Opinion | How a ‘Golden Era for Large Cities’ Might Be Turning Into an ‘Urban Doom Loop’ | By The Perfect Enemy

The last thirty years “were a golden era for large cities,” Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia Business School, wrote in November 2022: “A virtuous cycle of improving amenities (educational and cultural institutions, entertainment, low crime) and job opportunities attracted employers, employees, young and old, to cities.”

New York, Los Angeles, Boston and San Francisco, Van Nieuwerburgh continued, “became magnets for the highest-skilled employees and the top employers, with particular concentrations in finance and technology.” In late February and early March 2020, the Covid-19 pandemic hit New York and other population hubs. In Van Nieuwerburgh’s telling, the Covid-19 crisis “triggered a massive migration response. Many households fled urban centers. Most of these Covid migrants moved to the suburbs.”

As the pandemic endured and subsequent Covid variants prompted employers to postpone return-to-office plans, Van Nieuwerburgh noted, “Covid-induced migration patterns began to take on a more persistent character. Many households transitioned from temporarily renting a suburban home to purchasing a suburban home.”

In Van Nieuwerburgh’s view — and that of many of his colleagues — what seemed like a transitory step to avoid infection has become a major force driving the future direction of urban America.

Scholars are increasingly voicing concern that the shift to working from home, spurred by the coronavirus pandemic, will bring the three-decade renaissance of major cities to a halt, setting off an era of urban decline. They cite an exodus of the affluent, a surge in vacant offices and storefronts and the prospect of declining property taxes and public transit revenues.

Insofar as fear of urban crime grows, as the number of homeless people increases, and as the fiscal ability of government to address these problems shrinks, the amenities of city life are very likely to diminish.

Jacob Brown, a post- doctoral fellow at Princeton’s Center for the Study of Democratic Politics, elaborated in an email on the consequences for cities of the more than 20 percent of urban employees now working full- or part-time from home:

With respect to crime, poverty and homelessness, Brown argued,

One thing that may occur is that disinvestment in city downtowns will alter the spatial distribution of these elements in cities — i.e. in which neighborhoods or areas of a city is crime more likely, and homelessness more visible. Urban downtowns are often policed such that these visible elements of poverty are pushed to other parts of the city where they will not interfere with commercial activities. But absent these activities, there may be less political pressure to maintain these areas. This is not to say that the overall crime rate or homelessness levels will necessarily increase, but their spatial redistribution may further alter the trajectory of commercial downtowns — and the perception of city crime in the broader public.

“The more dramatic effects on urban geography,” Brown continued,

may be how this changes cities in terms of economic and racial segregation. One urban trend from the last couple of decades is young white middle- and upper-class people living in cities at higher rates than previous generations. But if these groups become less likely to live in cities, leaving a poorer, more disproportionately minority population, this will make metropolitan regions more polarized by race/class.

My Times colleague Nicholas Fandos documented the damage that even the perception of rising crime can inflict on Democrats in a Nov. 27 article, “Meet the Voters Who Fueled New York’s Seismic Tilt Toward the G.O.P.”: “From Long Island to the Lower Hudson Valley, Republicans running predominantly on crime swept five of six suburban congressional seats, including three that President Biden won handily that encompass some of the nation’s most affluent, well-educated commuter towns.

And on Tuesday, Mayor Eric Adams of New York announced plans to potentially subject severely mentally ill people who are found on subways or city streets to involuntarily hospitalization.

Nicholas Bloom, an economist at Stanford, described some of the economic forces at work in an email:

In big cities like New York and San Francisco we estimate large drops in retail spending because office workers are now coming into city centers typically 2.5 rather than 5 days a week. This is reducing business activity by billions of dollars — less lunches, drinks, dinners and shopping by office workers. This will reduce city hall tax revenues.

Compounding the problem, Bloom continued,

Public transit systems are facing massive permanent shortfalls as the surge in working from home cuts their revenues but has little impact on costs (as subway systems are mostly a fixed cost. This is leading to a permanent 30 percent drop in transit revenues on the New York Subway, San Francisco Bart, etc.

