Cities across the world are in the midst of an identity crisis. With fewer workers commuting into offices and more shoppers heading online, what are they now for? It’s a question that commercial real estate investors are scrambling to find an answer to.
On this week’s podcast, hosts Tom Lee-Devlin, Mike Bird and Alice Fulwood explore an office block that’s been repurposed to find out what the future holds for cities. Nick Bloom, a professor of economics at Stanford who’s been researching home working for more than two decades, tells them fully remote work can dent productivity by 10%. And Ed Glaeser, chair of the economics department at Harvard and one of the world’s leading experts on urban economics, says that troubled cities like San Francisco need to focus on making their downtown areas safe.
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Houston Road, where I am now, is a busy road in central London where thousands of office workers used to spend 8 hours a day, 5 days a week.

After the pandemic, not all those workers returned to their desks.

And that has left the people who own the offices facing a costly problem.

This is a 15-odd-storey steel and glass building, originally an office building, I understand.

It's been here for a few decades, but It's in the process of being repurposed in part for other uses.

It's multi-tenanted and I'm going to take you inside and introduce 2 of the floors that have been repurposed from offices into lab enabled space.

There is lots of very high tech looking equipment here.

Just a few months ago this was a regular office space, it's obviously completely different now.

Could you tell us a bit about what went into that conversion?

As you rightly say, it was a completely open plan with desks and chairs and a central corridor.

Now, lab spaces are heavily partitioned from the write-up areas.

You can see the other side in the lab, the floor is very different.

The floor is more solid so that it can stop any vibrations as people walk through the space.

And that's important when you're running experiments.

If you turn around, you can see that there's a separate room area where you've got specific bins for hazardous waste.

And can you tell us a bit about the rationale for doing this conversion.

The office market, certainly since the pandemic, has been changing.

The reason that this building works really well is because, importantly here, we're in close proximity to some exceptional centres of excellence with the Francis Crick Institute, Wellcome Trust, UCL, and that's why this type of transition from offices to labs works in this location.

That said, there are buildings in certain pockets of London, they just don't work because you're not near a transport interchange, you're not near centers of excellence.

And so how are developers thinking about repurposing those types of buildings?

So they're looking at alternative uses in the growth sector, so residential, And that's not just private residential, that's built to rent, it's student accommodation, it's co-living, but also hotel type uses as well.

So maybe we should leave the scientists to work then.

Zoe, thank you so much for showing us around today.

In London, investors like CBRE have already plunged billions of pounds over the past few years into repurposing vacant office spaces for a variety of uses.

That is a trend that is happening all over the world and promises to transform the shape of cities.

But will it be enough to save them from the rise of remote working?

You're listening to Money Talks from The Economist, our weekly podcast on the markets, the economy and the world of business.

And in today's show, are cities in peril?

First, we hear how the rise of cities was interrupted by the pandemic.

Offices emptied out, shops closed, and a lot of remote workers fled for suburban lives.

Then we explore what remote working will look like in the future.

The research data looks like maybe minus 10%.

And finally, we look at what struggling cities like San Francisco must do to avoid a death spiral.

The first thing is to make sure the knowledge workers feel they can go back to the office without having to run through an open-air fentanyl market.

So Mike, how does it feel to be in the world's second most successful city?

Well, it depends what we're talking about.

I'd say it's pretty close to first place if we're talking about food, maybe a little lower down the rankings if we're talking about the weather.

Singapore doesn't make it into first place?

Well, not according to the Economist's ranking of major cities based on their performance over the past 3 years, which looks at things like population and economic growth, office vacancies and house prices.

This topic is particularly pertinent at the moment because there's been a lot of chatter around how cities like San Francisco have been really struggling post-pandemic.

But cities are a pretty diverse bunch, and places like Singapore have been doing a lot better.

So Mike, who do you think Singapore lost out to then for first place?

Well, Singapore definitely seems like the obvious choice in East and Southeast Asia to me, given commodity prices.

I'm wondering about maybe somewhere in the Middle East?

It was actually somewhere on Alice's beat, Miami.

I must say, when I started out doing the Wall Street gig in 2019, I really didn't expect to spend so much of my time, if any, there, but it sucked up an enormous amount of talent away from New York and Greenwich, Connecticut.

