Remote and hybrid work is here to stay—what does that mean for local governments?

Written by Andy Castillo

When it comes to work-from-home and hybrid work, the data is in: It’s here to stay. From about 5 percent before the pandemic, the percentage of American workers logging in from remote offices has catapulted to 30 percent—and that number is projected to hold steady into the foreseeable future.

“Work from home has increased sixfold in the U.S. It’s just an enormous rise,” said Nick Bloom, William Eberle Professor of Economics at Stanford University and co-founder of WFH Research, noting that the jump represents “30 to 40 years of increase” based on the previous trendline. He was speaking on a panel hosted last month by The Volcker Alliance and Penn Institute for Urban Research about the long-term outlook of the impact of working from home. Other members of the panel were Andrew Rein, president of the Citizens Budget Commission, Stijn Van Nieuwerburgh, Earle W. Kazis and Benjamin Schore Professor of Real Estate, Columbia Business School, and Lauren Weber, a reporter for the Wall Street Journal.

As the dust settles during the third year of the pandemic, “I think this is the new normal,” he said. Commercial real estate investors are already feeling the hit. Offices in America’s largest cities are only about 40 percent occupied.

“The crash so far has been in very low new-lease volumes,” Van Nieuwerburgh said, noting that while there was only been a 10 percent drop in lease renewals between 2019 and 2021, a more telling metric is found in newly signed leases: those have dropped by almost 75 percent.

For businesses and workers, remote or hybrid work is “generally good,” Bloom said, highlighting increased flexibility and the opportunity to move away from city centers, freeing up space for others who need to physically clock in. Studies have also shown increased productivity.

The impact of hybrid and remote work on cities and counties has yet to be seen.

“A lot of local governments rely heavily on tax revenue from property,” said Van Nieuwerburgh. New York City, for example, gets about half of its revenue from real estate, and of that, a little more than 20 percent is from offices.

As quantified via a data model that takes into account a number of different metrics like the percentage of occupied offices, Van Nieuwerburgh said “the market value of the entire stock of New York City Offices dropped by 33 percent in 2020. And then the model simulates out for 10 years, and by 2029, it still predicts a 28 percent decline relative to pre-pandemic values.”

In other words, office values won’t recover.

This decline “will eat into tax revenues,” he continued. “Plugging that hole will require tax increases or spending cuts.”

Up to this point, the impact of the ongoing work evolution hasn’t been entirely felt by local governments because they’ve been bolstered by an incredible amount of federal dollars. But with spending timetables expiring in coming years, the impacts “are about to kick in.”

Public transportation is another aspect of government that’s particularly at risk.

According to Rein, New York’s Metropolitan Transportation Authority (MTA) has seen a 55 percent reduction as compared to pre pandemic ridership. The enormity of this drop can’t be understated: “10 percent of ridership is like three-quarters of a billion dollars in revenue; that is tough for the MTA,” he said.

And besides the monetary hit, less people riding the subway could dissuade others: “The fewer people are taking public transportation, the less safe people feel on it,” Weber said.

But while the outlook is grim in some aspects, cities and counties can mitigate the impact. As administrators consider these and other challenges their cities will face as a result of remote and hybrid in coming years, it’s important to remember that “Local governments are not bystanders in this,” Van Nieuwerburgh said, “they can affect their outcome through smart policies.”

Namely, this could mean changing zoning rules to facilitate an easier conversion from office space to residential housing, and by encouraging offices to upgrade into high-end spaces, which are projected to recover to somewhere close to their pre-pandemic value.

“The future of the office will be decided over the next two or three years. This may well become a train wreck in slow motion,” said Nieuwerburgh.