Forcing Employees Back to Office, in-Person Work Won’t Save Big Cities

Ever since the COVID-19 pandemic struck the US, the shock waves from the disease have been most pronounced in our biggest cities. A once-vibrant sidewalk ballet morphed into grim desolation as hundreds of thousands fled cities altogether. But now, as the last of the pandemic restrictions are finally being lifted, public officials are trying to draw people who decamped to the suburbs back downtown.

But reams of survey data show that the office workers who typically populate these cities’ business districts are increasingly demanding the right to work from home, at least part of the time. This leaves cities and the politicians who lead them in a pickle. For several decades, the entire economic model for these metropolises has been predicated on attracting white-collar employers and their free-spending employees to gleaming towers in bustling downtowns. Now, remote work has pulled the rug out from under this paradigm. Experts on urban economies say that for all city leaders’ bluster about the “return to the office,” there may not be much they can do to reverse the work-from-home revolution.

But contrary to early-pandemic warnings that America’s largest cities will become desolate husks, this monumental shift is actually an opportunity. In fact, it could usher in a new golden age for our metropolises — if leaders adapt to make their cities more livable, enjoyable, and attractive to people as residents, not just revenue-producing office drones.

How remote work screws over cities’ old economic model

Politicians in large cities are scrambling to push workers back to the office. San Francisco’s mayor, London Breed, rescinded mask mandates for offices and other indoor businesses. New York’s new mayor, Eric Adams, has made the return to the office a top priority in his administration’s early days and said remote work makes no sense because employees “can’t stay home all day in your pajamas.” Even President Joe Biden has pushed the “back to the office” narrative. While it’s understandable that these leaders want to rev up the economic engines that powered their business districts in the Before Times, the badgering is at odds with the growing desire for flexible work among the white-collar employees who are also a key part of their constituencies. Why risk angering the very voters you want to win over?

The main reason is that over the past 50 years, our biggest and most vibrant cities built their economies around service industries — from finance and consulting to restaurants and the arts — rather than manufacturing. But for the last two years, Americans suddenly and radically shifted away from these services, spending their cash on physical goods like washing machines, cars, and furniture. This shift has only just begun to reverse. And even as some of this service spending comes back and tourists trickle back to places like New York, Los Angeles, and San Francisco, the most crucial element of the service-oriented urban economy is not one-off spending by visitors going to see a Broadway show, but the day-in, day-out spending by office workers. These are the people who buy lunch every day, drop off their dry cleaning, and send their kids to daycare near the office. They’re also the exact type of workers who are now working from home.

A new working paper published by the National Bureau of Economic Research found that approximately a third of all jobs are candidates for remote work, but an astonishing 80% of highly skilled service employees can do their jobs from anywhere. These numbers are crushing for businesses in city centers — consumer spending in Manhattan was projected to have fallen by as much as 65% during the pandemic’s first year. And the persistence of remote work will linger for years to come: New York’s Independent Budget Office now projects that the city won’t regain the jobs lost during the pandemic until 2025, which would leavethe city well below pre-pandemic projections for employment growth. So even as the country experiences its strongest economic growth in generations, these downtown areas could be shut out of that boom.

But that doesn’t mean all hope is lost. In parts of cities that depend less on office workers, commuters, and travelers, the picture has been very different. A report from the Mastercard Economics Institute found that by mid-2021, consumer spending in more residential areas of New York City — even as some restrictions were starting to ease — was booming compared to before the pandemic. And the “urban exodus” many predicted in 2020 largely reversed by 2021. People came back to cities, if not the office.

So if cities have experienced more of a reshuffling of population and commerce than a hemorrhaging, why are politicians haranguing workers to get off the couch, put on a suit, and head into the office? Why does it matter to Eric Adams that a white-collar worker orders their lunch for pickup in Manhattan rather than for delivery in Brooklyn? From the point of view of a city’s underlying economic health, “if the residential real-estate market is as robust as it’s ever been, if populations seem to be increasing, then it’s not clear why you want a particular mix of land uses,” said University of Virginia law professor Richard Schragger, an expert on urban governance and economy policy. “Why wouldn’t you be perfectly satisfied with a majority residential city?”

The problem has to do with taxes. Local governments overwhelmingly fund themselves with taxes on real estate, and office buildings are taxed at higher rates than residential buildings. According to a review of states’ property-tax systems by the Lincoln Institute, commercial properties are taxed at effective rates 77% higher than owner-occupied homes. As a recent report from the New York State Comptroller’s office found, New York City’s offices are concentrated in just three Manhattan neighborhoods, and they account for more than a quarter of the city’s property-tax revenue. As a result, property and sales taxes on office buildings make up a huge share of big-city budgets.

