Remote Work Is Poised to Devastate America’s Cities
In order to survive, cities must let developers convert office buildings into
housing.
By Eric Levitz, senior writer for Intelligencer.
https://nymag.com/intelligencer/2022/12/remote-work-is-poised-to-devastate-americas-cities.html
The “work from home” revolution has been very good for political columnists who
like to write shirtless in pajama pants and share too much personal information
with their readers. But the phenomenon hasn’t been so great for America’s
cities.
The nation’s office buildings aren’t as empty as they were before COVID
vaccines became widely available in spring 2021. But they’re still far less
populated than they were in 2019.
A recent analysis of Census Bureau data by the financial site Lending Tree
found that 29 percent of Americans were working from home in October 2022. In
New York City, financial firms reported that only 56 percent of their employees
were in the office on a typical day in September.
Full-time remote work has grown less prevalent since the worst days of the
pandemic. But flexible work arrangements — in which employees report to the
office a couple times a week — are proving stickier.
A recent paper from the National Bureau of Economic Research estimated that 30
percent of all full-time workdays would be performed remotely by the end of
2022.
As Insider’s Emil Skandul illustrates in an excellent piece, these surveys and
projections are buttressed by mobile phone data showing that, in virtually all
major U.S. cities, foot traffic in central business districts is down
substantially from 2019.
And collapsing office attendance rates are taking cities’ tax revenues down
with them.
When only 50 percent of a company’s staff leave their homes in the morning,
that firm’s desire for floorspace plummets. If storm-clouds appear on the
economic horizon — like, say, a central bank dead set on slowing the economy to
kill inflation — downsizing your office becomes the easiest way to cut
expenses. Thus, as rising rates have laid tech low, San Francisco’s signature
office towers have emptied out. In New York, meanwhile, Meta has ditched
450,000 square feet of office space. Across the nation as a whole, only about
47 percent of offices are occupied.
All this translates into plummeting demand for commercial real-estate, which
translates into plummeting property values, which translates into plummeting
tax receipts. A recent study from New York University’s Stern School of
Business found that office values fell 45 percent in 2020, and are likely to
remain 39 percent below pre-pandemic levels for the foreseeable future. If that
projection proves true, it would wipe $453 billion in property values off
American cities, thereby slashing a critical source of municipal revenues.
In New York City, property taxes are the single largest source of public funds,
supplying one-third of the city’s tax revenue. Office buildings account for
one-fifth of that sum. The declining market value of Manhattan’s major office
districts alone cost the city $5.24 billion in revenue.
Remote work’s toll on cities does not end with its implications for property
tax revenue. Enable suburban commuters to work from their dens several days a
week, and you transfer all manner of smalltime commerce — lunch orders,
after-work drinks, etc. — from the urban core to its periphery. And lost
transactions mean lost sales taxes. U.S. cities expect their sales tax revenues
to decline by an average of 2.5 percent in 2022, according to a survey from the
National League of Cities. Last year, New York City Comptroller Scott Stringer
estimated that remote work would cost the city $111 million in sales tax
receipts annually.
Meanwhile, emptier office towers also mean emptier subways and buses. Although
mass transit ridership has recovered from its COVID-era lows, it’s plateaued at
roughly 70 percent of pre-pandemic levels. That poses an existential threat to
municipal transit systems, many of which were struggling to operate on budget
even before the COVID crisis. In New York, the Metropolitan Transit Authority
is poised to see a widening gap between its revenues and operating expenses as
this decade progresses.
The great danger for cities is that these trends could become self-reinforcing.
Falling revenues could translate into lower-quality public services (e.g. less
reliable subways, less well-maintained infrastructure, lower performing public
schools, stingier safety nets), which render cities less attractive to high
earners, who then decamp for the suburbs in greater numbers, thereby depressing
revenues further. Meanwhile, underpopulated downtowns are less conducive to
successful small businesses and more conducive to crime. As central business
districts become home to fewer restaurants and more criminal activity, more
firms will flee them, leading to even more underpopulated office towers.
For now, the American Rescue Plan’s copious aid to states and municipalities
are keeping cities out of this vicious cycle. But those funds will dwindle in
the coming years. In the National League of Cities recent survey, nearly
one-third of cities said that they will confront financial challenges next
year, as relief funds grow thin.
It is possible that work from home will simply fall out of fashion as the
pandemic recedes into history. But given the myriad advantages that flexible
work arrangements have for both employees and firms, cities shouldn’t count on
it. Instead, major U.S. cities should capitalize on the one benefit of
commercial real-estate’s collapse: The newfound potential to create a ton of
new housing in already constructed, centrally located buildings.
