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 five 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... 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.
Bloom provides data showing the economic incentives for businesses and employees to continue WFH,
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.”
The work of Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh points to "apocalyptic" drops in property valuations,
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.”...
The decline in office values and the surrounding central business district retail properties... 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...
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.
Some thoughts
1. I'm struck by the certitude of economists whose professional expertise does not lie in urban history and urban economics in making such bold predictions on such critical issues like the fortunes of cities. Talk of evidence-free thinking. This is especially since we are discussing about cities which have survived numerous such crises, some much more devastating, and spanning centuries.
At best one can describe trends and compare with the outcomes of historical episodes with similar trends. But to make eye-ball capturing grandiose proclamations about doom loops and demise of cities is plain unprofessional and populist.
2. Before the pandemic property prices in the large cities had become so expensive as to price out most people from these cities into their suburbs or elsewhere. To the extent property prices are central to urban affordability, the sharp drop in property prices are perhaps the most important opportunity that could have emerged to help cities regain their competitiveness and attractiveness for people and businesses.
3. As history shows, cities, especially the large global metropolises, are exceptionally resilient. They figure out ways to respond to emerging economics trends and adapt themselves. They have gone through several such adaptation and reinvention cycles. Indeed, it's already the case that commercial real estate is being converted into residential properties in many cities. In the initial stages, the sales will happen at lower prices and there will be bankruptcies. But that pain is inevitable in any such adaptation and renewal.
Policy makers need to be aware of such adaptation requirements of cities, spot the emerging trends, and quickly support them with urban planning and fiscal policy levers. Those cities which are able to quickly adapt to these trends are those that will thrive in the new circumstances.
In fact, the current decline in property prices may be a good opportunity to repurpose the city downtowns and business districts into mixed-use localities from their current status as ghost towns after office hours. This would help cut down carbon footprints from long commutes and improve the quality of urban lives. The productivity of such cities can be even higher than the current ones. Don't bet on New York or London reinventing themselves as mixed-use city cores with greater productivity.
4. Such renewals and adaptations should not be seen as crises, but as natural processes. Cities are not static entities but are constantly evolving by adapting to changing needs. If one were to make a prediction based on a long history and numerous examples of such crises, it's hard not to come away with the conclusion that the larger cities will adapt to the changes.
No comments:
Post a Comment