My latest column is online in Governing magazine. It’s called “The Cloud Over the Future of America’s Downtowns” and is about the particular challenge coronavirus related shutdowns pose to the American downtown renaissance. Here’s an excerpt:
The pandemic has dealt American downtowns severe blows across multiple dimensions. The first is the impact on tourism and visitor-related spending. The convention and events business is a big pillar of economic activity in many downtowns, and some of them rely heavily on tourism as well. This supports not just the hotel industry but also restaurants, clubs and other attractions. This industry has all but been shut down, and there’s little prospect of an immediate bounceback. This puts a lot of the businesses that depend on visitors at risk of shutting down permanently.
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Another challenge will be from increased working from home. Whether or not there will be a major permanent uptick in remote work remains to be seen, but it’s hard to imagine the share of people working remotely doing anything other than going up. This will reduce downtown office demand and employee headcount.What is very clear is that many large corporate employers have decided not to have workers return to the office in the near future, in some cases not until 2021. These workers are a key constituency that patronizes restaurants, retail and cultural institutions downtown. Some establishments that might survive the loss of tourism business won’t be able to overcome the loss of office-worker customers as well. And when these major companies finally do summon their employees back to the office, they may discover that it’s to an environment denuded of many of the amenities that made downtown an attractive corporate location.
Click through to read the whole thing.
Cover image credit Jordan Michael Winn/Wikipedia
There’s no more cloud over downtowns than over middle and working class suburbs. The economic mixture of both will surely change, but that doesn’t mean one will become more or less important than the other in metro economies. Downtowns and midtowns have flourished as focal points for the professional classes, not as places for the middle and working classes to work and shop as they once were. Fewer hotels and theaters in downtowns catering to professional class visitors and theatergoers will give way to more professional class residents and co-working spaces. Fewer big box and strip mall stores in middle and working class suburbs give way to…well….it’s not clear to me what value those buildings and land might have. But, I’m sure someone will come up with something. Still, it doesn’t mean that the sets of economic interests that have driven the recent decades of American cities will simply disappear. The one true threat to Downtowns is a massive publicly-funded suburban industrial complex subsidizing low-density development on the fringes of urban areas. They are the most subsidized areas of America, not downtowns.
(Downtown) Chicago is a real cockroach of a city. Fires? Plagues? Riots? Murder? Fiscal doomsday? Been there, got the t-shirt. We’ve had people calling for bankruptcy and/or occupation by the National Guard for at least a decade before the ongoing interesting times, including some of our own city fathers. The office and residential markets were already overheated, and the (hopefully temporary) loss of convention revenue is gonna hurt, but as the nation’s urban whipping boy we’ve developed a sardonic laugh and a stiff upper lip, and we’ll rebuild without the humorless quitters who have been histrionically fleeing to Phoenix for years. In fact, I kind of hope we get more permissive to alternative land uses like Detroit out of desperation, a dearth of NIMBYs and code enforcement triage, though I doubt that’s going to happen anytime soon.
What about downtown Nashville, Charlotte, Indy? The bright, clean, masterplanned city centers built up over the past decade to be inoffensively competitive with the suburbs, now viewed by the relatively conservative locals as hotbeds of disease and strife? That I can’t answer.
I agree downtowns are in for a tough time, but I think it’s an acute, not a chronic, condition. All but the frailest downtowns will repair damage from unrest. Transit systems will find ways to adapt to the new normal, by (e.g.) installing UV air filters on buses and hand sanitizer at train stations. Office towers may lose rents and property value, but City Observatory has noted that there’s still strong demand for urban living, so older office buildings may yet be converted to condos. And while a COVID-19 vaccine is likely in the next 18 months, improved treatments to reduce its lethality are even more likely.
Remember also that this same prediction of the death of downtowns has been made several times in the recent past–in the ’90s with the rise of the internet and the promise of remote work, and again after 9/11 when everyone was convinced that people would flee cities in fear of terrorist attacks. Neither panned out. If you’re going to make this argument, Aaron, you’ll need to explain why this time is unlike the others.
