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Amid the widespread economic pain from COVID-19, count America’s city centers as top victims. After all, far fewer people now come into these places for work or play. Moreover, the shift toward more teleworking will continue after this pandemic – and thus have long-term effects on real estate. City centers may permanently change as a result.
To understand these seismic changes, first consider the seven main cohorts who consume in city centers:
1. Residents of city centers
2. Workers: City centers are traditionally the sites of workplaces. For example, while only 7% of NYC residents live in Manhattan below 59th Street, that location contains 30% of all workplace establishments. Workers buy meals, drinks, receive medical care, attend movies, and spend on other various goods and services because they spend their weekdays there.
3. Consumers who frequent high-quality entertainment, such as museums, theaters, concerts, and upscale restaurants.
4. Tourists: In many large cities, the aforementioned high-quality entertainment as well as tourist attractions and hotels are within city centers.
5. Business travelers who attend conferences and use office buildings and hotels.
6. Shoppers and consumers of other services: For example, while only 7% of NYC residents live in the Manhattan city center, it’s home to more than a quarter of all dental offices.
The impact on city centers before COVID-19 vaccinations are widely available
How are consumption, work, and entertainment changing in the period before a vaccination is generally available?
In the estimated one to three years until full vaccination is available, the number of people who spend money in city centers will likely remain well below pre-pandemic levels in the categories above. In some areas, residents are escaping densely populated city centers for less contagious locations. The share of remote work will likely remain highly elevated, decreasing commuters to city centers.
Many entertainment activities are considered dangerous due to viral transmission and thus will be slow to normalize. Tourism and business trips often involve air travel, which many will continue avoiding.
Shopping and other personal services may suffer for two reasons: First, remote work means fewer are in city centers and thus spend less on food, retail, and personal services while there. Second, some are avoiding shopping trips to these places because of reluctance to use public transportation – convenient, yes, but relatively dangerous in terms of viral transmission.
In sum, while virtually every geographic location will experience a deep downturn during this recession, businesses in city centers will suffer more than those in other areas. The number of bankruptcies is likely to be higher, and the business landscape will shift more dramatically. Consumer-facing businesses with a strong concentration in city centers will suffer more. Some of the lost spending will shift to locations outside city centers. Within metro areas, business and real estate tax revenues will likely decline more for the principal cities than for the cities and towns outside the principal city.
Not all city centers are equally affected. Those more affected are tourist destination-heavy centers, and ones that regularly draw visitors from the rest of the metro area for entertainment.
Metro areas that rely heavily on commuting via public transportation will also feel more pain. In these areas, contagion risk is greater, and it will probably be more difficult to contain the virus while resuming normal life. Thus, in areas where the share of workers using public transportation is the highest, more workers may prefer to continue teleworking for the duration of the pandemic rather than commuting to city centers.
New York, San Francisco, Chicago, Boston, and Washington, DC are tourist destinations that also have densely populated city centers that heavily rely on public transportation. Tourist hotspots including Miami, Los Angeles, and Las Vegas will also take a big hit.
The impact on city centers after COVID-19 vaccinations are widely available
How will consumption, work, and entertainment change once a vaccination is widely available?
There is a growing consensus that the share of remote working will remain well above pre-pandemic rates. Work trends change slowly. COVID-19 forced them to change quickly. A higher incidence of remote working during the pandemic may be one disruption that sticks. Similarly, virtual meetings and events may permanently replace some in-person business meetings in city centers.
As a result of the permanent rise in remote working, people living outside city centers will adjust their consumption behaviors away from those centers to areas closer to home. Some adjustments may become permanent. On the other hand, tourism or demand for high-quality entertainment in city centers are expected to make a full recovery once people no longer fear the virus.
The impact on real estate
The large and rapid shift to remote work and online shopping will greatly impact real estate markets, both in and outside city centers.
Commercial real estate will suffer a double whammy, because on top of a recession-related drop in commercial real estate demand, remote working and dropping consumption in city centers will significantly reduce demand for city center office and commercial space. As some of these trends become permanent, demand for commercial real estate will likely trail pre-pandemic levels, even after full vaccination.
And in regard to the impact on housing, at some point many Americans had to decide whether to live in smaller homes close to city centers, partly to reduce commute time, or to live farther away but in larger homes. The rise of teleworking will make the second option more attractive for two reasons: First, commuting will no longer be a factor in the decision, eliminating the major attraction of smaller, closer homes. Second, the need for a home workspace adds to the attraction of larger, more distant homes.
As a result, housing demand may shift away from city centers, as will demand for office and retail space. Decline in demand for city center real estate will put downward pressure on prices, and new construction will be depressed for some time. However, additional demand for both retail space and housing outside city centers will raise real estate prices in these areas. The rise of remote working may also reduce the demand for housing in suburbs near train stations and major highways, as shorter commute times become less important for many buyers.
Until full vaccination, city centers will be more economically affected by the pandemic than most other locations. As working and consumption patterns shift away from city centers, the initial drop in real estate prices will likely be larger than in other places. Areas outside city centers will benefit from this trend, experiencing an increase in consumption and demand for real estate.
But in the long run, city centers will likely remain an attractive residential destination. Entertainment in these places will likely recover. One potential long-term change is an outflow of families who seek more space and an inflow of younger people who want to live in more socially vibrant city centers that are suddenly more affordable. Another change may be that workers who value personal interactions with their colleagues and other professional peers will have more desire to stay close to city centers. Others, perhaps on average the less career-driven, may prefer to live farther away.
In an extreme scenario, the shift in business and real estate tax revenue from main cities in metro areas to other locations will start a vicious cycle of fiscal crises in main cities. Such a scenario, which we hope does not manifest, would reduce government services and the quality of life in large cities.
In sum, the COVID-19 pandemic is and will continue to be devastating for city centers, at least until full vaccination. Beyond that, the permanent rise of teleworking will permanently change city centers.