COVID-19 has created significant uncertainties for cities with high-density employment centers, such as Philadelphia. What they now don’t know is the willingness of firms to continue locating in high-rise buildings, and if they stay, what will be the size of their work force.
During the last decade, cities have once again become “the” place to be. But the virus exposed companies to new problems and opportunities.
On the risk side, it is unclear how workers in high-rise/high-density office buildings can be kept safe. Work spaces may have to be reconfigured, necessitating fewer workers per square foot. That would raise costs, making those locations less desirable.
There is the issue of getting people to their offices safely. This includes the efficacy of commuting using mass transit, as well as the mass transport of people within buildings using elevators.
As for opportunities, it was discovered that remote work could work well. Productivity has been maintained across a wide spectrum of industries, and workers are starting to embrace the work-at-home concept.
However, the more people work at home, the less the need for office space.
When you combine the risk to employees of another virus outbreak with the ability to work remotely, the likelihood is that demand for Center City, high-rise commercial real estate will decline.
That would have a massive negative impact on high-density cities. Clearly, if the rate of employment growth declines, wage/income tax revenues will slow or even fall. In cities such as Philadelphia, where those taxes represent significant proportions of own-source revenues, that could seriously harm budgets.
A reduction in the need for commercial space would affect the “microeconomies” that offices support. Suppliers of services and goods, such as cleaning, catering, and office supply companies, would lose sales. And less demand for space could lead to declining commercial real estate values and lower property taxes.
In addition, there are the secondary effects that fewer workers have on the businesses they support. A lower employment base means reduced demand for food services, retailers, and all other businesses that provide products and services to the large numbers of workers in the city.
But it doesn’t stop there. If fewer people were employed downtown, mass transit usage would drop. That affects the finances of the transit systems and harms the microeconomies they sustain. Think of all the retailers in and around Suburban, Jefferson, and 30th Street Stations that depend upon transit riders for much of their income, as well as the suppliers of parts, equipment, goods, and services to the transit system.
The virus has raised other issues. How will colleges and universities change? Clearly, the short-term effects are significant for those neighborhoods and their microeconomies where students are no longer on campus.
Whether it is rental housing, restaurants, bars, suppliers of everything needed to run dorms, classrooms, athletics, and research, demand has dropped sharply. What the long run holds for education is unclear, but some change is coming. For those who depend upon those institutions for their livelihood, the impact is not likely to be positive.
And then there is the larger issue of the recentralization of households. Over the last decade, cities have benefited greatly from the renewed desire to live in high-density, amenity-rich locations. Baby boomers and millennials have led that change.
The problem is that density and virus spread go hand-in-hand. Will higher-risk and often higher-income boomers still want to move back into downtowns? How will millennials, who are entering their prime family-building years, feel about city living?
Already, there has been a change in perceptions about the desirability of high-density locations. Lower-density/low-rise buildings are becoming more preferred. It is not clear whether this change will continue or accelerate, but it is a concern that cannot be dismissed.
Thus, to the extent that in-migration might moderate, while out-migration could increase, the population growth we have seen in so many cities could be slowed or even reversed.
There is a symbiotic relationship between population growth and business growth. Each accelerates the gains of the other. A more desirable household location provides additional workers and consumer spending to the economy. Those factors attract more businesses. And an expanding, vibrant business sector becomes a magnet for workers. Reversing that trend harms every sector and industry, slowing overall growth.
There is more. Federal, state, and local government budgets have been devastated by the shutdowns. Don’t expect the deficits to be resolved quickly.
A recent report by the Congressional Budget Office indicates it could take two years before national economic activity returns to the level it was at the end of 2019. Budget pressures could persist for as long as a decade, which is how long it could take for total economic activity to again reach its potential.
The ability of government to do the things needed to improve the lives of all members of society has been greatly reduced. Plans will have to be altered, as the money is just not going to be there.
Finally, the outflow workers and households will have the greatest impact on those firms that are part of the microeconomies supported by those who are leaving. Because those businesses tend to be in retail, restaurants, and services, lower-income/lower-skilled workers would bear the brunt of any layoffs. The income gap is likely to widen significantly.