Disfavored suburbs and single-industry/single-employer towns stand to lose the most from the economic shifts now occurring. They are experiencing the kind of disinvestment cities experienced from the late 60s to the early 2000s. The pandemic doesn’t change the trajectory of any place, it just increases the speed with which each place moves along that trajectory. Places like Rockford, Illinois or the southern burbs of Chicago are in much greater trouble than the Loop.
The cover photo on the Governing website of downtown Bay City, MI shows an area of old buildings devoid of trees. I was immediately struck by how different this photo is of pictures of central cities in Holland, Denmark and other northern European countries, which are full of trees and have a mix of old and new buildings. Those places have been updated without losing their character. More importantly, they have modern economic functions.
That’s not true of most American downtowns, which, if they have any life at all beyond governmnet functions, are usually specialty retail centers with a mild tourism overlay. For the most part, they are not essential places for the people who live there. Yes, people may go down to them to work out, buy a a b cup of coffee or buy a book at the local independent bookstore, all relatively “upscale” activities for those with disposable time and wealth, but they are not essential places to live or work, hence their emptiness when the coronavirus came along.
If we really want our downtowns to be vital and strong, we need to re-integrate them with the rest of our cities, so that they become places to both live and work. In too many places, the surrounding neighborhoods have gone down, partly because the local schools cannot compete with those in the better-funded surburban areas. (The so-called “favored quarter”). This is true even in college towns like Chapel Hill, where the Northside neighborhood immediate above the downtown is run-down houses largely occupied by college students. In that town, the neighborhood could be filled with small, high-value houses all within walking distance of a vibrant retail scene. Even that wouldn’t be complete, however, for in Chapel Hill there is little downtown employment, even though the university is almost downtown. Why? Because for the last 50 years the region has largely pursued a strategy of separate land uses, putting many of the jobs in places like Research Triangle Park.
The irony is that suburban stand-alone places like Research Triangle Park are now having trouble drawing back companies because these places do not appeal to young workers, but there has been little of the public policy and funding to make the downtowns strong again as a combination of places to live, work and play. Regional and state governments subsidized,both direclty and through highway improvements, the construciton of those large, suburban work centers, but the same funding is not available now to diversify the existing downtowns and other urban centers.
Here in Puget Sound, there has been some funding for one suburban town center, Bellevue, which will soon have a light rail line running near its edge. That downtown has become a major tech center, a kind of re-born “edge city” from the 1980s that is still dreadfully suburban. It has a lot of different uses,but because the place was formed in the 60’s, 70s and 80s, it is not walkable or truly human scale. The other, older downtowns in the region have gotten little if any outside financing help. Yes, many of them are trying to pursue the National Main Streets program of making themselves tourism and dining destinations, but that program doesn’t really include work, and bringing work places downtown will require parking garages and other high-ticket amenities that are largely beyond the capability of local towns to fund.
If we really want our older downtowns to function, turning them into the kind of interesting walkable places that tech companies will want to locate them in, then we are going to need this regional funding. That funding is already there, in the form of regional expenditures on freeway improvements that often cost $50 million or more per interchange. We have become so used to those big transportation projects that we are not aware that we could spend the money in other ways. If we really want to have strong, diverse, and economically attractive places, however, we are going to have to redirect that freeway spending.
There are a lot of people that are in a state of denial but downtown and inner cities are dead.
The first question people ask when moving to a place is is this place safe. The inner cities are unquestionably failing that test between virus, riots (which are like to be ongoing), looting, abolishing the police and the general economic collapse.
I have some friends who are part of the so called “creative class” (a better term is “arrogant bourgeois” frankly) who live in inner city areas and its interesting that all are either moving or have plans to.
Combine this with remote working and commuters minimising time in the office (even three days a week will have a big effect on businesses) if they come back at all + reduced population cohorts in the 25-35 age bracket over the next decade or so.
A disaster is coming for the inner cities. Many say good riddance.
The rioting and looting didn’t last more than a day or two in most places. In Chicago it’s been over for weeks and actually ended earlier downtown than in suburban Naperville and Joliet, with better prospects for rebuilding. The front line of COVID infection has also moved away from New York, Chicago, Detroit etc. into less sprawling locales.
