The line at Philadelphia’s City Hall stretched longer than a football field one hot July Monday this summer, as municipal workers waited at a food truck serving up free Chickie’s & Pete’s Crabfries. But even though the sports bar’s seasoned crinkle-cuts are a Philly favorite, not everyone was grinning from ear to ear. Instead, more than one city employee told the Philadelphia Inquirer they were “not happy.”
Their complaint: Mayor Cherelle Parker LPS16 had ended remote work. As of July 15, 25,000-plus municipal workers were required to be in the office five days a week. Parker’s administration arranged the free fries, along with other restaurant discounts, as a “welcome back” gift of sorts.
She was the first Northeast big-city mayor to enact such a policy — even as other cities and many large private-sector firms have continued to allow employees to work remotely at least part of the week. The trend, which the COVID-19 pandemic spurred and technology enabled, has proven very popular with office workers, particularly in big cities with long, frustrating commutes. Even as the public health emergency has subsided, employees have resisted giving up the flexibility of remote work. As of early 2024, about 20 percent of American workers were either fully remote or hybrid, with only some days spent in the office.
Now, alongside persistent challenges that have long kept mayors up at night — poverty and inequality, crime, aging infrastructure — downtowns are struggling with the economic impact of emptier office buildings. The drop in weekday bustle means less trade for small businesses and less city tax revenue from high-rises. “Remote work has tanked [Washington] D.C.’s growth and is causing a budget nightmare,” Parker said in a press conference at which she defended her return-to-office mandate and emphasized the aim for a “more vibrant Philadelphia.”
This wasn’t mayoral grandstanding. In fact, in the nation’s capital, where a Washington Post poll found 37 percent of workers were fully remote as of 2023, the city’s chief financial officer lowered revenue projections by nearly $500 million through 2026 due largely to the anticipated loss in revenue from commercial real estate and office buildings.
In addition to lowering office occupancy, Americans’ ability to ditch their commutes and work from home has accelerated a second problem for big-city mayors: Demand for housing has increased, and people are eyeing larger, cheaper houses farther and farther away from urban cores.
Company policies on remote work are still evolving, but current signs point to a likelihood that a hybrid model is prevailing, particularly for college-educated, higher-paid professionals. In “Doom Loop or Boom Loop,” published in May 2024 by the Volcker Alliance, Wharton real estate professor Susan Wachter and co-authors warn that cities urgently need to grapple with this new reality lest teetering downtowns “lead to shrinking public services and higher taxes, which in turn lead to cycles of decline like those that occurred in the 1960s and 1970s in many U.S. cities.”
Wachter and several other Wharton faculty members are studying COVID’s lasting impacts on big U.S. cities, including Philadelphia, New York, San Francisco, Chicago, and Washington, D.C. And while their findings may be unsettling, they also offer a road map for successfully navigating through uncertainty. The challenges are pressing, but history proves that cities can adapt to disruption.
“Cities’ responses to social transformations have often sparked a renaissance and new growth and new centers of activity,” says Wachter, who is also co-director of the Penn Institute for Urban Research. “These are early times. We’re not in the middle of the story, let alone the end of the story, in terms of how cities are responding and how technology will affect the underlying opportunities that cities have.”
The Empty-Cubicles Conundrum
Of all the COVID impacts on society, among the most lasting is the change in where many Americans work. Remote employees made up 4.8 percent of the New York City workforce in 2019. In 2022, that figure was 16.2 percent. In San Francisco — the current poster child for troubled cities — remote workers now account for about 32.5 percent of the workforce. The effect is measurable: Data from March 2024 on downtown cell-phone activity during working hours reveals San Francisco is at 57 percent of pre-pandemic levels, with New York at 59 percent and Chicago at 53 percent.
Hence, the problem for commercial real estate investors and lenders is simple math: Companies with fewer employees in the office every day need less space. Low occupancy in commercial buildings makes them worth less. A decline in value means a drop in tax revenue for cities. Meanwhile, sales decrease for the surrounding small businesses that have long served weekday workers, such as restaurants, gyms, and shops. This all ultimately puts a dent in municipal budgets.
