Special Briefing: The Future of Downtowns

Revenue Crises Loom for Cities with Work-from-Home Outlasting Pandemic

By Stephen Kleege, Volcker Alliance Special Project Consultant

• COVID-driven remote work may produce estimated $413 billion value destruction in US office markets
• Risk of 1970s style "doom loop" rises as workers desert central cities, tax revenues drop
• San Francisco is especially hit hard, as tech sector employees stay away
• Experts see need, opportunity for transformative housing, transit overhauls

Pandemic-driven remote-work has led to a drop in US office building value, putting pressure on cities that rely on commercial property taxes to rethink everything from tax and land use policy to mass transit, according to participants in a Special Briefing on the Future of Downtowns, co-hosted by the Volcker Alliance and the Penn Institute for Urban Research (Penn IUR).

“When the pandemic hit, the share of workdays performed at home rocketed from about 5 percent in 2019 in the United States to more than half in the spring of 2020,” before settling in recently at about 30 percent, said Steven J. Davis, senior fellow, Hoover Institution, and professor at the University of Chicago Booth School of Business. “We’re living with the fallout of that, and we will continue to live with the fallout of that indefinitely.”

Shortfalls in commercial property tax revenues, which had been “papered over” by an influx of federal COVID-19 stimulus money, are a growing focus for investors, said Howard Cure, director of municipal bond research, Evercore Wealth Management. The revenue decline is likely to continue as office leases come up for renewal and landlords win reductions in property tax assessments, he said. At the same time, he said, continued government support of mass transit systems after commuter fare revenue plunged may present opportunities for the municipal bond investors.

Moderated by William Glasgall, Volcker Alliance senior director, public finance and Penn IUR fellow, and Susan Wachter, Penn IUR co-director, the January 19 briefing was the thirty-eighth in a series of sixty-minute online conversations featuring experts from the national research networks of the Volcker Alliance and Penn IUR and other leading academics, economists, and federal, state, and local leaders.

In addition to Davis and Cure, panelists included Tracy Hadden Loh, fellow, Anne T. and Robert M. Bass Center for Transformative Placemaking, Brookings Metro; Stijn Van Nieuwerburgh, Earle W. Kazis and Benjamin Schore professor of real estate and professor of finance, Columbia University Graduate School of Business; and Romy Varghese, politics editor, Bloomberg News.

Van Nieuwerburgh said a research paper he co-authored with Arpit Gupta of the NYU Stern School of Business and Vrinda Mittal, of Columbia Graduate School of Business found a 39 percent decline in the long-run value of New York City office structures and $413 billion of value destruction nationwide associated with the surge in remote office work. The concern, he said, is that this may trigger a 1970s-style “doom loop” similar to what Detroit and New York City suffered, resulting in a lowered quality of life and business environment.

Varghese, said San Francisco’s office market was especially hard hit by the shift to working from home because of its reliance on the tech sector. San Francisco lost the most residents of any major city and hasn’t recovered as well as others, she said. The departure of workers and a decline in business travel into the city have had a spillover effect on downtown retail sales tax revenue, she said, with the city projecting a $728 million budget gap over the next two fiscal years.

Loh said the impact of COVID has been varied, with office occupancy rates close to pre-pandemic levels in cities such as San Diego, and even higher in Salt Lake City. She said demand for office space had been declining before the health crisis, and that the hard-hit cities now have an opportunity to adjust land use and tax policies to meet changing needs.

“Very low office utilization rates have made one thing extremely obvious: Central business districts where offices are extraordinarily dominant land-use, like over 90 percent of real estate inventory, perhaps do not actually reflect the highest and best use of the location,” she said.

Loh said downtown residential development should meet the needs of low-income households, the homeless, and those in need of transitional support. “Housing is not a substitute for offices in the case of downtowns, which will always be centers for work, but it is a big complement,” she said.

For cities, Davis said, “the stakes are higher now than they were before the pandemic with respect to getting the right mix of local economic policies, the right local goods and services.”

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

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