With the rise of remote work, American cities face an ‘urban doom loop’ as revenue declines

Just as the Industrial Revolution fundamentally changed the purpose of city downtowns during the 1800s, today’s rapid evolution to remote work is forcing metros across the United States to reconsider business centers and adapt office spaces to emerging needs.

“We’re going through this major revolutionary change, and it will take decades to play out,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s Graduate School of Business during an online panel discussion Thursday titled “Special Briefing: The Future of Downtowns” hosted by The Volcker Alliance and the Penn Institute for Urban Research. “It will be a slow and painful transition.”

Over the last several years, remote work in the U.S. has exploded from about 5% of the total workforce before the pandemic to around 20% today, according to data from the Census Bureau. The impact on city revenues has been profound, given their reliance on commercial real estate taxation.

And with less people heading into offices, “public transportation commuting fell by about half, from 5% of workers in 2019 to 2.5% in 2021, the lowest percentage of workers commuting by public transportation that has ever been recorded by the ACS (American Community Survey),” reads a statement about the Census Bureau’s annual demographics report, which was published near the end of last year.

Elsewhere, restaurants that have traditionally served commuters are struggling to stay afloat and small businesses catering to foot traffic are closing up shop. Office spaces are emptying out as leases aren’t renewed, or remain vacant. Van Nieuwerburgh called this symbiotic spiral an “urban doom loop.”

Larger metros, those with a lot of tech businesses and a high percentage of educated residents have been particularly impacted. San Francisco, Calif., a city of more than 800,000 people where tech accounts for about 30% of industry, is a good example of one of those cities.

“San Francisco has not recovered like other cities. Business travel has been slower to return than leisure travel, and business travelers spend more than leisure tourists,” said Romy Varghese, a politics editor at Bloomberg News and a panelist. Even before the pandemic, housing was incredibly expensive and homelessness was a huge problem. When many tech companies embraced remote work, residents moved elsewhere.

Structurally, San Francisco’s downtown is built as an economic hub around commercial real estate, and its business tax is driven by the number of people working inside its borders. San Francisco’s office vacancy rate sits at 25%, hammering its bottom line. Over the next two years, the local government is projecting a $728 billion deficit.

“Public officials were a bit in denial about this. Now, there is widespread acceptance that remote work is here to stay, and they’re focusing on different ways to bring people back into the downtown,” Varghese said. Methods include encouraging biotech to move into empty offices, converting commercial spaces into housing, and a focus on softening the downtown area to encourage varied uses.

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