In “Doom Loop,” Wachter and her co-authors project that by 2028, the cities with the worst office vacancy rates would be San Francisco, at nearly 39 percent, and Chicago, at 20.3 percent. Factors like general fiscal health matter as well, but the authors note that some cities are predicting revenue shortfalls up to nine percent.
Commercial real estate values are already declining. In April, San Francisco saw a building sell for $6.5 million that last sold, in 2016, for $62 million. An office high-rise in Midtown Manhattan that sold for $332 million 18 years ago went to new buyers for $8.5 million in July. Summer 2024 sales of five Philadelphia buildings saw a collective loss of $151 million from their total assessed values.
Today’s high interest rates are affecting lending, too. But according to Joseph Gyourko, Wharton real estate professor and director of the Zell/Lurie Real Estate Center, “Work from home is real. It has lowered demand for office [space] substantially, by something on the order of 15 percent to 20 percent.”
Gyourko predicts that office buildings will get emptier as expiring leases won’t be renewed and that companies will rent less space when they renegotiate. In turn, high-rise owners will default on loans. “All these office failures that people like me keep talking about — they’re only starting,” Gyourko says. “You can see these defaults happening a bit more frequently. By the end of 2025, beginning of 2026, this will have changed from a trickle to a really big flow.”
Many headlines have hailed the solution of converting unused office buildings into apartments. But even after all the desks, fake plants, and Keurigs have been cleared out, experts estimate that’s an option for only 10 to 30 percent, depending on the market. The high costs of renovation — adding plumbing, changing windows — just don’t make financial sense. “The conversion costs are roughly $300 a foot in a market like Philadelphia,” Gyourko says. “They’ll be $600-plus in New York City. You have to have high rents to offset those costs.” In cities that can’t make that math work, he says, some buildings will inevitably “become close to valueless” and be torn down.
The “Doom Loop” authors note that office vacancies also mean fewer commuters on public transportation, which requires a robust ridership to remain safe and reliable. Lighter foot traffic downtown hurts small business owners, too. For their April 2023 paper “COVID and Cities, Thus Far,” Wharton real estate professors Gilles Duranton and Jessie Handbury examined pandemic-driven retail trends in the 12 biggest U.S. cities and found that as of 2021, businesses like bars, coffee shops, and gyms saw foot traffic recover more quickly in suburbs than in downtowns. Everyone experienced 2020 lockdown shock, they write, but “the drop was more precipitous downtown … and the subsequent rebound less robust.” Duranton and Handbury put it plainly: “If downtowns cease to be great places to work, they may also stop being such great places to live.”
On the Move
Well before the pandemic, the cost of living in big cities was forbiddingly expensive for many people, and COVID only accelerated the rise of home values. Looking at metro areas, Wachter and the co-authors of “Doom Loop” adjusted for inflation and calculated that from 2020 to 2023, house prices rose 20 percent in New York and nearly 11 percent in Philadelphia and San Francisco.
Remote work has exacerbated cities’ affordability problem and hampers their potential to make up for the loss of daily commuters by gaining more residents. Further, they now need to do more to keep the city-dwellers they do have. Larger, cheaper housing farther away from downtowns is attractive to people who don’t have to commute every day and would love an extra bedroom to turn into a home office. Naturally, those who choose to leave take their spending and taxes elsewhere.
“Increasing housing options in cities and increasing the draw so that cities continue to be a magnet for talent is critical,” Wachter says. At the same time, she points out, “Households are now more footloose. I believe that one of the major legacies of work-from-home will be on the housing market and its affordability. It increased demand for housing, and that’s not going away.”
COVID-fueled trends are not the only culprits. Cities simply haven’t been building enough housing to keep up with demand. Wachter cites as causes wage increases, a shortage of skilled labor in the building trades, and a lack of developable plots. “It’s very difficult to supply in already built-up areas,” she says.
Duranton notes that housing demand is also being affected by demographics. “Households are getting ever smaller, and they’re consuming ever more real estate,” he says, giving the example of older people living alone in big houses where they once raised families.
