With the pandemic forced millions of U.S. employees to shift to remote work in the past year, no one could be faulted for predicting that some of the big cities and office buildings they fled would eventually become permanent worker ghost towns.
After all, office vacancy rates in some of America’s biggest metropolises already had been sliding before the outbreak hit the U.S. more than a year ago. The Covid-19 health crisis served to worsen the decline.
CBRE, a commercial real estate advisory firm, estimates the office vacancy rate in Midtown Manhattan rose to 12.1 percent as of February 2021 from 7.8 percent a year earlier. San Francisco’s vacancy rate climbed 2.8 percent in the first quarter of this year to a record 19.7 percent.
Compounding the issue is that many employees expect to continue working remotely even after the pandemic ends. A Global Workplace Analytics survey of 3,000 people working remotely during the pandemic found that 76 percent want to continue to telecommute at least 2.5 days per week.
In addition, almost half of the businesses surveyed by PwC in January 2021 said that they had no definite plans to return to the office and don’t feel any urgency to rush the process.
New suburbanites set to return to cities
However, history suggests it would be wise to hold off writing the obituaries of cities such as Manhattan, which has weathered its share of challenges over the centuries, experts say.
According to a City Journal article by Jason M. Barr, a professor at Rutgers University, between 1791 and 1893 there were at least 27 pandemics in New York. More than 5,000 people died of cholera in 1849, a mortality rate of 60 deaths per 1,000 residents, well above the Big Apple’s 2019 rate of 6.3 per 1,000 residents.
“The history of cities is the history of the constant struggle between the present and the future,” Barr writes. “When shocks hit, we turn to address the immediate problems and wonder how things can return to normal.”
Jesse Handbury, an assistant professor at the University of Pennsylvania’s Wharton School of Businesses, argues that people who left cities during the pandemic were probably going to move anyway, and adds that many new suburbanites will eventually return to the urban areas and offices they fled.
“Once the businesses are back up and running and the uncertainty of demand has been resolved, you’ll see the traditional college graduates come in to fill in the ranks behind those families that maybe have accelerated their moves out to the suburbs,” she told the school’s Knowledge@Wharton website.
Cities with large concentrations of technology and biotechnology companies like San Francisco and Boston can withstand pandemic-induced economic damages better than communities with more industrial economies such as Detroit and Cleveland, according to Bill Fulton, director of Rice University’s Kinder Institute for Urban Research.
The economic toll of Covid-19
“This is the result more of larger industrial trends than anything else,” Fulton said. “Detroit and Cleveland were brawn economies, not brain economies. When manufacturing jobs declined (both because they were exported and because of automation), their huge job base disappeared.”
“In tech, the brawn economy is already gone,” he added. “They used to manufacture computers in Silicon Valley, for example, and now they don’t. The Bay Area de-industrialized just like Detroit, but the tech economy was so robust it took over the region.”
To be sure, the economies of large, densely populated cities such as New York, Boston and San Francisco have been devastated by the coronavirus outbreak.
Still, they are poised to rebound because of their large numbers of knowledge-based employers such as technology and life-science industries, economists say.
The jobless rate in Manhattan was between 3.5 percent and 4 percent in the first quarter of last year in May., according to the U.S. Bureau of Labor Statistics. It hit 18 percent before falling to about 10 percent this year.
Boston started 2021 with a jobless rate under 3 percent. It spiked to 16.5 percent in April 2020 and now sits at between 7 percent and 8 percent, the agency said.
Unemployment in the San Francisco area was below 3 percent when the health crisis began before reaching a high of 13.7 percent in April. 2020. As of February, the rate was 6.3 percent.
“In each of those places, there have been elevated case numbers,” said Adam Karimins of Moody’s Analytics. “The pandemic has been extremely costly, especially because of the nature of life in those cities.”
The recovery of cities goes hand in hand with the return of remote workers to the office in one fashion or the other once the pandemic subsides, experts say.
The good news for commercial real estate landlords – and the cities where their buildings are located – is that businesses don’t expect to abandon offices for good. Many are developing hybrid business models that will enable staff to work from home and the office. As a result, demand for office space is starting to reach or exceed pre-pandemic levels in some markets.
Offices will continue to play a vital role
“A lot of that surge is driven by pent-up demand from 2020,” according to a statement from VTS, a commercial real estate platform. “We will have more confidence in the recovery after we see many months of sustained activity at pre-pandemic levels.”
As measured by VTS’s Office Demand Index (VODI), demand for office space rose between January and February for the first time since October 2020. New York City and Washington, D.C. — two of the worst-performing markets in the VOD — posted the biggest gains in the VODI, followed by Seattle.
Tenants in the Big Apple are especially keen on Trophy or Class A properties, which accounted for 76 percent of all toured space. According to VTS, much of the demand in New York is coming from the finance sector.
Non-profit agencies and law firms flocked to D.C. as the administration of President Joe Biden took office. Seattle has benefitted from a rebound in various industries, while tech companies are driving a smaller share of office demand than before the pandemic.
Regardless of their location, workers still expect offices to continue to play a vital role.
Even if employees are given the flexibility to work remotely on a partial basis, only a minority of workers (13 percent) believe that the importance of the physical office will drop significantly, according to the Future of the Office survey by CBRE Research.
“The function of the office will shift away from traditional work processes and oversight to more collaborative, educational, and social needs of a growing hybrid workforce,” the study said. “This is not much different from the evolution of the office before Covid-19, where the workplace was seen as a primary facilitator of collaboration, innovation, and productivity.”