For this reason, Schragger noted in his 2016 book, “City Power,” elected officials have been conditioned to see their job as luring employers to big downtown business developments with sweetheart deals, zoning changes, and tax breaks. Schragger and other experts have long been skeptical about whether such enticements actually help the surrounding community, but now the point may be moot. The traditional tools politicians used to juice office demand only work when firms need tons of office space. Tax breaks can’t compete with the money saved by closing an office, letting workers go remote, and paying zero in rent.

Livability, not workability

As the work-from-home revolution solidifies, politicians responsible for powerhouse cities are stuck figuring out how to grapple with changes that are largely beyond their control. “There’s a big economic game being played between workers and companies in which governments have a pretty small role to play,” said Sharat Ganapati, a professor of economics at Georgetown University and a coauthor of the NBER paper.

As a result, elected officials like Eric Adams have resorted to “moral suasion” to get workers back into offices, said Arpit Gupta, a professor of finance at NYU Stern School of Business who studies urban real estate. Think of Adams’ infamous comments about “low-skill workers” who can’t work from home, but depend on spending from the wealthy professionals who can do their jobs remotely. Mayors can scold and guilt-trip, but they can’t do much else.

Now Adams and his peers need to rearrange their priorities and focus instead on making cities more attractive to residents and potential residents. A remote-work paradigm “totally ramps up the importance of city livability factors compared to corporate incentives,” Gupta said. A 2021 paper published in the Journal of Urban Economics modeled how Los Angeles residents might change where they live if they no longer had to commute. The authors found that those who could move went to places with cheaper homes, but prioritized livability and access to amenities that enhanced quality of life. In other words, to keep people moving to their cities, mayors need to invest in long-neglected aspects of city life that residents enjoy instead of just placating big corporate employers.

Gupta pointed to policy interventions at the street level as examples of the kinds of things that could improve quality of life for residents: New York’s successful experiment with outdoor dining and closing streets to cars, for instance, or longstanding proposals to transition the city’s garbage pickup system from piles of bags on the curb to contained dumpsters. “It’s a small, simple thing but it would improve the livability of the city and it would help you retain more people as residents,” he said.

More places to lay their heads

Even as fewer people choose to work in skyscrapers, plenty of people still want to live in big, diverse, culturally thriving cities. While the steepest relative increases in home prices and rents have occurred in suburbs, smaller towns, and Sun Belt cities like Atlanta and Austin, demand for housing in coastal metropolises is still white hot. San Francisco and New York, the two cities that saw the greatest population loss in the immediate aftermath of the pandemic’s arrival, both saw home prices rebound to their highest levels ever in 2021. What may be holding those cities back, compared to their Sun Belt competitors, is that housing there was already so expensive to begin with.

Perversely, housing production had actually slumped for years in some of the country’s hottest urban markets. According to data crunched by nonprofit newsroom The City, New York added slightly fewer units in the years between 2010 and 2020 (192,700) than it did from 2000 to 2010 (207,000) — even as the city’s population grew during the decade leading up to the pandemic by almost 700,000 residents, to an all-time high of 8.8 million New Yorkers. In the San Francisco Bay area, the housing crisis is even more pronounced — construction of new homes declined by an astonishing 26% from 2018 to 2020.

These coastal cities neglected to build new housing before the pandemic because the pull of office jobs was so strong that new people kept coming even as older residents fled for lower-cost locations, Gupta said. Leaders didn’t have to put too much effort into solving cost problems or quality-of-life challenges because they seemed to think that, as Gupta put it, “people will come no matter what.”

Now, in the era of remote work, if city leaders feel they have to compete for new residents rather than new employers, “that means ensuring high-quality housing stock with more amenities, ” Gupta said.

After years of losing population to more affordable places like Arizona and Texas, California has recently begun the thorny process of holding up state funding for many cities and towns unless they commit to collectively build millions of housing units over the next eight years. This has forced previously exclusive enclaves like Beverly Hills to develop plans to increase housing density.

New York is roiled in a fight over similar measures. Local legislators have sponsored bills that would abolish single-family zoning within the state, mandate higher densities near transit, and fast-track new housing in the richest areas, where painstaking public-review processes usually snarl any attempt to build. Despite some initial enthusiasm, Governor Kathy Hochul ultimately pulled such measures from her state budget following opposition from a gubernatorial primary challenger, Congressman Tom Suozzi of notoriously NIMBY Long Island. But if combined with the state’s 2019 “mansion tax” on luxury housing or similar proposals for taxes on second homes, a building boom in the most historically overheated housing market in the country could go a long way toward filling the property-tax-revenue hole left by cratering office demand.

COVID sent a sudden shock to America’s cities, but our country’s metropolitan centers have weathered such changes in the past. Technology like telephones and emails have threatened the primacy of the office in the past, but the true freedom of choice that remote work could afford well-paid white-collar workers means politicians can’t use the same playbook from those previous threats. In order to keep cities vibrant and growing, leaders need to let go of the “back to the office” badgering and instead invest in things that will make their cities more enticing: basic services, amenities, and most importantly, way more places for people to live.