These difficulties for cities will not go away anytime soon. Bloom provided data showing strong economic incentives for both corporations and their employees to continue the work-from-home revolution if their jobs allow it:

First, “Saved commute time working from home averages about 70 minutes a day, of which about 40 percent (30 minutes) goes into extra work.” Second, “Research finds hybrid working from home increases average productivity around 5 percent and this is growing.” And third, “Employees also really value hybrid working from home, at about the same as an 8 percent pay increase on average.”

In the case of New York, Bloom wrote that he is “reasonably optimistic in the long-run,” and “current office leasing markets are soft but not in collapse.”

That view is not shared by three other experts in real estate economics, Arpit Gupta, of N.Y.U.’s Stern School of Business, Vrinda Mittal, both of the Columbia Business School, and Van Nieuwerburgh. They anticipate disaster in their September 2022 paper, “Work From Home and the Office Real Estate Apocalypse.”

“Our research,” Gupta wrote by email,

emphasizes the possibility of an ‘urban doom loop’ by which decline of work in the center business district results in less foot traffic and consumption, which adversely affects the urban core in a variety of ways (less eyes on the street, so more crime; less consumption; less commuting) thereby lowering municipal revenues, and also making it more challenging to provide public goods and services absent tax increases. These challenges will predominantly hit blue cities in the coming years.

In their paper, the three authors “revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 45 percent decline in office values in 2020 and 39 percent in the longer run, the latter representing a $453 billion value destruction.”

Extrapolating to all properties in the United States, Gupta, Mittal and Van Nieuwerburgh write, the “total decline in commercial office valuation might be around $518.71 billion in the short-run and $453.64 billion in the long-run.”

Their conclusions are not necessarily cast in concrete but they are bleak:

We estimate that remote work is likely to persist and result in long-run office valuations that are 39.18 percent below prepandemic levels. The decline in office values and the surrounding central business district retail properties, whose lease revenues have been hit at least as hard as office, has important implications for local public finances.

For example, the share of real estate taxes in N.Y.C.’s budget was 53 percent in 2020, 24 percent of which comes from office and retail property taxes. Given budget balance requirements, the fiscal hole left by declining central business district office and retail tax revenues would need to be plugged by raising tax rates or cutting government spending.

Both would affect the attractiveness of the city as a place of residence and work. These dynamics risk activating a fiscal doom loop. With more people being able to separate the location of work and home, the migration elasticity to local tax rates and amenities may be larger than in the past.

In a separate email, Van Nieuwerburgh warned that

As property values of urban office and urban retail fall, with the increased importance of work from home, so do the tax revenues generated from those buildings and the associated economic activity. Since local governments must balance their budget, this means that they need to raise tax revenues elsewhere or cut public spending. The former is bad for the business climate. The latter is bad for the quality of life in the city: cuts to public transit, schools, police departments, sanitation departments, etc. As the quality of public services deteriorates, crime could increase, making public transit potentially even less attractive. More generally, an urban doom loop could ensue, whereby lower property tax revenues beget lower spending and higher taxes, triggering more out-migration, lower property values, lower tax revenues, less public spending, more crime and worse schools/transit, more out-migration.

In his November 2022 paper, “The Remote Work Revolution: Impact on Real Estate Values and the Urban Environment,” Van Nieuwerburgh writes:

Since March 2020, Manhattan has lost 200,000 households, the most of any county in the U.S. Brooklyn (-88,000) and Queens (-51,000) also appear in the bottom 10. The cities of Chicago (-75,000), San Francisco (-67,000), Los Angeles (-64,000 for the city and -136,000 for the county), Washington DC (-33,000), Seattle (-31,500), Houston (-31,000), and Boston (-25,000) make up the rest of the bottom 10.

