The shock of the pandemic was still fresh in August 2020 when James Altucher, a New York City comedy club owner, penned a LinkedIn article declaring NYC dead forever. Altucher wasn’t the only person to resort to these types of hysterics, but his article quickly went viral. Just a couple of weeks later, long-time New Yorker and comedian Jerry Seinfeld fired back in a New York Times op/ed, saying, “You think Rome is going away too? London? Tokyo? The East Village? They’re not. They change. They mutate. They re-form. Because greatness is rare. And the true greatness that is New York City is beyond rare.” Both Altucher’s and Seinfeld’s essays caused a stir and, since that time, many people continue to debate whether big cities like NYC can survive the turbulence of the pandemic.
William Strange, a professor of real estate at the University of Toronto, was interested in the debate, and he teamed up with a pair of other researchers, Stuart S. Rosenthal and Joaquin A. Urrego, to investigate. Many academics have studied COVID-19’s impact on urban centers, and Strange’s research focused on the value of commercial real estate in downtown city centers and business districts. What they found was that in large, dense, transit-dominated cities, commercial rents typically decline as one moves further away from a city’s central business district. He and his fellow researchers examined data from a cross-section of large U.S. cities such as New York, Philadelphia, and Washington, D.C., and found that after the onset of COVID-19, the rate of commercial rent decline fell by roughly 20 percent.
“This means that businesses are willing to pay a smaller premium than previously to be near downtown,” Strange said. “And these are long-term leases, roughly five years in length, so this is not simply a temporary response. Perhaps, the premium will rise again when the costs of the disease itself have abated. But perhaps they will not. If fewer workers are downtown, there is less reason for any given firm to locate downtown in search of interactions and synergies. And if the work can be carried out effectively outside of the office, there’s less demand for central business districts. The evidence so far is suggesting not an abandonment of central business districts, but instead a weakening of their appeal.”
This doesn’t exactly sound like good news for diehard New Yorkers like Seinfeld. But Strange said the results of their research were more nuanced. “Seinfeld is right that New York is not over, but the people who started the debate aren’t exactly wrong because the attraction to downtowns so far in our data is weakening,” Strange said. “The thing I wouldn’t want to say is that we know for sure what’s going to happen in 2023 or 2024 when, knock on wood, COVID becomes a lot more manageable. Then the effects that we’re seeing may not be the effects of COVID, but the effects of remote work and stuff like that.”
Even before the pandemic, America’s largest cities were seeing decreased population growth. Big cities saw gains in population in the early 2010s, but the growth slowed later in the decade and people moved to the suburbs, according to a report by the Brookings Institute. Brookings analyzed the Census Bureau’s estimates of annual city population changes and found that when the pandemic became active between July 2019 and July 2020, cities with populations exceeding one million, like New York, Chicago, Los Angeles, and Boston, actually lost inhabitants. For example, New York City lost 89,000 people in the 2019-2020 period. This ‘exodus’ from big cities was partly caused by the pandemic, as large cities like NYC were early COVID-19 epicenters.
But Brookings noted that other factors for population loss included lower immigration from abroad, fewer births, and more deaths. The American cities (with between 250,000 and less than one million people) still grew but at a slower pace. And some mid-sized cities like Austin, Texas, and Seattle bucked the trend and grew by a notable margin. Brookings concluded it’s unclear if the big city population losses just accelerated a pre-pandemic trend or if the shock of COVID-19 would be a temporary thing.
Either way, it’s become apparent to many observers that COVID-19 will have a lasting impact on large, dense cities and their commercial real estate, though the changes that will happen are speculation for now. Since the 1950s, cities worldwide have had a sixfold increase in population growth, and the trend toward more urbanization had seemed unstoppable. City dwellers now outnumber rural residents globally in many countries, but the pandemic has reversed the tide a bit. Leaving the city for the surrounding suburbs isn’t just happening in America. For example, in Australia, the country’s Bureau of Statistics data from 2020 shows capital cities there experienced a net loss of 11,200 people. Even in less well-developed countries, rural-urban migration patterns have reversed recently in some cases, according to Jason Byrne, Professor of Human Geography and Planning at the University of Tasmania in Australia. Byrne said it’s still too early to tell if these trends will be permanent.
“I’m speculating, but my guess is a city’s value can be unlocked by spreading things out,” Strange said. “One of the things I see happening is that we’re changing the activities that need to be downtown. We still need dealmakers to be in close proximity to each other, that kind of stuff seems hard to do online. But we don’t need quite as much stuff downtown as we would’ve needed pre-pandemic. So, my prediction is we don’t see big cities go away by any means, but we see the set of activities downtown changing.”
The cost/benefit of density
Strange said high density in urban centers, especially central business districts, can come with high costs, such as poorer air quality from higher traffic congestion and more expensive housing, leading to higher levels of economic inequality. What could happen, as Strange suggests, is that cities become more decentralized. In the study, commercial rent premiums also declined for more spread-out cities like Dallas, but the correlation was weaker.
Other research has also echoed the pattern for rent premiums linked to density in the residential market. Looking across a sample of U.S. cities, researchers found that the residential rent premium for being closer to downtown fell considerably after the COVID-19 hit. With more people able to work remotely, the findings suggest fewer folks are willing to pay high rents downtown if they can find less expensive places elsewhere.
Remote and hybrid work will likely outlast the pandemic, as many workers have grown to prefer it and in the constrained labor market we are in currently they have the power to demand it. “It’s a workers’ market right now,” said Jorge De la Roca, Assistant Professor USC Sol Price School of Public Policy. “Part of what we’re seeing right now is employers are just saying yes to whatever workers are demanding.”
But there are still many companies that argue for the importance of in-person interaction that happens in an office. “This will not last forever,” continued Professor De la Roca. “In the medium term, we envision industries that benefit most from downtown offices will have their workers return eventually. But those industries that benefit the least from downtown offices, they will probably relocate to the outside of city centers.”
Another important consideration is that increasing density of cities is one of the only ways that they will be able to live up to their lofty environmental goals. Right now, the suburban office has been bolstered by the large populations that live nearby. By building more dense housing, closer to where people work and play, cities can help reduce their carbon footprint and will inject new consumers into the market for commercial space.
The pandemic has caused quite a shock to big, dense cities and downtown business districts. Cities like New York and Chicago saw considerable population losses immediately following the pandemic. Many people simply moved to the outlying suburbs of those areas, and they may eventually move back. It’s still too early to tell. But at least for now, it seems that it has affected commercial and residential rents in urban cores. Big cities aren’t dead for good. The history of cities shows their resilience and ability to adapt to a changing world. Jerry Seinfeld is right that New York City isn’t going anywhere because its greatness is rare. But if it doesn’t evolve to satisfy the changing needs of its inhabitants it might be sharing more of its greatness than ever with its outlying suburbs.