Special Briefing on Vulnerable Cities Facing Work from Home Realities

Work-From-Home Trend Poses Challenges for City and State Budgets, Transit Systems

By Stephen Kleege, Volcker Alliance Special Project Consultant

• Pandemic spurred sixfold increase in working from home in U.S.
• New York office valuation dropped 33 percent as workers vacated 
• Biggest hit is on Class B and C office properties
• MTA ridership is stuck at 55 percent of pre-pandemic levels

The COVID-19 pandemic spurred a six-fold increase in the percentage of U.S. employees working from home, undercutting the value of commercial real estate and posing a challenge to city and state budgets, according to speakers at a special briefing hosted by the Volcker Alliance and the Penn Institute for Urban Research.

“It’s here and it’s here to stay,” Nicholas Bloom, professor of economics at Stanford University, said of the work-from home phenomenon. The portion of employees working full-paid days from home has increased to about 30 percent from 5 percent before the pandemic. For U.S. cities “the main area of concern is over public finances” as fewer people will be living and working within cities, reducing tax receipts, Bloom said. “The biggest worry for me is over public transport,” he added. “Usage may be down 20-40 percent.” 

Organized by William Glasgall, Volcker Alliance senior director, public finance and Penn IUR Fellow, and Susan Wachter, co-director of Penn IUR, the briefing was the thirty-third in a series of sixty-minute online conversations featuring experts from the Volcker Alliance's national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders.

In addition to Bloom, panelists included Stijn Van Nieuwerburgh, a professor at Columbia University’s Graduate School of Business; Andrew Rein, president of the Citizens Budget Commission in New York; and Lauren Weber, who writes about workplace issues and employment in the Wall Street Journal's corporate bureau in New York. Glasgall moderated the discussion. 

Panelists cited data from Kastle Systems that showed occupancy of office space averages 44 percent in the 10 biggest US cities, ranging from 38 percent in Philadelphia to 58 percent in Austin, Tex. Much of the discussion centered on New York City, the nation’s biggest office market, where occupancy averaged 41 percent in the week ended July 18 .

Based on an analysis of broker-sourced leasing data, Van Nieuwerburgh said, New York office valuation dropped by 33 percent in 2020 and may still be down 28 percent by 2029. That has implications for real estate investment portfolios and for the debt held by investors and banks. “It’s not enough to trigger a financial crisis, but it’s worrisome nevertheless,” he said. Van Nieuwerburgh's article, "Work from Home and the Office Real Estate Apocalypse" was published in June 2022. 

New York City gets 53 percent of its revenue from real estate, and, of that, 22 percent comes from office property taxes, Van Nieuwerburgh said. “Plugging that hole will require tax increases or spending cuts, neither of which are good for the business climate,” he said. He said that the city can avoid “a 1970s-style doom loop” through steps like making it easier for office owners to convert their properties to residential use.

Rein said the New York office market has shown resiliency through past crises and that class A office space is performing relatively well. Lower-quality properties may not be so fortunate. “The real issue is there’s going to be a bigger hit on Class B and C office space,” which accounts for $2.5 billion in revenue for the city, Rein said. “There’s a lot more of that space than probably is necessary.”

Weber said emptier subways and busses have created an “unvirtuous circle” for the Metropolitan Transportation Authority, the state agency that runs New York City’s subway and bus systems. Though crime is down, recent shooting incidents and emptier subway cars have made subway passengers feel less safe, she said, complicating efforts by the debt-burdened authority to increase ridership from 55 percent of pre-pandemic levels. 

The work-from-home phenomenon has had a spillover effect on retailers in central business districts, reducing demand for lunch trucks and other businesses that relied on office workers for sales. However, Rein said he remains optimistic about the entrepreneurial spirit in New York. He cited a report from city Comptroller Brad Lander’s office that while there had been a 5,100-business decline in retail entities in Manhattan, the number has increased by 1,300 in the largely residential borough of Brooklyn. 

Special Briefings are made possible by funding from The Century Foundation, the Volcker Alliance, and members of the Penn IUR Advisory Board.