Not even a pandemic can break rich cities' grip on the U.S. economy

Adam Fawer has seen the ups and downs of living and working in New York City. In the early 1990s and just out of college, he struggled to find work. A decade later, just three hours after he had quit his job to strike out on his own, two planes brought down the World Trade Center.

Later, when it became clear there was no funding to be found in a post-9/11 New York, he shuttered the company.

Each period branded the city with deep economic pain, triggering massive job losses and the evisceration of small businesses. He remembers headlines blaring, "New York is over," but that "every single time, we bounce back," he said.

Now 49 and the chief operating officer of a health and fitness app, Noom, Fawer is trying to steer his company through the shocks of the coronavirus and ensuing recession. Operations shifted online and staff went remote in March. Business fell about 10% initially but swiftly picked up. He’s now adding staff, and expects that the corporate head count will soon be double what it was in January.

While it showed that the company could function, even thrive, without a physical office, Fawer said, “we’ve also learned we don’t enjoy it that much. It’s the difference of being at a party, and being on FaceTime and people are passing you around.”

For many Americans, the disorienting rush of the coronavirus pandemic prompted a revaluation of major life choices — such as where to live — and broader questions on whether the pandemic will diminish the dynamism and allure of New York and other “superstar cities.”

This elite class of American city, including San Francisco, Los Angeles and Washington, comprises densely populated economic powerhouses with deep reserves of talent and wealth. But without an office to report to, their ultra-expensive real estate become harder to justify, especially as technology and necessity have opened pathways to work anywhere.

The intense clustering of professionals in industries such as aerospace and software development underscores the self-reinforcing ecosystems of world-class research universities such as those found in Boston, and sprawling corporate hubs in Seattle. Of the 250,000 technology jobs created from 2005 to 2017, roughly 90% flowed to just five cities.

Alongside the rising pay for a subset of skilled worker also came a scarcity of housing, bruising commutes and widening inequality. Rents in San Francisco, in the heart of Silicon Valley, are roughly twice the national average, Commerce Department data show. And nearly 1 in 10 American workers have commutes of an hour or more each way, reflecting the distance people in many areas must travel to find affordable housing. The need to socially distance and to dedicate a part of the home to office work has also compelled people with the means to consider more spacious homes in more affordable places.

The initial outbreak of the novel coronavirus in the U.S. triggered a domestic migration. It also highlighted the inequality of having the option to leave big cities at all.

In New York, for instance, more than 400,000 of the city’s wealthiest residents fled in the spring, leaving neighborhood home vacancies as high as 40%. Vacation-home sales in resort towns, which already have higher rates of remote workers than the rest of the country, have skyrocketed. In Park City, Utah, the number of homes under contract jumped 70% this summer compared with the same period last year, according to Reach Advisors, a market research firm.

After a decade of rising rents, rent prices are actually falling in the biggest, most technology-intensive cities. Two of the most expensive metro areas, San Francisco and New York, have seen sharper drops, as the “high-income, high-rise lifestyle” has lost some appeal, said James Chung, president of Reach Advisors. But home sales overall, after plummeting during the early months of the pandemic, have surged this past summer, showing equal strength in the suburbs and in the denser urban core.

“We are not seeing a massive rush to the suburbs from central corridors,” Chung said. Sales "are going up in both markets,” he added, pointing to historically low interest rates, and a mismatch of supply and demand, where fewer people put their homes on the market during a season when many more people bought. “We’ll not see cities die; we’ll see cities evolve.”

In D.C. and its suburbs, the pandemic has fueled a real estate boom as families yearn for more space and younger professionals look to upgrade. Though the rate of millennial workers moving to the metro area was slowing even before the outbreak, its entertainment venues, cultural activities, restaurants, outdoor spaces and public transit tend to attract a highly educated workforce, despite the high cost of living, said Derek Hyra, a professor at American University who heads its Metropolitan Policy Center.

But he said the nation’s capital, even when the U.S. climbs out of a recession, won’t offer the same recovery for all of its residents. The city has seen the forces of gentrification push out less affluent Black people.

"When we come out of this recession, I do feel like cities as a whole will do well, but I don't know if people of color in cities will do well," Hyra said.

The pandemic has accelerated economic changes.

For the countless companies that have been operating without a central office for months, the change has been a forced experiment in virtual work. The results suggest businesses might add flexibility to work arrangements in the future, assuming that a coronavirus vaccine and other developments allow most office workers to return safely.

While face-to-face interactions have disappeared, workers have found benefits, too. The absence of a commute, and the ability for some employees to be just as productive at home, will lead some companies to adopt a shorter in-office workweek, or a hybrid model in which employees rotate between working from home and coming into the office, business leaders say.

“The idea of having a huge physical footprint in New York, with people at their own dedicated desks, we’re reconsidering that,” said Mike Rudoy, chief executive of Jetty, a financial services company that aims to make renting more affordable. Rudoy envisions a new type of office space where people congregate for meetings and come in a few days a week. “The feedback I’ve received from my team is that there are elements of working from home that allow them to focus and that office work might not allow.”

The pandemic has also broadened views on recruitment. Early-stage start-ups and smaller companies have had to compete with the extraordinary salaries offered by tech giants, drawing in-demand engineers. Rudoy said that hiring first-rate employees without requiring them to be physically present in superstar cities can expand the pool of talent.

But changes in hiring and office dynamics might continue to deflate the commercial real estate market, which the pandemic has battered. Nearly 70% of chief executives expect to scale back their office space, according to the financial services firm KPMG. And more than two-thirds of office workers say they would prefer to work away from the office at least two days a week, once the coronavirus crisis ends.

Cheaper and more abundant office space, however, might not be a bad thing, said Nicholas Bloom, an economics professor at Stanford University. The shift to remote work might reverse some urban trends, leaving city centers less dense and cheaper to live and work in. Over the summer, Bloom found that 42% of American workers were doing their jobs from home full time. He expects the growth of city centers to stall, as remote work cements itself as a long-term fixture, reversing some of the gains and extreme costs of living that superstar cities have generated over the past several decades.

Bloom even speculates that a more diffuse job market might reduce the political polarization between urban and suburban populations and more rural communities.