With the rise of remote work, American cities face an ‘urban doom loop’ as revenue declines

Just as the Industrial Revolution fundamentally changed the purpose of city downtowns during the 1800s, today’s rapid evolution to remote work is forcing metros across the United States to reconsider business centers and adapt office spaces to emerging needs.

“We’re going through this major revolutionary change, and it will take decades to play out,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s Graduate School of Business during an online panel discussion Thursday titled “Special Briefing: The Future of Downtowns” hosted by The Volcker Alliance and the Penn Institute for Urban Research. “It will be a slow and painful transition.”

Over the last several years, remote work in the U.S. has exploded from about 5% of the total workforce before the pandemic to around 20% today, according to data from the Census Bureau. The impact on city revenues has been profound, given their reliance on commercial real estate taxation.

And with less people heading into offices, “public transportation commuting fell by about half, from 5% of workers in 2019 to 2.5% in 2021, the lowest percentage of workers commuting by public transportation that has ever been recorded by the ACS (American Community Survey),” reads a statement about the Census Bureau’s annual demographics report, which was published near the end of last year.

Elsewhere, restaurants that have traditionally served commuters are struggling to stay afloat and small businesses catering to foot traffic are closing up shop. Office spaces are emptying out as leases aren’t renewed, or remain vacant. Van Nieuwerburgh called this symbiotic spiral an “urban doom loop.”

Larger metros, those with a lot of tech businesses and a high percentage of educated residents have been particularly impacted. San Francisco, Calif., a city of more than 800,000 people where tech accounts for about 30% of industry, is a good example of one of those cities.

“San Francisco has not recovered like other cities. Business travel has been slower to return than leisure travel, and business travelers spend more than leisure tourists,” said Romy Varghese, a politics editor at Bloomberg News and a panelist. Even before the pandemic, housing was incredibly expensive and homelessness was a huge problem. When many tech companies embraced remote work, residents moved elsewhere.

Structurally, San Francisco’s downtown is built as an economic hub around commercial real estate, and its business tax is driven by the number of people working inside its borders. San Francisco’s office vacancy rate sits at 25%, hammering its bottom line. Over the next two years, the local government is projecting a $728 billion deficit.

“Public officials were a bit in denial about this. Now, there is widespread acceptance that remote work is here to stay, and they’re focusing on different ways to bring people back into the downtown,” Varghese said. Methods include encouraging biotech to move into empty offices, converting commercial spaces into housing, and a focus on softening the downtown area to encourage varied uses.

“There’s no one size fits all problems or solutions,” said Tracy Hadden Loh, a fellow at Brookings Metro’s Anne T. and Robert M. Bass Center for Transformative Placemaking, and a panelist. The challenges are expected to yield “operational and fiscal crises in the next several years,” she continued, noting that federal aid is “cushioning things for now.”

But that aid is slated to run out soon.

“American downtowns are in profound distress. In my personal sense, it’s too soon to say whether or not they’re doomed,” Hadden said. In many ways, the pandemic simply accelerated what was already coming. For a decade prior, “the median office space declined by 25 percent. Rather than look for a return to the office, we should look for an acceleration to this new type of workspace that meets new needs.”

The remote shift has also made the taxbase more sensitive to the quality of local government. Without ties to a physical office building, constituents can move if they don’t like the community or its government.

“The stakes are higher now than they were before the pandemic, with respect to getting the right mix of local economic policies, the right mix of local services, said Steven Davis, a senior fellow at the Hoover Institution, a professor of business and economics at the University of Chicago Booth School of Business, and a panelist. Cities that get that right “are well positioned to benefit from the shift to work from home.” Those that don’t “do face this potential doom loop”: residents move out; revenue decreases; services suffer; more people leave.

For administrators working to prevent this downward spiral, the panelists offered advice.

“Cities should make it easy to do the right thing, which is to reduce vacancy rates by whatever means necessary,” said Hadden Loh, noting that commercial real estate that’s sold to a bank is a worst case scenario because it will sit empty.

The final panelist, Howard Cure, director of municipal bond research at Evercore Wealth Management, recommended “Rethinking the urban setting” and focusing on “Making a city attractive and liveable for people, making the streets safe” and investing in local schools.

“Zoning changes, in two words,” Van Nieuwerburgh said, stressing a need to relax requirements like having a window in bedrooms to allow office spaces to be converted to residential apartments. “The good news is that the worst hit offices are the ones that are the most easily convertible.”