I’ve also been wondering where all these people are supposed to go. Since WWII we’ve built up and filled in the outer city, the suburban portion of the urban county, the adjacent collar counties, outlying exurban areas, once-sleepy state capitals, seemingly random cities in the Sun Belt, and an increasing number of small towns with decent weather and mountain views. Even with all that building we already have a housing crisis on our hands. Where are we going to house a sharp mass exodus from the cities on top of that?
We’ve heard people proclaiming the death of downtown for decades, and it’s never really panned out anywhere larger than Akron. I do hope you enjoy your cork-sniffing new neighbors though, comrade.
They’ll be in Munster, Dyer, and St. John Indiana. That’s where the new South Shore Line extension is going.
I’ve got my opinions as to whether anyone currently living within three miles of Chicago’s Loop is going to be knocking down the doors to get into Dyer. Either way, if the extension of a rail line terminating in downtown Chicago is supposed to be the catalyst for new development, that implies many of the new households will still have someone commuting to downtown Chicago at least part of the time.
Harvey, lots of people already live in Chicago burbs and commute in. That mix probably won’t change appreciably.
…and abandoned much of the pre-war development. These developments are part of one large suburban industrial growth complex. It’ll be impossible to recreate such a growth complex for at least a generation.
Great post, Aaron. Excellent commentary as well. This is a reset, not a recovery.
The “Big Reset” that’s coming as a result of the pandemic will affect these basic quality of life issues:
Food
Shelter
Clothing
Health
Safety
Education
Employment
The communities and neighborhoods that excel in providing these basics – regardless of whether or the resources are public are private – are the places that will sustain themselves, and attract new residents and new investors.
Those communities and neighborhoods that cannot provide these basics will suffer.
I think the keys will be leadership. And strong social, cultural and political connections at the LOCAL level.
In short, good teamwork and quality public / private sector guidance.
Just my two cents for now…
This is not a “Great Reset.” Everything mentioned here was already well underway. The pandemic just forces the issue. Failed places will still fail. Successful places will still succeed. Old industries will still decline. New industries will still rise. Nothing has changed. It’s just more visible because of the pandemic.
@Matt – I agree partially that there’s an acceleration of some trends that were in place well before the pandemic, such as the shift from bricks-and-mortar retail to online retail.
That being said, I do think the forced adoption of work-from-home over the past few months is closer to a “Great Reset” for the commercial real estate portion of the economy that is directly tied to the health of downtown areas. There are a lot of companies that didn’t allow remote working previously (including, ironically, some of the tech giants that are fundamental to our digital lives like Facebook and Google) that have done a 180-degree turn on this issue once they were finally forced to see what it was like… and it has generally been positive. While remote work has its pros and cons, it is popular with employees on the balance *and* it provides the opportunity for employers to reduce real estate costs. Companies may still want a headquarters in a high profile location for leadership to gather periodically or to have a common space to hold key employee meetings, but I think the pandemic has forced those companies to reevaluate the value of mandating that all of their employees physically in the office all of the time.
Even if companies don’t eliminate offices completely, we are already seeing companies reducing office space footprints substantially and putting on hold expansion plans. The cumulative effect of all those physical downsizing actions could have huge repercussions on the commercial real estate market. Those actions then impact all of the restaurants and stores that serve those office workers. My office is right in the thick of things in the Chicago Loop and it’s scary to think how many of the restaurants in that area aren’t going to be coming back… and that’s a *thriving* downtown.
To be sure, I don’t necessarily see a desire for city *residents* to leave for other locations simply because of the pandemic. People who love living in the city largely haven’t changed on that front. That being said, if the amenities that made city living attractive (e.g. restaurants, cultural events, sporting events, etc.) either go away or get substantially reduced, then that can naturally have a negative downstream effect on a city’s population. Still, I think cities have shown to recover on that front from recessions in the past when it comes to the desirability for the *residents*.
When it comes to the demand for office space, though, anyone who underestimates the power of (a) no commute for employees plus (b) lower real estate costs for employers is fooling themselves. This pandemic totally forced a shift in thinking on this front that is already having a ton of negative impact on commercial real estate that I don’t think is going to ever be the same.
