Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
One way to describe cities is to call them labor markets. Historically, people have chosen to live in cities because they have provided economic opportunities (among, of course, many other things). That’s why the data is very clear: wages are higher in larger cities.
But what we have also seen over the last few years — and what is causing a lot of dislocation in real estate markets — is an untethering of work. More people are working from home and from locations that offer greater lifestyle benefits (or greater tax benefits).
We spoke recently about what this divide between in-person and remote work might mean, but regardless of this outcome, I think there’s an important truth here: Lots of people would like to live somewhere else. (In my case, my daydreams take me to Paris.)
And for the first time ever, really, it is possible for more people to do this and stay connected to work somewhere else. Earlier innovations, such as the streetcar or car, also compressed geographies and empowered people to travel greater distances. But now the catchment area has seemingly expanded to the world.
I’m not saying anything particularly novel here, but I do think it’s important to point out that this desire exists in many of us. Because this tension between “I do work here” but “I really want to live over there” seems like it’s only increasing.
I’ve been thinking more about yesterday’s post and what it might mean for cities, and I’d like to add some additional thoughts. The report that I linked to looks at what the fiscal implications of WFH have been on a number of US cities (at least so far). That is the chart that I shared summarizing New York City’s “agglomeration losses.”
But along with this, there is an important assumption that we have not yet reached a new equilibrium. In other words, we are still in a period of adjustment, which feels right, especially if you talk to anyone in the commercial real estate industry. And that means that there are alternative and largely unknowable scenarios for the future.
In the report, they study the following three:
Doom loop prevails (current state where city finances get worse)
Recovery (cities regain their pre-pandemic levels of agglomeration economies)
Virtuous boom loop arises
Obviously the objective with their recommendations is to help cities achieve this last one. This is the scenario where cities regain prosperity because firms are able to simultaneously increase their concentration of high-value in-person workers (who benefit from agglomeration economies) and shift all the other stuff to WFH (which allows firms to save money and drive efficiencies).
More specifically, this scenario assumes that agglomeration economies start to grow again; that wages increase because of it; and that firms, overall, become 10% more productive. It also assumes that office real estate values recover to pre-pandemic levels.
The future is, of course, notoriously difficult to predict. But I am optimistic that the best and most desirable cities will figure out how to create a new virtuous boom loop. History has shown us that cities are remarkably resilient.
However, implicit to this discussion seems to be the creation of two classes of workers: workers who are expected to show up in-person and do innovative things with their colleagues, and workers who are encouraged to stay at home and do the tasks that do not benefit from co-location. Of course, lots of people do both of these things. But for the purposes of this post, let’s just compare and contrast these two.
Importantly, these two types of workers are expected to have different wage outcomes (in the above report). For WFH workers, wages are initially modeled to fall because of the loss in agglomeration-related productivity. But interestingly enough, before this wage decline happens, WFH workers are unambiguously better off — they have the same salary and none of the direct costs of going into the office.
On the other hand, in-person workers are modeled to have their wages increase because of the gains in agglomeration-related productivity. The authors of the report have calibrated their models so that these two types of workers eventually become equally well off, once you adjust for changes in wages and things like the direct costs of commuting. But what would this really mean in practice?
To oversimplify, we’re talking about two different types of workers:
An in-person worker who is expected to have higher wages, be more productive, and live closer to a city center because of their need to be physically present
A WFH worker who is expected to have lower wages, be less productive, and live further out (or in a different city) in order to equalize their lower earnings by way of less expensive real estate
If this is how our labor markets evolve, then it strikes me that there could be far-reaching socio-economic implications. What I worry about is further segregation within our cities. The above scenario means doubling down on the role of big cities as centers for innovation and agglomeration economies. But in doing this, how do we ensure that we don’t exclude everyone else?
Once again, I suspect that a good place to start would be lowering the cost of new housing and increasing the pace of production.
One of the interesting things about return-to-office trends is that there’s a meaningful difference between smaller and larger cities. In smaller cities, most people have returned to working in their offices. But in larger cities, this hasn’t been the case. This makes intuitive sense. Larger cities tend to have more expensive real estate (which forces people to decentralize) and, in turn, longer and more punishing commutes. So in a larger city, the individual benefits of WFH (i.e. having zero commute costs) tend to be far greater.
However, in-person interactions are critical to what are known as agglomeration economies. This is why we have things like financial districts — because there are real economic benefits to even competing firms locating proximate to each other. WFH arguably reduces these benefits. And in this recent report called, Doom Loop or Boom Loop: Work from Home and the Challenges Facing America’s Big Cities, the authors, Richard Voith, David Stanek, and Hyojin Lee, have tried to estimate what these agglomeration losses might be for cities like New York, San Francisco, and Philadelphia.
Here’s New York City:
If you agree with their assumptions, then you might also agree with their policy recommendations. Among other things, the report argues that larger cities, like New York City, should be focused on promoting themselves to industries/jobs that benefit the most from in-person interactions, recognizing that WFH isn’t going away. At the same time, cities should understand that reducing the cost and increasing the pace of housing production also helps to reduce agglomeration losses. It keeps more people centralizing around a particular place.
To download the full report, click here. It’s an interesting read.
The trend continues. BlackRock — the world’s largest asset manager with about 20,000 employees in more than 30 countries — announced today that employees need to be in the office at least 4 days a week starting this September. This is an increase from the current 3 days a week.
You can’t read the news today without seeing some sort of headline about the demise of downtowns. But what is clear from announcements like these is that we still have yet to reach an equilibrium. And it’s probably just taking a lot longer than most people initially anticipated.
