Work from Home
Work from home (WFH) has become the new normal for many people. As much as we might tire of being in our homes, there are positive productivity gains from being away from the office. Just the time of the commute alone is worth a lot in some areas. As we near the one-year anniversary of the transition to work from home, it is time to consider any long-term changes to the U.S. workforce and what it means for cities and real estate.
Who Gets to Stay Home?
The answer to this question is not surprising. Who gets to stay home? The people whose jobs can be done from home, and the firm allows the worker to stay home. In some sense, WFH is just one more advance in the flexible workplace. Some of you may remember when Casual Fridays were quite the topic. It is hard to believe that it was not too long ago that firms used to have strict dress codes including rules, such as women had to wear pantyhose or employees could not wear anything sleeveless. A nice part of WFH is the attire.
Another necessary ingredient is that the firm has to agree that you can stay home. That means that the firm believes your productivity will be higher and thus, you are a more profitable employee, even if you are not at the office every day. That alone says a lot about time wasted commuting to/from and being at the office. It also means that your job is not time-dependent on your coworkers or you are also not assembling anything in a factory. Thus, the WFH crowd are most likely educated middle to upper-middle income professionals.
Office Space and Lunch
If workers are only in the office a few days of the week or month, firms need less office space. For example, Salesforce is remodeling its office space into smaller, more café-style office space. The employees might focus on “café-style” but the interesting financial idea is “smaller.” Less downtown office space is needed. Additionally, fewer workers downtown every day also mean fewer workers buying lunch or shopping. That change lowers the cash flows to downtown businesses that serve those workers.
The workers go somewhere. We are seeing rents in outer areas of the cities increase along with increasing housing prices (and here). Why pay San Francisco rents when you can pay Sacramento rents? Why not have a bigger backyard in a less populated area? It might be a longer commute, but the employee will only be doing it once or twice a week. Those restaurants losing business downtown? They are replaced by restaurants closer to home. Overall, the total restaurant numbers may not change much, but local numbers will shift. That shift means taxes are also shifting.
Smaller Cities Gain
Rising property values in one place mean more property tax funds for schools. That sounds great. However, if the city that is gaining the WFH cohort builds new schools, parks, and other amenities, that city takes on new long-term financial responsibilities.
What if the shift does not last? What if firms decide productivity and profitability are reduced from WFH? Those workers will return to the office more frequently and might choose to reverse the shift and move closer to work. The current influx of families becomes short-term. The smaller city is left with costs it might struggle to cover.
Of course, right now this smaller city has to provide positive location amenities as it competes for the current WFH crowd. If employees can move anywhere, there are lots of competitive options. What can this smaller city do? They need to provide the amenities the employees want. It is not just schools and parks but roads, airports, and other convenience features. Maybe it can encourage the firm to move or create an office space locally, instead of forcing everyone back to the main building in the metropolis. No matter what, the small city needs to make the shift long-term. That gain in tax funds will be spent quickly.
Death of the Downtown?
Does the shift mean that the large cities’ downtowns are doomed? I doubt it. Cities always are attractive because of the urban lifestyle. Smaller cities cannot compete with the feel and opportunities. The office buildings may have to be remodeled for living space. Perhaps, lower rents will encourage new firms to move to the downtown and receive the gains from the synergies of nearby businesses, much like the technology industry has benefited for decades.
The shift also means that someone is losing property and sales tax funds in the prior place. Some of the restaurants and small businesses that used to serve the professionals may go out of business. To stop this from happening, the downtowns will need to reinvent themselves to keep the people and the taxes flowing. They need to do it quickly because they cannot afford to let their amenities fall into disrepair.
Is Your City Doing Enough?
Historically, cities competed for firms. Firms means jobs, which means people, which means tax revenue. WFH changes the equation. Now cities and towns compete for the higher-income WFH employees. Is your city taking advantage of the WFH shift?
Dr. Anne Macy
Edwards Professor of Finance