On the last day of February, Glen Lee, the chief financial officer of Washington, D.C., issued a warning to the mayor and members of the District of Columbia Council, who are undertaking such costly ventures as free bus service and expanded affordable housing.
“The Covid-19 pandemic,” Lee wrote, “has brought about significant changes in the District’s population and economy, with potential long-term implications.” Revenue estimates, he said, have “been lowered due to 1) a more pessimistic economic outlook; and 2) a deteriorating real property market.”
In Lee’s view, there are still more danger signals:
Recently completed preliminary real property tax assessments, which is the basis for FY 2024 real property tax revenue, are lower than anticipated, and year-to-date revenue collections through January for deed and unincorporated business taxes, both of which are gauges of strength of the real estate market, are drastically lower than last year.
Washington is not alone. Most of the nation’s major cities face a daunting future as middle-class taxpayers join an exodus to the suburbs, opting to work remotely as they exit downtowns marred by empty offices, vacant retail space and a deteriorating tax base.
The most recent census data “show almost unprecedented declines or slow growth especially in larger cities,” William Frey, a demographer and senior fellow at Brookings, emailed in response to my query.
From July 1, 2020 to July 1, 2021, “New census data shows a huge spike in movement out of big metro areas during the pandemic,” Frey argues in an April 2022 paper, including “an absolute decline in the aggregate size of the nation’s 56 major metropolitan areas (those with populations exceeding 1 million).”
This is the first time, Frey continues, “that the nation’s major metro areas registered an annual negative growth rate since at least 1990.”
The beneficiaries of urban population decline are the suburbs.
The combination of domestic migration, immigration, and natural increase led to a different outcome in the suburban counties of major metro areas. There, domestic migration increased through mid-decade to a fairly constant level from 2015 to 2019. It rose after that, especially dramatically during the prime pandemic year of 2020-21, in large part due to an increase in city-suburb movement.
Even more damaging to the finances of major cities is the fact that the men and women most likely to move to the suburbs are among the highest paid, key sources of income and property tax revenues: workers with six-figure salaries in technology, finance, real estate and entertainment. Those least likely to move, in turn, are much less well paid, working in service industries, health care, hospitality and food sales.
There is a striking interaction between the Covid-driven exodus from the cities and changing racial and ethnic urban populations.
From 2020 to 2021, the nation’s 56 largest metropolitan areas saw a 900,000-person cumulative decline in their white populations, Frey reports.
In an August 2022 essay, “White and youth population losses contributed most to the nation’s growth slowdown,” Frey writes that, of the metropolitan areas with populations in excess of one million, “43 saw absolute declines in their white populations. Sixteen saw absolute declines in their Black populations, and six saw declines in Latino or Hispanic and Asian American populations.”
In the period 2020-2021, the white population of the New York-Newark region fell by 222,530, compared with a 39,363 decline among Hispanic Americans, 53,763 among Black Americans and 11,485 among Asian Americans. There were very similar patterns in Los Angeles-Long Beach, Chicago-Naperville-Elgin and Philadelphia-Camden-Wilmington.
In the decade before that, 2010-2020, the minority population of big cities grew substantially, driven by Latinos, a 1.5 million increase, and Asian Americans, a 1.2 million increase, while the Black big city population declined by 129,807, according to Frey. The population of whites in big cities grew over those 10 years by a modest 239,378.
The question facing large cities, especially the older “legacy” cities in the North, is whether they can break what urban experts now call an “urban doom loop.” The evidence to date suggests that things are not improving much.
Nicholas Bloom, an economist at Stanford, described the overall “remote work” pattern in an email:
The trend now is for professionals and managers to be hybrid, typically three days in the office from Tuesday to Thursday and two days at home. What we see is employees moving further from city centers to the suburbs of the same city. This is the donut effect, and it’s hitting every large city in the U.S. and in Northern Europe. But importantly they are not leaving big cities and going to Boise or Hawaii, but going to the suburbs of big cities so they can still commute in three days a week.
This is a reversal, Bloom continued,
of 1980-2019 phenomenon of people moving into city centers. Now we are going back to the 1950s to 1970s trend of people moving to the suburbs. Hybrid work-from-home folks want more space, and trade that for a longer commute, and so are reversing their parents’ trend of moving toward city centers — now we are moving back out again to the suburbs.
There are two big losers, according to Bloom’s calculation:
First the big city mayors. These big city mayors are losing vast amounts of tax revenue to the suburban cities. They are losing retail taxes, property taxes (as property values are down), office taxes and hotel taxes. San Francisco is losing revenue to East Bay, Marin county, South-Bay and other surrounding counties as the activity moves further out. These surrounding counties are having a tax windfall, but the central cities are struggling.
