Downtowns After the Pandemic

Office buildings are quiet and no one’s on the train. We’re in the middle of an economic shock, and some cities may never be the same.

By Michael Arnold

Economic shocks come in many forms, both positive and negative. Wars, technological advances and political surprises can have a significant impact on the cost of what we consume, how we produce goods and services, and the way we live. Think of how World War II, the birth control pill, the 1973 Arab oil embargo, and the rise of the internet and social media had dramatic economic effects over many years.

The pandemic may be the next example, largely because of the shift to remote work. Private companies and public agencies alike are still allowing millions of employees to work from home. People have gotten accustomed to using technology to “attend” meetings, communicate with far-flung colleagues and get work done.

Have you called customer service recently? Most call centers are empty as technology routes the calls to agents’ homes. Have you talked to a government worker? Many agencies are being run by staff based at home. Facebook and Google have most of their workforces operating from home, as do investment banks, brokerage firms and news organizations. Only around a quarter of office workers were back at their desks in mid-November, according to numbers from more than 2,500 commercial buildings in 10 major cities. That’s up from less than 15% in April, but well below what landlords had hoped for by now.

Consider what’s happened to public transit. Passenger numbers dipped during the 2007-2009 recession and then recovered. At the start of the pandemic, transit use plummeted and so far has hardly recovered. The drop is not only due to health concerns but also to the sharp decline in workers commuting to their jobs.

When the pandemic is over, to what extent will people continue to work from home? It’s too early to tell, but it looks like we're heading toward the next economic shock. This one will not only be caused by millions of people no longer working at “work,” but also by people moving far away from their former workplaces so that they can live in cheaper and more desirable locations, and gain more space for working from home. The implications of such a change, particularly on cities, are enormous. As writer and television host Fareed Zakaria noted last month on Washington Week Extra:

I think people are going to work two-to-three days a week (from home), maybe four days. Maybe they won’t go in at all one week. In a way, it’s a return to an older model when the shopkeeper lived above the store, the craftsman plied his trade in the garage [of the house] where he lived, the farmer always lived on the farm. So we might find that work and life become more mingled. And that will create a different city. It’ll create a city maybe of neighborhoods that are more complete and intact.

Employers are learning whether their employees are as productive virtually as they were in a brick-and-mortar setting. Simultaneously, employees working from home are learning whether they like this arrangement and how much.

Certainly not all employers can allow their workforce to work remotely permanently. But if a substantial percentage of workers do, the change will dramatically reduce the number of full-time employees based in central business districts and suburban office parks across the nation and, in turn, hurt the shops, restaurants and other businesses serving those locations.

The national office vacancy rate reached 14.4% in the third quarter of 2020, the highest level in six years, according to commercial real estate services company Cushman & Wakefield. More than 90% of the cities and regions covered by the survey are experiencing more vacancies, with San Francisco suffering the largest increase.

To the extent that vacancy rates remain high, landlords will be forced to lower rents. But an excess supply of downtown office space doesn’t imply empty buildings for very long. That’s because commercial development can be far more adaptable than residential development and, in many cities, office buildings are located where there is a housing shortage. Over time, these buildings can be converted to rental apartments and condominiums. And prolonged periods for getting planning and zoning approvals can be largely avoided because the buildings are already standing. We may soon see the beginning of commercial properties being converted to residential use on a scale never seen before.

There is a precedent for this. After Sept. 11, 2001, financial firms and many other businesses in downtown Manhattan were forced to decamp to Midtown. The buildings they left behind, many of them classic, turn-of-the-last-century structures, were often turned into residences in the following years. As Reuters noted in 2011, “a decade after the Sept. 11 attacks enveloped Lower Manhattan in a thick gray dust of pulverized buildings and human remains, the surrounding area has become a trendy neighborhood with a booming population.”

Commercial real estate owners are evaluating how the migration of much of the workforce will affect occupancy rates and rents. But what about state and local government plans for public transportation and land use? These bureaucracies seem to be looking in the rearview mirror, at least based on what is happening in the San Francisco Bay Area. There, officials are still focused on pre-pandemic concerns about traffic congestion and high housing costs despite the widespread recognition that this economic shock might radically alter metropolitan land use and public transportation patterns.

Within a year, after widespread distribution of the vaccine and the anticipated ebbing of the pandemic, we should know whether much of the workforce has relocated for good. Any change will be reflected in public transit ridership, the number of empty storefronts and boarded-up businesses in downtowns and, most of all, office vacancy rates and rents. And regardless of the forecasts, we'll also know because relocations may be common among our friends and family members.

In the near term, we can expect many mass transit advocates to focus on bailing out public transportation systems. The politicians backing this massive spending will argue that ridership will return to normal. But if ridership doesn’t return, the bailouts won’t last for long. The cost of subsidizing poorly used transit systems is simply too high, and governments will be forced to restructure transit systems and the agencies that oversee them.

Stand by. It won’t be long before we know whether this shock to where we work and live—and whether our commute is a train ride into the city or a walk downstairs to our home office—is temporary or permanent.