Nevertheless, Duranton says, the challenge looms: “The key is, people want to consume more space. Unfortunately, space is not being provided quickly, and this is not being provided easily. So as a result, overall, the price of floor space is going up.”
Wachter sees some upside in this trend for cities that have large downtown housing bases, like Philadelphia — at least, as they navigate post-COVID reality. City budgets, she says, benefit from “the value of housing increasing, as commercial real estate takes a hit.”
Still, there are plenty of downsides, and they extend to the existential. Fernando Ferreira is another Wharton real estate professor eyeing the lack of affordability. He points to widening inequality in places where nurses and teachers can’t afford to rent and buy. Pricey big cities foment other divisions, too. “Young families in less dynamic parts of the country … if they know in advance that they cannot even try to dream of accessing those jobs or those cities because they’re expensive, that may exacerbate cultural, economic, and political divides,” he says.
Dodging the Doom Loop
City Hall action like ending remote work for Philadelphia municipal employees might inspire some firms to mandate the same. But this isn’t a moment for wait-and-see. Cities have to adjust to the current reality of hybrid work.
CEOs of big companies are “aware of the effects that remote work has on their urban communities. They are also aware of the interests of their employees who do not want to come back to the office fulltime,” says Peter Cappelli, professor of management and director of Wharton’s Center for Human Resources. Cappelli’s 2021 book The Future of the Office offers advice to employees and employers on how to navigate this next era.
There are signs that political leaders are trying to adapt. In 2022, California passed legislation to boost conversions of commercial buildings into affordable housing. In March, Washington, D.C., kicked off a program that will offer 20-year tax abatements on commercial buildings turned into residences. There’s even a bill in Congress that seeks to turn unused federal, state, and local government facilities into affordable rentals.
According to Cappelli, the Philadelphia mayor’s return-to-office mandate “is the most obvious first step for urban leaders — [recognizing] that there is a big benefit to the urban community that goes well beyond the benefit to your immediate employer.” Wharton professors, including Wachter, Duranton, and Gyourko, also say cities should focus on attracting businesses that thrive on in-person collaboration as they increase housing affordability, rethink downtowns, and make transit more flexible.
To start, for the sake of downtown vibrancy, tax revenues, and more housing, Wachter and Gyourko say, those office towers that are convertible need to be tackled with urgency. Housing is one possibility, but commercial options like self-storage and small-scale logistics — think online ordering/delivery — could be a fit, too. In most cases, zoning regulations will need to be changed, and according to Gyourko, some sort of public assistance will likely be necessary. “Don’t wait for [buildings] to decline,” he says. “A number will fail. They will be sold to new owners. The government should help those new owners get to where they want to be in terms of another structure as soon as possible. It will help the neighborhood.” As for the total price tag and whether public funding will be forthcoming, Gyourko says, “We have not thought through what the cost to cities is going to be. It could be political stasis at the federal level — divided government between the Republicans and Democrats — if they view this as a blue-city problem and nothing gets done.”
Tenants in sectors that depend on in-person collaboration may also come knocking. Wachter says Philadelphia has been able to weather the disruption better than some big cities because of a strong health-care and education economy (so-called “eds and meds”). She recommends that cities focus on attracting artificial intelligence and biotech firms, too. In “Doom Loop,” she and her coauthors write, “These cities have benefited from job growth in the technology and financial services sectors in the past — and they can again.” Indeed, in a June briefing on the paper, Wachter pointed to recent research that showed good news for New York, which had the fastest growth in tech jobs.
Adapting public transit will also be crucial. If traffic congestion goes up while train reliability goes down, hybrid workers will be further discouraged from coming into the office. Transit authorities need to make systems more flexible and responsive. Service routes and schedules may need to change. “Yes, we need to cut down on some of what they provide, but we need to do that in the most reasonable and rational way,” Duranton says. “At the same time, the public purse will probably need to participate a little bit more.”
