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Remote work is here to stay

New York City may be coming back to life, but downtown remains relatively dormant. Kastle’s estimates suggest that office occupancy in the New York metro area is at 40% of pre-pandemic levels. Only 8% of Manhattan office workers come in five days a week, while 28% work remote full-time, and even more follow a hybrid remote schedule. Similar patterns apply nationwide: 30% of paid workdays are done remotely, estimates remote work expert Nick Bloom, a figure that includes in-person jobs for which no remote option is available. ‘exist. For jobs that box be done remotely, only about half of the hours are in the office.

So remote work is clearly here to stay. Businesses and workers have invested heavily in the technology and living space that makes this possible. Workers are reporting a very strong desire to work remotely in the future, and companies are increasingly responding to these demands to attract and retain top talent. Many other aspects of society have fully recovered from the pandemic, but remote work persists. This has major implications for the functioning of commercial real estate and urban space, and calls for a radical rethinking of how cities function.

Start with the commercial office buildings themselves. Once a basic requirement of white-collar work, these have become optional, leading companies to reduce their demand for hire. In the research I have done with Stijn Van Nieuwerburgh and Vrinda Mittal, we document these changes in rental income and try to project the impacts on office property valuations. We estimate that valuations in New York have fallen by 28%. If extrapolated to the rest of the country, this would translate to a total loss in value of $500 billion and a catastrophic drop in the value of the central business district, the central anchor that holds urban areas together.

The challenges of municipal governance are also profound. Consider the direct revenue loss that remote work inflicts. New York City derives more than half of its tax revenue from real estate, much of which can be attributed to office buildings, including a tax on commercial rents that brings in nearly $1 billion. Declines in office values ​​are already starting to show up in property assessments and city revenues. Indeed, cities across the country depend on a healthy business district to generate revenue, imposing sales taxes on retail sales and personal income taxes on workers. San Francisco derives substantial revenue from business and commercial real estate taxes, some of which went into effect just before the pandemic.

Remote work also puts public transportation systems at risk. Commuters have formed the backbone of New York’s MTA, where ridership remains down about 40%. At these levels, the system will face imminent bankruptcy in a few years. Many other cities across the country have seen comparable declines in transit ridership, though federal aid could avert disaster.

These shifts in travel and office presence are mutually reinforcing. Fewer people going to the office means a less visible human presence on the streets and subways, encouraging crime and disorder. As more people leave a metropolitan area, the shrinking tax base makes it difficult to provide public goods and amenities to those who remain, encouraging more people to leave. Such urban “catastrophic loops” unfolded throughout the 1970s and 1980s.

Revival only came to places that could attract successful businesses and their employees to their downtowns. But these superstar cities failed to build enough housing for their new workers, leading to steep price increases. The population of many major cities had begun to decline even before the pandemic, suggesting that housing costs were already driving away some workers. The pandemic has accelerated these pressures. Now that people have more choices about where to live and work, cities will need to innovate to stay competitive. Three key policy changes can help.

Reorganize central business districts. Our research finds evidence of a ‘flight to quality’ effect: better-equipped office space appears to be in greater demand. In a world of remote work, companies need to motivate workers to show up at the office. Encouraging further improvements in office space can therefore help support demand.

Lower quality offices, Class B and C spaces, are in much less demand and should be converted into residential units. The conversion from office to residential is challenging but far from unprecedented. In New York’s Financial District, old office buildings have narrow slabs, making it easy to convert. Conversions are particularly attractive because they produce new housing at the center of the transit network, providing residents with many attractive transportation options.

Zoning changes and relaxation of residential regulations can speed up the process. Conversions are made more expensive by various housing regulations, including the requirement that every bedroom have a window. While natural light is indeed valuable, famed investor Charlie Munger has successfully designed buildings with rooms without natural light, which nonetheless remain very attractive. Ultimately, it should be up to residents to decide if they want to live in units with natural light.

While office work is down, tourism is booming, especially in amenity-rich cities. However, effective bans on building new hotels, as well as short-term Airbnb rentals, are driving up hotel prices and limiting the number of tourists who can visit. As cities move from centers of production to centers of consumption, they will need to accommodate visitors and tourists who generate income.

Correct public transport. Different commuting patterns call for different transit patterns. Tourists visit city centers on weekends, but the typical volume of weekday office commuters remains low. Passengers take trains at all hours of the day, rather than mainly during morning and evening rush hours.

Reducing transport costs remains a priority. New York, in particular, should consider drastic reforms, including reassessing the requirement that every subway car have two-person crews and redirecting (planned) proceeds from congestion pricing toward fixing operational deficits. Fare amounts should also be reassessed, and potentially increased, especially if the alternative is service reductions.

Public transport infrastructure can be improved at the margin. In cities across the country, people are increasingly using bicycles, e-bikes, scooters and other “micro-mobility” vehicles. Lime and Bird scooters are commonplace in Washington, DC, while in New York, bicycle traffic on East River bridges has increased 40% since the pandemic. Rather than spending money on expensive new projects, cities can invest more in these forms of public transit. A new set of pedestrian and bicycle bridges across the Hudson and into Queens, for example, would connect many more people at a much lower cost than traditional infrastructure.

Build more housing. Finally, the best thing cities can do to combat remote working is to allow and accommodate more housing. The conversions respond to a source of demand for housing, but in general cities have to allow far more housing than they currently do. The post-pandemic recovery has led to an increase in residential rents, which are now above pre-pandemic levels. But this increase does not necessarily mean an exodus from the big cities. Instead, it appears that population flows from other urban areas have simply returned to the same pre-pandemic levels. Once again, people are leaving these expensive cities.

So what explains the recovery of rents without a recovery of the population? Remote workers, whether at home full-time or part-time, tend to need more space. People are less likely to live with roommates than before the pandemic, and more likely to require home offices or combine adjoining units. With a fixed housing supply, these workers will drive out other residents of the city. The only way to prevent this from happening is with plenty of housing.

Remote work does not mean the end of cities. This should, however, be a red flag for the complacent. Remote work has given workers more options and choices, and many are choosing to live elsewhere in ways that have consequences for urban governance. These problems may be manageable, but managing them will require greater creativity and focus than urban leaders have shown in the past.

Photo by Gary Hershorn/Getty Images

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