-home (WFH) policies on real estate, both commercial and residential, and (2) the likely long-term impacts of continued WFH policies on CBD / urban commercial real estate markets. The WFH policies that firms implemented in spring and summer of 2020 generated an immediate shock to the demand for real estate. However, the sign of the shock (positive vs negative) depended on the type and location of properties. Broadly, there are three aspects of demand changes to consider: (1) within city reallocation from high to low density, (2) across city reallocation, and (3) variation based on property type. - Within city shifts. The demand for residential real estate outside CBD / urban areas increased dramatically. This was the result not only of workers migrating from downtown apartments/condos into more suburban areas, but also a result of the significant monetary policy shift that drove interest rates down and decreased the cost of financing via lower mortgage rates. - Across city shifts. The demand for real estate in lower cost and less densely populated cities increased as workers temporarily (and permanently) moved to these areas. - Across property types. The demand for certain commercial properties (office, hospitality, some retail and multifamily) and residential real estate in CBD / urban areas decreased. This was the result of uncertainty about whether WFH policies would be transient or permanent, and thus uncertainty about whether work would remain physically located in downtown areas. Despite an immediate decrease in demand for many commercial property types, it is now clear that this shock may be temporary, particularly for the commercial property types that were most affected initially. A particular property type of interest is office properties, given that leases for these types of properties are extremely sensitive to WFH dynamics. 1. Donut effect a. What is the donut effect? b. What can the difference between real estate demand reallocation within vs across cities tell us about how firms and workers view the permanence of WFH policies? c. How can firm and worker reallocation trends across cities be measured? 2. Bid-rent functions, rent gradients and price gradients a. Define the rent and price gradients. b. How did the rent gradient in major cities change from two years prior to the pandemic through December 2020 ? What does this change imply about how much workers are will to pay to live close to work? How did the price gradient change in those same areas over the same time period? c. What can we learn from the difference in bid-rent and bid-price gradients.

1. Background/motivation: This Market Discussion will complement some of the key important
topics that we have touched on in Lectures: bid-rent and bid-price gradients, how commuting
costs shape urban form, and recent market trends for various property types, including office and
multifamily. The focus of this market discussion is on (1) the immediate impact of COVID-19
induced workfrom-home (WFH) policies on real estate, both commercial and residential, and (2)
the likely long-term impacts of continued WFH policies on CBD / urban commercial real estate
markets. The WFH policies that firms implemented in spring and summer of 2020 generated an
immediate shock to the demand for real estate. However, the sign of the shock (positive vs
negative) depended on the type and location of properties. Broadly, there are three aspects of
demand changes to consider: (1) within city reallocation from high to low density, (2) across city
reallocation, and (3) variation based on property type. - Within city shifts. The demand for
residential real estate outside CBD / urban areas increased dramatically. This was the result not
only of workers migrating from downtown apartments/condos into more suburban areas, but also
a result of the significant monetary policy shift that drove interest rates down and decreased the
cost of financing via lower mortgage rates. - Across city shifts. The demand for real estate in
lower cost and less densely populated cities increased as workers temporarily (and permanently)
moved to these areas. - Across property types. The demand for certain commercial properties
(office, hospitality, some retail and multifamily) and residential real estate in CBD / urban areas
decreased. This was the result of uncertainty about whether WFH policies would be transient or
permanent, and thus uncertainty about whether work would remain physically located in
downtown areas. Despite an immediate decrease in demand for many commercial property types,
it is now clear that this shock may be temporary, particularly for the commercial property types
that were most affected initially. A particular property type of interest is office properties, given
that leases for these types of properties are extremely sensitive to WFH dynamics. 1. Donut
effect a. What is the donut effect? b. What can the difference between real estate demand
reallocation within vs across cities tell us about how firms and workers view the permanence of
WFH policies? c. How can firm and worker reallocation trends across cities be measured? 2.
Bid-rent functions, rent gradients and price gradients a. Define the rent and price gradients. b.
How did the rent gradient in major cities change from two years prior to the pandemic through
December 2020 ? What does this change imply about how much workers are will to pay to live
close to work? How did the price gradient change in those same areas over the same time period?
c. What can we learn from the difference in bid-rent and bid-price gradients in terms of how
likely a shock to real estate prices is to be permanent? 3. Office sector during and after COVID a.
How has the performance of office properties following the COVID shock compared to the
performance of office properties in other periods of aggregate financial distress? b. Has the
office property sector responded uniformly to the impact of the COVID shock, or are there
geographic or other differences in how the sector responded? 4. Correlation between office and
multifamily rental rates a. What is the significance of the correlation (or lack thereof) between
office and multifamily rental rates? For what reasons are these rental rates typically strongly
positively correlated? b. How did the correlation between the two rental rates change following
the COVID shock? What does that change imply about future trends in WFH and demand for
urban amenities?