As major cities are caught in a downward fiscal spiral, the forces driving the process will be felt in varying stages. The loss of transit ridership fares and sales taxes is immediate; declining residential, retail and office property taxes will take longer to phase in as new appraisals are performed; drops in income tax revenues will occur as families moving outside city limits change their legal residence.

Ruth Fremson/The New York Times

One of the major consequences of these patterns, Jessica Trounstine, a political scientist at the University of California-Merced, wrote in an email, “has been segregation in fiscal capacity within metro areas.” In most cases, Trounstine suggested, “the people who will leave cities will likely be higher income and whiter than the people who stay. This means that prior patterns will only be amplified, not reversed.”

There are a number of ways to describe the changing character of urban America and the ever-evolving nature of post-pandemic life.

Tracey H. Loh, a Brookings fellow, wrote in an email that one way to view an urban downtown is like “a natural ecosystem” that has received a major shock:

Prior to the pandemic, these ecosystems were designed to function based on huge surges in their daytime population from commuters and tourists. The shock of the sudden loss of a big chunk of this population caused a big disruption in the ecosystem.

Just as the pandemic has caused a surge in telework, Loh wrote, “it also caused a huge surge in unsheltered homelessness because of existing flaws in America’s housing system, the end of federally-funded relief measures, a mental health care crisis, and the failure of policies of isolation and confinement to solve the pre-existing homelessness crisis.”

The upshot, Loh continued,

is that both the visibility and ratio of people in crisis relative to those engaged in commerce (whether working or shopping) has changed in a lot of U.S. downtowns, which has a big impact on how being downtown ‘feels’ and thus perceptions of downtown. These negative perceptions have become a real barrier to further recovery and are also shaping local elections, especially out west where homelessness is worse, such as last year’s Seattle mayoral election or the recent L.A. mayoral election.

Some urban experts have a less pessimistic outlook.

Edward Glaeser, an economist at Harvard and a co-author, with David Cutler, of the 2021 book “Survival of the City: The Future of Urban Life in an Age of Isolation,” wrote by email that “Conventional economic theory suggests that real estate markets will adjust to any reduction in demand by reducing price. Some of this has already happened in commercial real estate.” Glaeser also noted that “many businesses that thought that they were priced out of N.Y.C., San Francisco and Boston markets will reconsider if commercial prices are 30 percent lower.”

In fact, Glaeser argued, while

a thirty percent drop in rents in N.Y.C. or S.F. would not lead to disaster, a similar drop in Buffalo or Cleveland might be more problematic because many landlords might just decide to walk away from their properties. In that case, a bleak spiral could begin where vacancies beget vacancies as the urban service providers that cater to local businesses shut down or relocate as well.

The nation, Glaeser continued, is

at an unusual confluence of trends which poses dangers for cities similar to those experienced in the 1970s. Event#1 is the rise of Zoom, which makes relocation easier even if it doesn’t mean that face-to-face is going away. Event#2 is a hunger to deal with past injustices, including police brutality, mass incarceration, high housing costs and limited upward mobility for the children of the poor.

Progressive mayors, according to Glaeser,

have a natural hunger to deal with these problems at the local level, but if they try to right injustices by imposing costs on businesses and the rich, then those taxpayers will just leave. I certainly remember New York and Detroit in the 1960s and 1970s, where the dreams of progressive mayors like John Lindsay and Jerome Patrick Cavanagh ran into fiscal realities.

In the short run, Glaeser wrote,

both the reduction in tax revenues and current political impulses are likely to lead to more crime and homelessness, which will in turn create more of an urban exodus. I am sufficiently optimistic about cities to think that they are likely to react relatively quickly to that exodus and then pivot to being smarter about urban management. In this more hopeful scenario, the likely medium term effect is to create a new generation of city manager-mayors, like Mike Bloomberg, who care about inequity but fight it in a smart way.