Why is it “scary to think how many of the restaurants in that area aren’t going to be coming back?” You don’t know the future. You don’t know what will happen in the Loop. Those restaurants may close. They may change. Other businesses may open in their place. Your office may become a co-working space. It may become an apartment or condo from which someone will work from home. The rise of the professional class has driven downtown growth. That continues. If they don’t work there, they’ll live there, or both. Single family houses with lawns are not a universal human default. They are the particular creation of a particular set of laws, taxes, institutions, and cultures in a particular time in history. The economic specialization of wealth and power in the professional classes and elite is what’s driven city center growth in the last 20 years. The same forces have undermined the market power of middle class workers who drive suburban economies. Ask yourself…is moderate-skill labor suddenly going to become more valuable? Are specialist knowledge and networks going to become less valuable?
@Matt – It’s scary because it’s not a prediction about the future – the closing of those restaurants is happening now.
Low margin + high rents – lunch crowd workers = business is gone
Note that these are restaurants that almost completely depend upon workers and commuters as opposed to neighborhood places that, at least on paper, could stay partially afloat with takeout/delivery orders.
At the same time, the retrofitting of office buildings that aren’t open floor plate warehouses (which are the types of buildings that have been turned into lofts in places like the West Loop in Chicago) is incredibly expensive. There have been a small handful of projects in Chicago where non-warehouse office buildings have been converted to apartments or condos, but it’s generally not cost effective in this market. (It might be a different story in a place like NYC or SF where such high conversion costs might be justifiable since the land itself is so expensive.)
Look – I’m not arguing that cities are no longer going to be magnets for talent in the long-term. I have worked and/or lived in Chicago for my entire adult life and love the city. However, I don’t believe that most people live in cities due to some type of lifestyle ideology (e.g. your line about “single family houses with lawns are not a universal human default”). Instead, I believe most people weigh the pros and cons of living in the city versus the suburbs versus a rural area and act accordingly. Unless you have unlimited funds, you have to make trade-offs. Maybe you’re willing to take a smaller place in a better location even though it costs more or, on the flip side, you’re willing to endure a longer commute in order to get more space. Maybe you’re willing to give up a single family home with a yard in order to have a high rise condo or vice versa. Maybe certain things that seemed really important for a living space when you’re a single 25-year old are totally different when you’re a married 40-year old with children.
Having lived in a small apartment in the city and a larger home in the suburbs, I can’t sit here with a straight face and tell you that I actually liked the physical space of the small city apartment better. (If anything, this pandemic makes me more thankful for the additional space everyday.) I don’t miss that aspect of city living at all. The things that I *do* miss about city living are being able to walk to restaurants and bars down the street, being able to take the train to a baseball game or museum on a moment’s notice, and having such a huge array of cultural and entertainment options that you could spend a lifetime and not get through them all.
My guess is that the things that I just mentioned are the typical reasons that many people (particularly younger people) want to live in the city, too. As much as there might be broader environmental or tax revenue allocation benefits from more city living, that frankly isn’t on the mind of the average new college grad moving into Wrigleyville. Instead, they’re generally looking for the best spot to get downtown for work easily during the weekdays and then go to the bars and Cubs games during the weekends. (That’s not a criticism – that’s exactly how I thought coming out of school, too.)
So, what happens when there aren’t Cubs games to go to? What happens when only a fraction of the people can go to bars and restaurants… and that’s assuming that those bars and restaurants have been able to survive over the past 4 months? What happens when your commute doesn’t matter anymore because you’re working in your house?
To be sure, not all of those things are permanent – baseball will eventually be back and there will be restaurants and bars that survive. The commute issue (or lack thereof) might be much more permanent, though. The point is that “city living” isn’t some type of ideological principle for most people, but rather having easy access to amenities. If those amenities are scaled back or even eliminated in some cases (with the elimination of a commute being a huge one for many privileged professional workers), then that trade-off equation that I mentioned previously can become much different.
Note that it’s a different equation for a renter versus a home-owner even with the temporary effects of the pandemic, too. A single person in his or her 20s that’s renting an apartment that’s looking at the next 6 to 12 months of working from home with fewer city amenities available is going to be evaluating housing options a whole lot differently than he/she would have just a few months ago. Cities have more exposure because renters are inherently much more transient. No one that I know has sold their house as a result of the pandemic, but my younger co-workers (over a dozen of them) renting in the city have (without exception) *all* moved back in with their parents… and these are all well-paid technology consultants that are the foundation of the city’s knowledge economy. When the amenities leave, so will the renters in a way that doesn’t occur with homeowners.