The second set of people to lose, he continued, “are those who own commercial property, since the demand for office buildings is down, rents are down and values are down.”
Despite these losses, Bloom argues that in general the change in direction is likely to prove beneficial:
I think this is mostly good for cities — younger, hipper and lower-income folks, essential service workers, in-person retail workers are all more able to afford city center accommodation. Bankers, techies and other graduates drift out to the suburbs. This is making cities younger, more diverse and less gentrified.
I pushed Bloom on this, asking him: “How can you argue that ‘this is mostly good for cities,’ when so many downtowns have been deserted with office and retail vacancies lining once prosperous main thoroughfares, with restaurants and other amenities disappearing?”
It depends on your objective for cities. Continued gentrification would have seen a continued increase in property values and rents, with more and more middle aged and older folks living there (as they are the only ones that could afford the rents). Lower income, diverse and young folks would struggle to afford the rents and drift out. Working-from-home, by moving out some techies and bankers and making space for younger folks, helps cities.
Whether it’s good or bad, Bloom provided The Times with data suggesting that the current direction is not likely to be reversed.
First and foremost, the percentage of days employees worked from home shot up from 5 to 60 percent in the early months of the pandemic and then began to decline, stabilizing at just over 25 percent for the last year.
At the same time, employers are finding that the opportunity to work two to three days at home is a very attractive perk to be able to offer prospective hires and to keep valued workers. Bloom found that on average employees view an offer to work part of the week at home as equivalent to an 8 percent raise.
If that were not enough, Bloom reports that a survey of engineers, marketing and finance professionals found that working from home reduced quit rates by 35 percent.
Wendell Cox — a founding fellow at the Urban Reform Institute and a principal of Demographia, an international public policy firm — pointed out in a phone interview that the pandemic, and the accompanying surge in remote work, have wreaked havoc on the transit systems in New York, Philadelphia, Chicago, Boston, Los Angeles and San Francisco.
In a study of commuter patterns, Cox uncovered “unprecedented declines in (public) transit commuting from 2019 to 2021.” New York’s “transit market share” fell from 31.7 to 19.0 percent during that period; San Francisco’s fell from 18.1 percent in 2019 to 4.9 percent, with slightly smaller drops in Chicago, Philadelphia and Washington.
Looking at urban population shifts from 2019 to 2021, Cox observed that almost all substantial gains were in Sunbelt cities:
Among the top 15 metropolitan population percentage gainers, 13 were in the South, with two in the West (Phoenix and Las Vegas). Austin had the strongest population growth (3.0 percent), followed by Raleigh (2.4 percent), Phoenix (2.4 percent) and Jacksonville (2.0 percent).
In regional terms, the losers were more of a mixed bag, including such metropolitan areas as San Francisco
losing the most, (-2.6 percent) and San Jose second (-2.4 percent). Four more metros lost more than one percent, including New York (-1.8 percent), Los Angeles (-1.5 percent), Honolulu (-1.5 percent) and Chicago (-1.1 percent). Losses of from -0.8 percent to -0.4 percent occurred in Boston, New Orleans, Miami, Pittsburgh, Detroit, Cleveland, Milwaukee, Rochester and Washington.
Ryan Streeter, director of domestic policy studies at the American Enterprise Institute, noted in an email that large cities, many in the North, “have grown too expensive (mostly because of housing, but also because of taxes) have been experiencing out-migration even before the pandemic. The pandemic accelerated that in important, and apparently lasting, ways.”
Credit…Damon Winter/The New York Times
Streeter cites data collected by Kastle, a property technology and security consulting firm that tracks how many workers are returning to their offices. He pointed out that “cities that were already growing — like Phoenix, Raleigh, Austin — have been bouncing back in healthier ways,” while “San Francisco, New York and the District of Columbia are all below.”
I asked Joel Kotkin, presidential fellow in urban futures at Chapman University and executive director of the Urban Reform Institute in Houston, about the economics of major cities, and he replied by email: “The era of urban supremacy is over. The party that addresses this will win. These areas need infrastructure and tax structures that encourage building houses, particularly affordable single family ones” — “houses that a couple who work at Walmart can afford.”
Earlier this month, Kotkin published a decidedly pessimistic piece in Unherd, “The Ghost of Ancient Rome Haunts America: Its Great Cities Are on the Path to Decay”:
The death of Ancient Rome wasn’t so much a collapse as a slow, interminable decay: between the second and sixth centuries A.D., its population declined from a million people to just 30,000. A similar fate awaits our modern metropolises. This time, however, their decline will radically alter our perception of what ‘urbanism’ really means.