Richard Florida, a professor of economic analysis and policy at the University of Toronto, stands out as one of the most resolutely optimistic urban scholars. In his August 2022 Bloomberg column, “Why Downtown Won’t Die,” Florida asks, “Can America’s iconic downtowns survive?” His answer:

Great downtowns are not reducible to offices. Even if the office were to go the way of the horse-drawn carriage, the neighborhoods we refer to today as downtowns would endure. Downtowns and the cities they anchor are the most adaptive and resilient of human creations; they have survived far worse. Continual works in progress, they have been rebuilt and remade in the aftermaths of all manner of crises and catastrophes — epidemics and plagues; great fires, floods and natural disasters; wars and terrorist attacks. They’ve also adapted to great economic transformations like deindustrialization a half century ago.

What the Covid-19 pandemic has done, Florida argues, “is to accelerate a set of changes in our downtowns that were already underway. Vestiges of the industrial age, they were gradually evolving from the one-dimensional, work-only central business districts of the 1950s, ’60s and ’70s.”

In an email, Florida wrote that many urban central business districts are “relics of the past, the last gasp of the industrial age organization of knowledge work the veritable packing and stacking of knowledge workers in giant office towers, made obsolete and unnecessary by new technologies.”

Now, he argued, “Downtowns are evolving away from centers for work to actual neighborhoods. Jane Jacobs titled her seminal 1957 essay, which led in fact to ‘The Death and Life of Great American Cities,’ ‘Downtown Is for People’ — sounds about right to me.”

Despite his optimism, Florida acknowledged in his email that

American cities are uniquely vulnerable to social disorder — a consequence of our policies toward guns and lack of a social safety net. Compounding this is our longstanding educational dilemma, where urban schools generally lack the quality of suburban schools. American cities are simply much less family-friendly than cities in most other parts of the advanced world. So when people have kids they are more or less forced to move out of America’s cities.

Florida made the case in his email that cities have become critically important incubators:

What worries me in all of this, in addition to the impact on cities, is the impact on the American economy — on innovation. and competitiveness. Our great cities are home to the great clusters of talent and innovation that power our economy. Remote work has many advantages and even leads to improvements in some kinds of knowledge work productivity. But America’s huge lead in innovation, finances, entertainment and culture industries comes largely from its great cities. Innovation and advance in. these industries come from the clustering of talent, ideas and knowledge. If that gives out, I worry about our longer-run economic future and living standards.

While the future path of cities remains uncertain, Patrick Sharkey, a sociologist at Princeton, provided an overview of the problems they face:

Cities that have lost revenue from commercial activity have received substantial support from the federal government over the last few years, but that assistance won’t be sustained in the future. What comes next is not clear, but big cities have to reinvent themselves in an era when the downtown business district seems to be permanently changing. The risk that comes with fiscal distress is clear: If city governments face budget shortfalls and begin to cut back on funding for public transit, policing, and street outreach, for the maintenance of parks, playgrounds, community centers, and schools, and for services for homelessness, addiction, and mental illness, then conditions in central cities will begin to deteriorate.

The result?

When support for the people and the basic institution of urban life is withdrawn, people suffer and public spaces start to empty out. This, along with the rising prevalence of guns across the country, creates the conditions for gun violence to worsen, reinforcing the process of decline. None of this is inevitable, and we know that investments in the people and institutions of cities are effective in creating safe, thriving public spaces. But it’s not entirely clear to me where those investments will come from if revenue falls in the years to come.

In a paper from September, “Working from Home Around the World,” Nicholas Bloom, whom I cited earlier, and five colleagues, argue that “the implications for cities are more worrisome. The shift to working from home reduces the tax base in dense urban areas and raises the elasticity of the local tax base with respect to the quality of urban amenities and local governance.”

There is reason for both apprehension and hope. Cities across time have proven remarkably resilient and have survived infectious diseases from bubonic plague to cholera to smallpox to polio. The world population, which stands today at eight billion people, is 57 percent urban, and because of the productivity, innovation and inventiveness that stems from the creativity of human beings in groups, the urbanization process is quite likely to continue into the foreseeable future. There appears to be no alternative, so we will have to make it work.

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Published on The Perfect Enemy at https://bit.ly/3VkvXDJ.