And that used to just be this billionaire bosses of financial companies.

So people like Thomas Pettify of Interactive Brokers, which is a brokerage firm, or Israel Englander of Millennium, which is a hedge fund.

And they'd set up small offices in Florida where they also clearly wanted to live.

But over the last couple of years, you've seen all kinds of financial firms set up real presence there.

So Citadel runs an enormous trading floor, there are dozens of VCs, there was a sort of trickle of movement to Miami, the pandemic seems to have turned it into a flood.

Yeah, so my sense of what we are seeing here is that there's some cities like Miami that have really come out as net winners from the pandemic.

And there are some like San Francisco that have been net losers.

Then there are quite a few that are kind of in the middle, not really facing into a death spiral, but nonetheless wrestling with how to adapt to a world of hybrid work.

And New York is 1 example of that, and London, where I am, is another.

And we heard at the start there that some real estate firms like CBRE are starting to repurpose offices as lab spaces.

The other big opportunity a lot of cities are pursuing is converting those underutilized offices into residential apartments.

But there's also been some resistance to that.

So the body that runs the old City of London or the square mile as it's sometimes known has been actually quite opposed to shifting property from office space to residential use.

Tom, I know this topic is something you've been thinking about for quite a while now, thinking about it enough that I believe you've gone and written a book about it?

Yes, well, not to toot my horn too much, but you're right.

I have co-authored a book with Oxford University's Ian Golden, which is called Age of the City.

And that looks at how cities came to be such a dominant force in the economy and what the future has in store for them.

But it's also a topic that we've been writing about a lot at The Economist because we're really in this moment of transition for cities, which some are navigating far more successfully than others.

Yes, this moment raises all kinds of interesting questions about what cities will look like in the future.

This kind of old model of a central business district surrounded by a ring of inner city neighborhoods, then suburban neighborhoods, and then the sprawling exurbs with everyone commuting into work every day seems pretty questionable now.

So I suppose the idea here is to turn all of those underused office buildings into apartments or labs or other useful things?

Well, that's the gamble that a lot of property firms are taking.

And someone at The Economist who's been following that quite closely is our global property correspondent, Vingero Mkandawere, and I want to bring her in here.

Vingero, thanks so much for coming on the show.

So before the pandemic, cities were on something of a bull run.

Can you tell us a bit about what that looked like from a property perspective?

The house prices had been shooting up for years, particularly in the gentrifying inner-city areas.

On top of that, commercial property in cities like London was being snapped up for record prices.

And then of course the pandemic struck And now with fewer people going into the office 5 days a week, some cities seem to be struggling to adapt.

Can you tell us a bit about what you're seeing?

Well, as we know, the pandemic transformed cities overnight.

Offices emptied out, shops closed, and a lot of remote workers fled for suburban lives, and that's had a huge impact on footfall.

San Francisco has been 1 of the hardest hit cities, and there are huge issues there, particularly around homelessness.

Around 1% of the population there is homeless.

And that's for a number of reasons, including high property prices and a slump in the tech sector.

So unsurprisingly, the commercial property market there has struggled to adapt.

We know that tax revenues from commercial property help fund public services like schools or rubbish collection.

Cities also need to address the loss of income for restaurants and retailers and a host of other businesses that rely on city workers like dry cleaners or gyms.

You mentioned San Francisco there, which is in some respects both the best and the worst case study of the problems affecting cities because, you know, as you said, the problems there are particularly acute and visible as a result of a number of factors, 1 of which is the rise of remote work, but also, you know, we've seen a significant downturn in the tech sector that's heavily impacted San Francisco in particular.

Now, how are cities around the world responding to the shifting patterns of demand?

A lot of them are trying to change the way that they use their space by converting office blocks into residential or other purposes like hotels or labs for scientific use.

But cities and policymakers are taking other defensive measures too.

Many are looking to improve the quality of life.

Some have added more green spaces or cycle lanes.

Others have banned cars in parts of the city and opened up cities for dining and pedestrians instead.

Paris is, for example, cleaning up the Seine River for swimmers ahead of the Summer Olympics next year.