To be sure, I think the residential portion of city living can bounce back once the amenities come back. However, I’m definitely bearish when it comes to downtown office real estate (and it’s not going to be easily transformable to residential real estate in the way that you’ve suggested). I’ve got a close friend that has been working on some really large high profile commercial developments in the city and his verbatim quote is, “It’s a sh*tshow.” It has nothing to do with urban vs. suburban, but rather a fundamental shift regarding working in an office vs. working from home.
Almost all predictions are mistaken in some way. You don’t have a comprehensive theory of everything. No one does. You are almost certainly wrong about the future in some ways. Stick around and actually see what happens.
^^^This comment by Frank! (I wish Aaron’s blog had a “like” button.)
I take some issue only with the CRE part. It is possible that offices with doors may make so.ething of a comeback (as opposed to in-house coworking/hot seat arrangements).
I’d hate for you to miss some lucrative investment opportunities for the sake of your predictions ….https://www.bizjournals.com/washington/news/2020/07/01/covid-19-could-inspire-office-to-residential-moves.html
@Matt – I have certainly made a lot of wrong predictions in my life. If I had 100% clairvoyance in the real estate market, I’d be spending my days buying and shorting shares of REITs as opposed to sharing my thoughts here. That being said, there are certain events in life where it’s at least reasonable to predict that the effects are very temporary (e.g. the asinine suggestion of another poster in thinking that protests are somehow going to permanently dissuade people from moving to the city), somewhat temporary (e.g. the reduced capacity of bars and restaurants) or more of a permanent change (e.g. much more working from home). Sure, I could be totally wrong in those predictions – that’s what makes them predictions in the first place.
To be clear, I have no personal desire for the commercial real estate market in Chicago and other cities to tank. It does absolutely no good for my professional options, the value of my own home, my access to amenities, or our local taxes. However, I think the mass movement to working from home is a long-term fundamental culture shift which inherently negatively impacts commercial real estate (whereas the pandemic shutdowns and protests are temporary shocks). Frankly, I actually hope that I’m wrong there, but as I’ve mentioned, I know people directly in the industry with a LOT of skin in the game that are terrified and I see it with my own company (a Global Fortune 50 firm) where they’re unabashedly looking at cutting real estate costs wherever possible because they truly don’t see a need for wide swaths of employees to come back to the office even once we’re past the worst of this pandemic. The bottom line is that (a) employees like working from home and (b) employers like cutting costs. That’s a calculation that every business in America where working from home is possible is making right now that wasn’t happening back en masse in February. If you think that I’m wrong (and I freely admit that I could be wrong), this is the time to be buying up those REIT shares that you can get at a heavy discount right now.
I’ve done pretty well invested in multifamily REITS. You can’t pretend that commercial real estate is some separate and parallel universe to the rest of the economy. If working from home is the future, then work AND home will change. That is, commercial AND residential real estate will change. You’re projecting the present onto the future as is our host Aaron.
@Matt – I’m not pretending at all that commercial real estate is separate from the rest of the country. To the contrary, when revenue and profits are down (and outside of a relative handful of companies like Amazon, that’s going to be the case for many businesses across America for the rest of this year at a minimum), companies go into cost cutting mode. Office leases, which might have been seen absolutely necessary for many businesses back in February, are now being looked at as expendable or even luxuries today in June. On that front, this isn’t even a prediction by me. That IS happening and it’s happening across the board whether we’re talking about cities or suburbs. (Cities are just more exposed since they have a higher concentration of that type of real estate.) More importantly, the *nature* of that change doesn’t appear to be a temporary cost savings measure due to a poor economy or the pandemic itself, but rather a real fundamental shift in how businesses examine their costs.