America’s most successful cities have long failed to expand their stocks of
housing in line with demand. The result has been a perennial crisis of
affordability that constrains urban growth, transfers vast sums of money from
workers to landlords, and displaces longtime residents. Restrictive zoning
codes — and community opposition to new construction that threatens to bring
more noise, traffic, and competition for parking spots — have helped entrench
this sorry state of affairs.
But vacated office towers typically reside in districts already zoned for both
residential and commercial activities. And since the buildings are already
built, they tend to attract less community opposition. Their centrality,
meanwhile, makes them potentially attractive residences for urbanites who wish
to walk to work, and/or have virtually every good or service one could ever
want within a hop, skip, and a jump.
Alas, converting office buildings into housing is easier said than done.
Commercial buildings tend to have far fewer bathrooms and kitchens than
residential ones require. Which means that any conversion demands
reconstructing a tower’s plumbing and electrical systems. Expenses add up
quickly, especially at a time of elevated construction costs.
Meanwhile, many office buildings do not meet all of the standards that
municipal zoning codes require of residential buildings. Offices tend to have
much more interior space between windows, leaving much of their floor plans
without external light. Additionally, in New York City, residential buildings
are generally required to have 30-foot rear yards, in order to ensure a modicum
of light and air. Commercial buildings often have smaller rear yards, while
also running afoul of the parking minimums that many cities impose on
residential towers.
Faced with the high costs and regulatory headaches of attempting a conversion,
many real-estate developers have resigned themselves to lower revenues from
their commercial properties, while nursing hopes that remote work will prove to
be a mere fad.
If conversions don’t pencil out for private developers, however, they promise
profound benefits for cities as a whole. Turning thinly populated office towers
into apartment buildings would ease cities’ housing shortages, while boosting
both downtown commerce and property values and, therefore, tax revenues.
Thus, city and state policymakers would be wise to help lower both the funding
and regulatory hurdles to mass office-to-residential conversions.
Cities have often sought to promote development by giving tax credits and
abatements to new projects. Yet one of the main objectives of promoting
office-to-residential conversions is to increase property tax receipts. So,
trying to spur such developments by doling out property tax breaks seems less
than ideal.
Instead, cities should help finance new projects with revolving funds that
secure the public sector a cut of the ultimate proceeds. Montgomery County’s
Housing Production Fund in Maryland offers one model for this form of
public-private development. In simple terms, the county’s fund encourages
private investment in housing by providing partial funding for new projects,
thereby reducing the financial risk that developers must assume when pursuing
new construction. In exchange, developers agree to place income restrictions on
30 percent of the units in a given building, and to share a portion of their
ultimate profits with the government. Through this mechanism, Montgomery County
has managed to catalyze the construction of new affordable housing, at a
negligible net-cost to the public sector.
While providing capital for office-to-residential conversions, cities should
also exempt such projects from their most burdensome zoning requirements.
Residential towers in central business districts replete with transit options
should not have to comply with parking minimums. And they probably don’t all
need 30-feet yards either. Relaxing such standards will necessarily mean that
some new housing developments will offer residences with unusually poor light
and limited windows. But they will also offer renters and buyers the myriad
amenities of a city center and benefits of new construction. Having poorly-lit
new housing is not ideal. But having an acute shortage of affordable housing —
and a superabundance of downtown office space — is even worse. New York, Los
Angeles, and myriad other cities have offered regulatory exemptions to
conversion projects in the past, and have rarely regretted trading stringent
standards for more housing units.
Indeed, the benefits of office-to-residential conversions are so significant,
cities should consider exempting them even from the requirement that all legal
bedrooms have windows.
Given the massive core-to-window depths of contemporary office buildings,
converting many such towers to residences will require tolerating some deeply
weird floor plans. The real estate developer Bobby Fijan recently tweeted this
example of how a typical modern office could be refashioned into a spacious yet
bizarre home:
Not everyone is going to want to live in a 2,500 square-foot apartment with a
massive common area and 4 windowless bedrooms. But as Matt Yglesias argues,
some people probably would. Personally, I’m a very light sleeper who is
routinely awakened by city noise and morning light. So the idea of having a
bedroom insulated from both by solid walls has some appeal. If cities are faced
with a choice between letting office towers sit vacant, or letting photophobic
bargain hunters live in windowless bedrooms, they should opt for the latter.
The liberation of America’s white-collar homebodies need not come at cities’
expense. The remote work revolution could devastate municipalities’ downtowns
and finances, or it could help resolve their housing crises. If they can summon
the requisite policy imagination and flexibility, city officials can make “work
from home” work for everyone.
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