And other urban hubs are courting new business or making it greener to get around.

So, policymakers are trying to reimagine cities.

Fingeri, thank you so much for coming on the show.

To get a better idea of how changing attitudes toward work are reshaping our cities, I wanted to speak to Nick Bloom.

He's a professor of economics at Stanford and he's been tracking homeworking trends for more than 2 decades.

Nick, thank you so much for joining us on Money Talks.

So you've talked about the idea of a donut effect in cities, a kind of hollowing out of central urban areas as people use offices less, people spend less in retail destinations in central areas.

Could you just start by telling us a bit more about that donut effect and what you've seen in terms of the economic impact of the COVID pandemic on cities?

So over the course of the pandemic, particularly in

there was a huge move of people out from city centers, mostly into the suburbs of the same city.

So take an example, someone like New York, several hundred thousand people left the center of New York, moved out to the suburbs.

It's like if you've only going to come into the office, I don't know, twice a week, you can put up with a much longer commute, but you like a bigger home office or some space in the backyard.

As of mid 2023, we have not seen that many people return back to city centers.

I just want to spend a bit of time on the underlying driver of this, which is really the rapid uptick in rates of remote working that was triggered by the pandemic.

That's something that you've been tracking quite closely.

Could you just tell us about what you're seeing in terms of the rate of remote working now?

Has it continued to fall from its post-pandemic peak?

Yes, so I'm gonna give you data for the US, but Canada, UK, for example, look very similar to this.

So before the pandemic, about 5% of days in the US were work from home.

So pre-pandemic Work from home existed, but it was pretty rare.

April, May 2020, we see that work from home goes up to 60%.

And basically, pretty much anyone that can work from home, which is pretty much all grads were working from home and they were doing that full time.

We then see this is slowly falling back down by summer 2023.

So it really hasn't changed going back the last 6 to 9 months.

And you've been thinking for some time now about the viability of remote work.

Actually, even before the pandemic struck, I think you were researching this.

So, what is your view on the effectiveness of remote working compared to in-person collaboration in offices?

There's really 2 choices at this point, if you're going to have any work from home.

So 1 is hybrid, and the kind of classic vanilla version of hybrid would be, say, Tuesday, Wednesday, Thursday in the office, Monday, Friday, work from home.

The research, a lot of data, anecdotes from talking to companies looks like that's roughly flat on productivity, but employees really like it.

So the typical number is employees value that, the ability to work from home Monday, Friday as about the same as something like a 5% to 10% pay increase.

There is a second version, which is fully remote.

And fully remote is a very different animal.

So fully remote 5 days a week, this appears to lower productivity.

The research data looks like maybe minus 10%, but there's a big range.

The reasons appear to be it's harder to mentor, it's harder to innovate, it's harder to build culture.

He may then ask, why would any company have fully remote?

And The reason is fully remote is dramatically cheaper.

So first off, you get rid of the office, and that's about 10 to 20% of costs.

And then secondly, you can hire nationally or internationally.

So we've kind of reached this new equilibrium at scenes where about 25% of days worked are being done remotely and that's been kind of stable for some time now.

What does that mean for what's happening with this doughnut effect in cities?

If you go back to 2021, I might have thought back then, a couple of years ago, that eventually people are going to return to the city centers and it will be over.

And I think what's driving it is a lot of folks moved out to the suburbs.

I think the only way the donut effect is going to unwind is if employers force folks back to the office 5 days a week.

1 big picture way to look at it is to go back to World War II and say we know from World War II until about the 1980s, people were moving out to the suburbs.

So cars became more common, roads got better.

If you go to the 1970s or early 80s, it was a big thing of living out in the suburbs, driving in and out every day.

But then from the 80s onwards, congestion got so bad that we saw this return of urbanization.

So from 1980 to about 2019, the centers of European, particularly think of London or US cities, became relatively a lot more expensive.

What the pandemic has done is unwound maybe 10 to 15 years of that.

So it's not that radical, but it's kind of like city centers are back to maybe where they were in 2005.

They're still expensive, They're still busy, but a little bit less expensive and busy relative to

And so what is your longer term view on the prognosis for cities then?

Will they become structurally less important for the economy from here?