That’s why I believe that this is different than, say, the 2008 recession or the impact of 9/11 on NYC. Those events didn’t cause a fundamental shift in *how* we work in the way that this pandemic has had on our lives. With that in mind, I believe that you’re severely underestimating the power of no commuting for a significant portion of the population that is also disproportionately in the knowledge industries that have been consolidating in a relative handful of metro areas. You may be correct that it’s difficult to predict what’s going to happen, but it’s not as if though there’s some inexorable force that’s going to cause more consolidation as opposed to more of a dispersal to other areas. To be sure, I don’t think that there’s an inexorable force that’s going to cause lots of people to move to rural areas either.
I just push back on what seems to be an argument based on ideology (e.g. “Suburbs only exist because of outmoded tax incentives and public policies and therefore they’re not going to do well going forward”) as opposed to what people actually want. There are lot of things that I like about urban living, but I’m also not going to apologize that I want a yard and a great school district at a price that I can actually afford. (We can list all of the factors for living in a particular place, but for upper middle class families with school-aged children, the school district quality generally becomes priority #1, #2 and #3.) The school district and space for my family are definitely top priorities at this period in my life, whereas it was much different when I was 25 living in the city and I imagine that it will be much different in 15 years when I’m an empty nester that would probably want to move back to the city. Your priorities may very well be different, which is perfectly fine. Live and let live! Just don’t assume everyone’s priorities for living are all the same and that one particular set of priorities is somehow more valid.
I don’t doubt your passion or sincerity, just your perspective. Everything you mention is dependent on every other thing you mention. None is an independent, or pre-xisting variable. It can ALL change.You can’t argue that one thing will change and not others. The ideological agenda is the suburban industrial complex, not “urban living” that has characterized much of human history. Suburbs are dependent on “outmoded” taxes and policies. They were literally CREATED by taxes and policies. They are utterly dependent on those structures. They are as artificial a human social system as the former Soviet Union or a religious cult. In a society in which EVERYTHING is up for debate, the massively subsidized system of expressways, sewers, etc. that sustain low-density living are up for debate too. You’re personal preferences and experiences don’t exist outside of this, but within it. You aren’t an observer but a participant.
We all know the old canard about psychiatry/psychology. Q: How do you change a light bulb? A: You can’t change a light bulb. The light bulb has to WANT to change.
It doesn’t really matter what COULD change (i.e. is an independent vs. dependent variable). Everything COULD change in the long run, but it won’t change a lot in the short run because we are in a certain place and time and a certain set of economic and social circumstances that have some resistance to dramatic change. Note that Kondratiev waves are just under a human lifetime… and in the long run we’re all dead.
What matters today is what is likely to change soon, and the direction of change. Frank has just given a really thoughtful exposition, and challenging it based on a philosophical (rather than factual) construct without offering a sensible alternative reading of the current situation is kind of irrelevant.
So, what will change and what won’t change?
Reread what Frank wrote (at length).
Matt: Not a prediction, just facts. 8% of all renters in city of SF have broken their lease YTD in 2020. The amount of office space put into the sublease market in the last 90 days in SF EXCEEDS the combined total for NYC + LA +CHI + DAL + Austin. So if you think that SF is a reliable predictor of broader trends, e.g., office casual dress, bench workspaces, etc., the Bay Area’s full throated embrace of full WFH through the end of CY 2020 is not a good look for a quick rebound in downtown commercial space.
I don’t think that anything that happens during an unprecedented global pandemic is “a reliable predictor” of anything. I’m shocked that anyone would.
Matt,
One month ago, 41% of all commercial office space in SF was available on the sublease market, in excess of 4 million square feet. In May, the amount added to sublease was >1.4 million sq. feet. June figures could put the figures close to 50% or more. Yes, it’s an unprecedented global pandemic, but these are not short term decisions, these are 5 to 7 year term decisions. The ripple effect on small downtown businesses, already reeling from the absence of conferences, trade shows, tourists, live entertainment, sporting events, is a tsunami of bad news.
Search “Multi-family residential investment” in google. 5 years is short-term, unless you think the world will end in 2025.
I am not sure that working from home is going to play out that way on a longer time frame. My own experience has been that employees working from home is very frequently a prelude to them no longer working for the company. My suspicion is that for a lot of companies, they will see increasing rates of turnover the more remote employees they have. If they don’t want to reduce headcount, that kind of churn could be costly enough to get them to reconsider remote work.