December is the fun time for economists, as we are asked to provide forecasts for the coming year. But instead of offering a typical national outlook, this forecast will focus on special factors that might better determine Philadelphia’s near-term and longer-term growth.
One key issue is the future of Philadelphia’s commercial real estate sector.
Two years ago, the outlook for the Center City office market was upbeat. The growing need for health care and advanced technology, two of the region’s key sectors, was working in Philadelphia’s favor. Comcast’s Technology Center was going to lead the way toward creating an urban high-tech center, and University City’s health sciences concentration would be a world-class location for medical research and care.
At the same time, millennials were flocking to the city’s neighborhoods, growing the population and changing the tenor of business activity. A new vibrancy was infecting Philadelphia and the outlook was for an extended period of strong growth.
But then came the pandemic, and it altered thinking about the future.
The greatest unknown is the potential impact of work-from-home. Depending on how it plays out, it could derail the Philadelphia Renaissance.
» READ MORE: Philadelphia must adapt to work-from-home economy.
Philadelphia’s downtown commercial real estate supports microeconomies that are at risk if work-from-home takes hold. Businesses in hospitality and retail, as well as office supply, management, and maintenance companies need large numbers of local workers to be successful. A relatively small decline in the Center City office workforce, some have estimated that at 15%, could have a major negative impact on those sectors.
Consequently, economic forecasts for Philadelphia and the region require an understanding of the factors that will refill downtown offices.
Most critical may be the perceptions and reality of stay-at-home worker productivity. There is a growing body of research that points to employees working at home being at least as productive as workers located in an office environment. Because the results are not universal, it is important to know why the disparities exist.
The different results in the studies of which office setting encourages greater productivity may be related to two management constructs: corporate culture and collaboration.
Some executives have a strong view that culture and collaboration drive everything. JPMorgan Chase CEO Jamie Dimon said in June that working from home “doesn’t work for people who want to hustle, doesn’t work for culture, doesn’t work for idea generation.” He also thought that “everyone is going to be happy with [being back in the office], and yes, the commute, you know people don’t like commuting, but so what.”
I’m not sure what that says about JPMorgan Chase’s culture, but it says a lot about Dimon’s view of the culture he wants in his company. To the extent that collaboration and sharing a culture is viewed by senior management as mattering most for productivity, there will be a drive to move workers back into the office.
Undoubtedly, the view that the traditional office setting is best for the company is not held by every CEO. Meta CEO Mark Zuckerberg says he loves working from home. Consequently, we would need to do a micro analysis of the types of businesses that populate Center City and a psychological overview of their leadership to get some insights into how big an impact work-from-home might have on Philadelphia and the region. That makes forecasting incredibly problematic.
But even if workers return to the office, they don’t necessarily have to be there all the time.
A recent piece in the New York Times pointed to a future work model that is best described as “no model.” That is, what works for the particular firm will be determined by the firm. There will likely be companies where different groups take different approaches, ranging from all work-from-home, to a combination of working from home and the office, to the Dimon approach.
If “whatever works, do it” is the new office model/business culture, then Philadelphia’s growth trajectory has been altered. Demand for office space will be reduced. You don’t need as much space for hybrid workers, and you don’t need space for people working from home.
And if the Center City workforce declines, so does the workforce in the microeconomies that support the office workers.
Millennials are key
The change in work location also raises questions about whether millennials will continue flocking to densely populated areas such as Philadelphia. Like it or not, the resulting gentrification created a synergy where the growing workforce of younger, highly skilled workers and the need for office space fed each other. Will the trend be sustained? That is unclear, but it will likely be moderate.
That doesn’t mean Philadelphia will face a major economic slowdown. Center City office space may be at risk, but other real estate may not be affected greatly by the change in work locations.
High-tech firms will likely take a variety of approaches, and the hybrid model is well-suited for professional businesses such as law and accounting firms. Health care should continue booming, especially in Philadelphia’s research centers. Having taught, in person, at a university this semester, I doubt that virtual instruction will take the higher education sector by storm.
Similarly, the overall regional economy may not see a great impact from changing employment locations. People working from home require a variety of goods and services, though they may be different from office workers’ needs. The suppliers may change, but the level of demand might not. Smaller, hybrid work locations can prosper in suburban centers. And, finally, the trend toward online shopping and the need for warehousing will only expand.
So, what is the outlook for commercial real estate? In the city, demand should be strong, but in different segments and locations compared with the pre-pandemic period. Suburban space requirements should increase. But until millennials tell us what they are looking for, we will not know the extent of change that the pandemic has wrought.
Joel L. Naroff is the president and founder of Naroff Economics, a strategic economic consulting firm in Bucks County.