So the long run future of cities, I'm still very positive about.

1 thing to realize about the donut effect is folks left the city centers, but they tended to go to the suburbs of the same city.

So we've been tracking millions and millions of Americans through the United States Postal Service change of address data.

What you see is 60% of people that left city centers, say left center of New York or Washington or Chicago, moved out to the suburbs of the same cities.

So in that sense, cities per se, the big conurbations are doing fine and they've not really lost activity.

What's changed is it's moved out from the center into the suburbs.

And that has generated some frictions and some challenges more at the micro level.

So the 2 things I worry most about, The first is public transit.

So if you think of things like BART or the New York subway or the London Underground, these have very high fixed costs.

You got to pay for the train tracks and the trains and the staff.

But of course, if there's 30%, 40% less riders, you can lead into huge deficits and somebody's got to pay for that.

And that's 1 big worry where that's going to end up.

The other thing is what's going to happen to a bunch of these kind of 1970s, 1980s big office buildings.

It has a massive floor print, huge, far from any windows.

Many of these buildings, no 1 really wants to lease anymore.

If folks are coming in for hybrid, they want to lease what's called class A or trophy buildings, nice places, or they want to be out in the suburbs.

And these office buildings, you think, well, maybe convert them to residential, but when they have huge footprints, which are far from any windows, it's hard to do that.

So you're left with these buildings thinking, what am I going to do with them?

And right now, there's a rising vacancy rate with these buildings.

They may even have negative value because they're so expensive to destroy.

It's not clear if it's worth the cost to redevelop them.

So that's a second issue of kind of a blight on certain parts of the center of cities with a whole bunch of huge floor print, kind of ugly 1970s, 1980s buildings that lie vacant.

And as we know, vacant properties tend to be in a hotspots for crime and cause issues around.

Thank you so much for joining us on Money Talks.

So Alice, Mike, it sounds to me like remote work is out, but hybrid work is probably here to stay.

And as Nick alluded to, hybrid working does set a limit on how far people can really move away from their employers.

So moving to another city entirely or deep into the countryside is probably not going to work for most people.

I do also think it's worth noting that in cities like New York, for instance, there are tentative signs of a return of residents to inner cities.

And those places do offer their residents a lot more than just a short commute, whether that's cafes or nightlife or various cultural activities.

Now, all that said, I think simply waiting for things to eventually return to the way they were before pandemic would at this stage probably be somewhat foolish.

I was struck by the statistic Nick said about productivity losses from fully remote work.

Most economies, especially developed ones, can only hope to churn out about a 1 or 2% annual productivity growth rates.

In Europe, it's probably even lower than that.

And so in a world in which everyone went fully remote, if that estimate is even vaguely correct, you'd essentially knock living standards back by almost a decade.

You can make the case that productivity measures aren't capturing the utility that people derive from being fully remote and getting to live wherever they want.

There's obviously always the famous JFK speech that says output metrics cannot measure the strength of our marriages or the joy of children playing.

But I still found that pretty staggering.

And it does indicate that what he was saying about the doughnut effect is probably more likely than a world in which we're all fully remote.

Will I've always thought that speech was just too pessimistic about our ability to improve output metrics, personally.

But I was really interested in the stuff there on the financing of things like public transport and the viability of big commercial real estate in the center of cities, and the sort of vulnerable pinnacles of decades of reurbanization after the pandemic.

And it may be that long after we stop talking about the public health effects of the pandemic, or the education effects, or whatever it might be, we're probably still talking about these sort of effects on city centers.

If you look at somewhere like Detroit, the slump in property values that started in the 1970s was a huge problem even going into the first or second decade of the 21st century because the city took so much revenue from the property tax.

It's no small part of the default that Detroit went through.

Land value is also super important to everything because of the financing usually attached to them.

You get a lot of businesses borrowing a lot of money backed by things like commercial property, really land beneath the commercial property.

So yeah, I find this all hugely interesting.

And I think the ripple effects, we might not even be thinking right now about whether eventually going to end up hitting very hard indeed.

Speaking of debts, we owe lots of you a huge debt of gratitude because thousands of listeners responded to our last survey.

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Money Talks: Averting the city death spiral