This downward trajectory preceded the pandemic, but Covid accelerated it.
“Office occupancy has been declining since the turn of the century, along with the construction of new space. In 2019, before the pandemic, construction was one-third the rate of 1985 and half that of 2000,” Kotkin writes.
More serious, he goes on to say,
has been the movement of people. Migration to dense cities started to decline in 2015, when large metropolitan areas began to see an exodus to smaller locales. By 2022, rural areas were also gaining population at the expense of cities. The pandemic clearly accelerated this process, with a devastating rise in crime and lawlessness: notably in London, Paris, Washington, New York, Los Angeles, San Francisco, Philadelphia and Chicago. In some parts of Chicago and Philadelphia, young men now have a greater chance of being killed by firearms than an American soldier serving during the Afghanistan or Iraq wars.
So what is the urban future? Kotkin asks, replying to his own question:
The answer lies less in the central business districts than in the suburbs and exurbs. And this presents a nightmare for the traditional urbanist. In contrast to central business districts, suburban offices have fared far better as sprawled areas such as Tampa, Fort Lauderdale, Austin and Nashville have become the nation’s hottest office markets.
These peripheral developments, in Kotkin’s view, “are increasingly places with their own thriving town centers and cultural venues. By lending themselves to remote work and shorter commutes, they also prove ideal for energy efficiency and emissions reductions.” Traditional cities
cannot compete with these areas. If they are to have a decent future, they must move beyond their grandiosity and shift their focus to their greatest resource: strong neighborhoods and the creative people who inhabit them. Downtowns may be fading everywhere, but neighborhoods in places such Boston and even much of San Francisco have retained their streetwise vitality.
In a Jan. 27 article, “Downtown D.C.’s Struggles Mount as Many Workers Remain Remote,” Paul Schwartzman, a reporter for The Washington Post, captures the sense of devastation permeating the city’s once thriving downtown:
As his only tenant was moving out the other day, Anthony Lanier walked through his glass office tower in downtown Washington, all too aware of the looming financial danger he faces. Mortgage payments of about $1 million a month. A $3 million annual property tax bill. And, beginning in March, no rental income.
“It’s humbling,” Lanier told Schwartzman,
as he walked the empty corridors of what he touts as “the best 300,000 square feet in Washington” with a 150-foot-high atrium, lobby waterfall and rooftop views of the Washington Monument.
As the third anniversary of the pandemic approached, Schwartzman writes,
Downtown Washington is a wounded rendition of its once robust self. Even as more of the work force shows up daily, many streets at the city’s core are pocked by vacant storefronts, moribund sidewalks and offices that, even on the busiest days, are just over half occupied.
Schwartzman paints a bleak picture, but an even darker one emerges in the cold, hard numbers provided by Stijn Van Nieuwerburgh, professor of real estate and finance at Columbia University’s Graduate School of Business, in his presidential address at the American Real Estate and Urban Economics Association on Jan. 7. “Missing office workers in downtown areas have decimated urban retail,” Nieuwerburgh said, using New York City as a case study:
Employment in the NYC restaurant sector was down 25 percent from the end of 2019 to the end of 2021, or 78,000 workers. Data from OpenTable show that restaurant visits are still down 37 percent in NYC and 41 percent in San Francisco in August 2022 compared to prepandemic levels.
The exodus of these workers is driving a vicious circle, according to Nieuwerburgh:
Fewer (high-income) people and (high-profit) firms would mean lower tax revenues and lower user fees for public transportation, deepening the fiscal hole. Tax rates and spending cuts would need to be larger still, prompting further out-migration.
If left unchecked, this process “would result in a municipal fiscal crisis. N.Y.C. experienced such a crisis in the 1970s, Detroit more recently.”
Such a development would be a tragedy. Politically, it would be devastating for the Democratic Party, which already faces voter anger over manifestations of urban dysfunction: homeless encampments, rising homicide rates, rampant crime and a sense of disorder on city streets and in city schools.
In 2022, the poverty rate in Philadelphia was 22.8 percent; in Houston, 19.5 percent; Boston, 17.6 percent; New York, 17 percent, all well above the 11.6 national rate. In Los Angeles, 397 residents for every 100,000 are homeless; in New York, 394; in Seattle-Tacoma, 349.
The challenge facing cities is that dysfunction tends to engender dysfunction — downward spirals accelerate. Covid and remote work have transformed the face of urban America, just as the nation’s cities were becoming increasingly racially and ethnically diverse. In many ways, this is a test. It would be difficult to measure the costs of failing to pass such a test.
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