Notably, given recent news out of New York, the “Doom Loop” authors suggest that cities consider congestion pricing, too. London’s fee-for-cars scheme generated money for public transit and reduced driving. However, in June, New York’s governor stopped the launch of a program set to charge drivers up to $15 to enter Manhattan, citing concern that it would “create another obstacle to our economic recovery.” Duranton sees the halt as a missed opportunity for a “huge precedent that could have set an example for San Francisco, Toronto, Montreal, and Los Angeles, and also for large cities elsewhere in the world.”
As for increasing affordable housing, at the Wharton Global Forum in São Paulo, Brazil, in June, Ferreira shared the host city’s approach. Along with Santosh Anagol, a Wharton associate professor of business economics and public policy, and World Bank economist Jonah Rexer GRW21, Ferreira has studied the effects of São Paulo’s 2016 zoning reform designed to encourage densification along transportation corridors. According to their paper “Estimating the Economic Value of Zoning Reform,” they found that “developers responded swiftly to obtain approximately 65 percent more permits in blocks that relaxed zoning rules.” As a result, in the neighborhoods where more building was allowed, there was a 10.9 percent increase in supply and a 5.7 percent reduction in price of existing homes.
To make this happen, Ferreira explains, São Paulo took decisions that had previously been made at the neighborhood level and centralized them at the city level. This would be controversial in U.S. cities and would surely face political and legal battles; homeowners have a decided interest in stopping measures that lower housing prices. But the results could also be a major attractor for new residents. Ferreira says younger adults today are drawn to walkable places with good transit.
He speculates that the current remote-work-fueled pressures on downtowns could spur cities to be bolder. Rethinking housing would also help these worried downtowns guard against competition from lower-cost cities in the South and Southwest, which were luring people and firms well before the pandemic. “The country’s really big, and those other areas may benefit from attracting people and attracting companies when places like San Francisco and New York don’t build enough,” Ferreira says.
Finally, to survive and thrive, cities need to keep central districts humming even through office occupancy declines. That might mean spaces and events that cater more to tourists and conferencegoers. Meanwhile, to retain residents, these cities can’t let up on quality of life and the everyday diverse experiences that make millions of people want to live in close proximity to millions of other people.
High Stakes, High Hopes
There’s a lot on the line. If New York fails and a downward spiral ensues, the “Doom Loop” authors calculate that over the next six years, its population would drop 13 percent, and income-tax revenues would decrease to $11.4 billion, down from $13.4 billion in 2019. But if the Big Apple gets it right and enters what Wachter et al. refer to as a “Virtuous Boom Loop,” income-tax revenue could rise to $16.3 billion by 2030.
“I think cities need to up their game,” Gyourko says. “We know from the past they can. They can police smarter. They can fix the potholes in the roads. They can make transit systems work better. The challenge will be thinking a bit more broadly about what will make a city attractive to people so they want to live here even though they don’t have to be near their downtown work as much. You have to think … What’s your vision of the city?”
Urban leaders might look to Miami for inspiration. According to the “Doom Loop” authors, the Florida city has seen a relatively healthier post-pandemic office demand “due to sustained levels of robust immigration, proximity to a skilled workforce, and a pro-business atmosphere.” One big draw is the rent: Office buildings lease for less than half the price of spaces in New York and San Francisco. But Miami also has a low corporate income tax and no personal income tax.
In the authors’ Virtuous Boom Loop scenario, with in-person employees collaborating and creating in large downtown offices while remote employees handle day-to-day tasks, they forecast rises in productivity and wages. In this future, they project that “firms will become 10 percent more productive, and cities will lower corporate tax rates to retain a five percent increase.”
Cities that adapt to remote work successfully could, according to Duranton and Handbury, enjoy improved futures thanks to the resulting office reshuffle. “We expect that the recovering downtowns will host more creative workers who go to work to benefit from exchanging with others,” they write. “Because of their outward orientation and their spending power, these workers will energize downtowns and other concentrations of economic activity much more than the many workers who previously showed up at work just because everyone thought they should. These centers of economic activity may turn out to be even more vibrant than pre-COVID.”
Janine White is a freelance writer and editor based in Philadelphia.
Published as “Urban Doom … Or Boom?” in the Fall/Winter 2024 issue of Wharton Magazine.