I know that this is a very divisive topic and that many of you think I’m old school for continuing to say this. But I fundamentally believe that there are irreplaceable benefits to in-person interactions among teams. I don’t know, maybe it’s because of my architecture background.
In architecture school you’re expected to spend all of your time “working in studio.” And even though you’re often working and producing things on your own, you do it so that you can be around your peers, shout out questions when you need help, learn from their work, and go for burritos and beers together.
And it was such a fun and creative experience for me that I can’t imagine what it would have been like had I been forced to work from my apartment. I probably would have had an equal number of burritos, but maybe a lot less beer?
Consider the following stat: 65% of all transit trips across the US in 2019 came from just 6 metro areas: New York, Boston, Chicago, San Francisco, Washington, DC, and Philadelphia. Not surprisingly, these are all places with dense and walkable urban centers. In other words, they have built environments that are conducive to the use of public transportation.
While we know that more people working from home has been bad for transit and that agencies across the world are facing deep holes in their budget, I continue to come back to two things. One, we have not yet reached a post-pandemic equilibrium. We are still making our way back to the office. And two, the single most important thing when it comes to transit ridership is land use.
If we want more people to take transit, then we need to build our cities accordingly. That means streets people actually want to walk on, and a lot more density.
Royal Bank of Canada, which is one of the largest employers in the country, sent an internal memo to employees this week with statements like these:
“When our teams come together on-site more frequently, we are solving complex problems faster, learning and growing more effectively, and ultimately building deeper connections with one another.”
“Without frequent in-person engagement our long-term competitiveness is at risk.”
I feel strongly that we are going to continue to see more of this. Current work-from-home arrangements are not at all static. We have not yet reached a post-pandemic equilibrium. That will likely take a few more years.
More flexibility, rather than less, is something we all want, and I don’t believe that’s going away. But I do believe that for the most productive and congealed teams, the default workplace will remain the office.
I’m not sure how much you can actually glean from this Australian Bureau of Statistics data (taken from this recent New Geography article):
The data was collected on August 20, 2021 and, at that time, there were still a number of pandemic lockdowns in place. But consider the fact that during the last census (2016), Sydney’s “work @ home” share was only 4.9% and that its transit share was 26.2%.
Where Sydney is sitting today is obviously somewhere between where it was in 2016 and where it was in 2021. Who knows where exactly things stabilize — that is largely unknowable — but at least I got to use “Sydneysider” in a blog post title.
I have been fortunate to be able to travel a fair bit this year. But the vast majority of that travel has been me working remotely. In my mind, that means a few things: (1) I remain committed to staying on top of and clearing out my inbox each day; (2) I still take all meetings as if I were 100% in the office (which is my preferred way to work); and (3) I don’t put on an out-of-office reply. That’s the signal that you should expect a response. Today, however, is not one of those days. I just finished putting on my out-of-office reply and that is me capitulating against the looming email torrent.
On past vacations I have done things like turn this blog into more of a photoblog. I will probably do a bit of that, but my plan this time around is to concoct some combination of a photoblog, travel blog, and foreign city building blog. Travel is a great way to learn from other cities, and I will endeavor to share some of what I find in France and Sicily. (Sicily is in Italy, but not really, right?) Some of you seem to get a little grouchy when I stray from our regularly scheduled programming on this free and personal blog. So if this doesn’t sound all that appealing, you may want to check back in October.
At the end of August, our office closed for two weeks so that we could shuffle a bunch of desks around. During that time, we all worked remotely. I spent one week working from home and one week working from Utah. Being in Utah in the summer was, of course, a great treat. Everybody appreciates having more rather than less flexibility in how they structure their workday.
But at the same time, being away from the office reminded me just how much I hate working from home. I hate the onslaught of calls and zooms that ensue when you’re not proximate to the people you work with. I hate being distracted by the thought that I should probably do a load of laundry. And importantly, I also find that I have less energy.
One of the ways that extroverts and introverts are often defined is according to where they derive their energy from. The former is said to derive more of their energy from being around other people and the latter is said to derive their energy from being by themselves. Introverts need time to recharge. Of course, most people probably need both of these things. I certainly do.
But I think this is an important consideration as we all debate work-from-home policies. I enjoy being in the office. And I can tell you that our team overwhelmingly does as well. People were starting to get antsy during our two week hiatus. But not everybody feels the same way, which is why I wasn’t expecting this (the above) Twitter poll result.
At the time of writing this post there were fewer than 200 responses. But even with limited data points, I was expecting more of a bell curve, with the majority of people doing some sort of hybrid thing. That is not the case here. The results were fairly equal with 5 days a week having a slight edge. My sense is that WFH is continuing to wane.
But I don’t know, you tell me: What is your work routine right now and what would you consider optimal?
The Financial Times published an article this week talking about the record number of homes that Londoners bought outside of the boundaries of the city this past year. The total was about 112,780 homes worth some £54.9 billion — again, it was a record in terms of total value.
The argument is that this pandemic continues to fuel decentralization, flexible working arrangements, and greater demand for larger spaces. Housing preferences have permanently changed. And the suggested takeaway is that this dynamic might have “serious consequences for the city’s population and housing market.”
But of course, I’m going to question whether this is really the case. The ~£55 billion number is clearly a new high according to the article. The previous record was £36.6 billion back in 2007. But that doesn’t give you the full picture because homes cost a lot more today than they did back then.
If you look at the total number of homes purchased outside of the city by Londoners, the record still belongs to 2007 with approximately 113,640 homes. When I see this number it makes me pause.
Because here we are living through a global pandemic and the largest work from home experiment in modern history, and yet the total number of homes purchased outside of the city this past year is still comparable to that of the last housing cycle.
Did this moment in time really create an anomalous and irreversible shift in housing preferences?
