The COVID-19 pandemic has had a swift and crippling effect on our national economy, dramatically changing the way we live, work, and play. Perhaps, nowhere is that more extreme than in America’s major cities, which up until March were the epicenters of jobs, culture, and population. The shutdown and muted reopening of entertainment, hospitality, and restaurant venues has changed bustling downtown blocks full of life into eerily quiet corridors marked by darkened windows and passersby crossing the street to avoid one another. The flood of commuters that used to pack trains, swell daytime population, and spend money at restaurants, dry cleaners, and after-work happy hours are staying home.
But the key question is not how long this particular recession will last, although that is obviously a factor weighing on every budget officer’s mind. What city policymakers are struggling to contemplate is how much of this shift will be permanent? And what changes should they make in their approach to downtown planning to adapt to this uncertain future? Amid all of these unanswered questions, however, is one certainty. The turbulent times have created an opportunity for change.
“Many very successful communities today reinvented themselves because of an economic or other disaster,” says Nick Kittle, author of the book Sustainovation, on government innovation. The Great Chicago Fire of 1871, led to steel-reinforced buildings and the creation of the skyscraper that defines city skylines today, he noted. “The question now,” he asks, “is how and will communities make change happen in this crisis?”
A Blow To Retail Revenues
The pandemic and the social distancing required to stop the spread of the virus has created a service industry recession, which means it is disproportionately impacting those in the entertainment and hospitality industries and related tax revenue.
On average, cities experienced an 11 percent drop in sales tax revenue in fiscal 2020, according to the National League of Cities’ (NLC) annual City Fiscal Conditions report. Income tax receipts fell by less (3.4 percent), likely due to both the higher incomes earned by residents and because the temporary federal boost to unemployment insurance helped buoy taxable income for a time. Property tax growth slowed but still increased by 1.9 percent, a boost that helped keep total revenue growth in 2020 just in the positive. Most cities rely on property or sales taxes, or a combination of both. About one in 10 cities (generally speaking, the nation’s large cities) also tax income, according to the NLC.
Looking ahead, cities expect fiscal year 2021, which ends in June for most cities, to be even worse than the previous year. On average, says the NLC, cities anticipate a 13 percent general fund revenue decline when adding up the losses between their expected revenue in fiscal 2020 and anticipated 2021 revenues.
In some of the nation’s largest commuter cities, the drop in cultural and entertainment activity this year was dramatic. In New York City, sales tax revenue from April through June plummeted 30.8 percent, according to the city comptroller’s latest report. Total sales tax revenue for fiscal 2020 was down 4 percent, or $304 million, from what was budgeted and the city is forecasting it will fall another $500 million (or 8 percent) below what was expected for the current fiscal year (2021). Hotel occupancy taxes were down 23 percent in fiscal 2020 from projections and are expected to fall $250 million or 48 percent below what was budgeted in 2021.
Sales taxes make up about 7 percent of New York City revenues and, together with hotel taxes and other business taxes, account for a significant portion of the projected $7 billion gap in tax revenue in fiscal 2021. The business and public policy nonprofit Partnership for New York City estimates that as many as a third of the 230,000 small businesses that populate neighborhood commercial corridors may never reopen.
In Washington, DC, the tax revenue generated by the hospitality industry dropped from $766 million in fiscal 2019 to an estimated $360 million in 2020, the city’s CFO reports. Hotel occupancy in the heart of the city plummeted in March and increased to just 8 percent by June 2020, according to a report by the DowntownDC Business Improvement District (BID). More than 1,000 theaters and other performances have been cancelled so far this year, which means a total of 400,000 patrons will not be visiting downtown, the BID says.
In California, San Francisco’s hotel tax revenue came in a whopping 68 percent (or $137 million) lower than expected in 2020, according to the city controller’s latest report. Sales taxes are expected to drop by 10 percent, or $20 million from budgeted. Los Angeles is expecting a 33 percent (or $61 million) drop in expected Transient Occupancy Tax (home sharing and hotels), driven by a more than 70 percent drop in the city’s travel and tourism industry, according to Comptroller Ron Galperin’s latest revenue report.
The Work From Home Effect
The work from home numbers have been growing over the years but it has been slow when compared to the growth in remote technology. Pre-pandemic, more than 13 million Americans telecommuted at least one day a week and about three in four of that cohort worked from home full-time, according to research published by the Rockefeller Institute of Government earlier this year. But in a matter of weeks, the pandemic changed how and where many people work. More than one-third of employed workers teleworked in May, according to the Bureau of Labor Statistics. In the late spring, it was unclear how strongly the sudden uptick in the work from home population would take hold and those numbers have dipped down to 22 percent as of the latest report. However, this represents a huge jump from the approximately 9 percent of workers pre-pandemic.
One of the biggest barriers was attitudes: workers and employers did not think they would be as productive at home compared with the office. While that is still true for some, the last six months have demonstrated that most workers are adjusting. A September FlexJobs survey of more than 4,000 people who are working remotely during the pandemic found that 51 percent of them said they have actually been more productive working from home while another 44 percent said their productivity has been about the same.
“I do think the longer the pandemic goes, the more likely people [and employers] are to say, ‘Maybe we should invest the money in more permanent changes.’ And what’s the tipping point for that?”
The positive experience and time and money saved on commuting is a big factor in why 65 percent of the survey’s respondents said they now want to become full-time remote employees post-pandemic. Another 31 percent say they would prefer a hybrid work arrangement. These numbers aren’t just theoretical—FlexJobs also reports that 30 percent of respondents have already requested and won approval to continue their remote work arrangement post-pandemic.
Perhaps nowhere is this a greater looming revenue issue than in San Francisco and other California commuter hubs. California cities have business taxes, which taken together are payroll and other taxes generated by where a job is located. San Francisco is just 47 square miles and Controller Ben Rosenfield estimates that half of the city’s workers in professional services, financial services, and information sectors live outside city limits—and about half of those workers are now working from home. So, San Francisco is projecting a 21 percent drop or $219 million drop in what was budgeted for business tax revenue in 2020.
While the 2021 city budget assumes a nearly full recovery in business tax revenue that is in part due to an expected tax restructuring that will generate more revenue. Controller Rosenfield’s report warns that telecommuting remains a budgetary risk for the city and that “permanent [job] relocations out of the San Francisco area could have a larger impact on the city’s tax base.”
What about workers themselves? The Pew Research Center reports that about one in five adults moved because of COVID-19 this year or knows someone who did. Young adults are among the groups most affected, with 9 percent aged 29 or younger reporting they moved in with relatives due to pandemic-related job losses or because of the shutdown of college housing in early spring. Overall, 3 percent of adults reported that they moved either permanently or temporarily because of the pandemic.
While not an alarming number, it is still an impressive statistic that adds to the idea that the pandemic is changing the way we live and work. After all, fewer Americans are moving these days and last year less than 10 percent of adults moved, compared with 15 percent in the early 2000s. Anecdotal evidence for the pandemic’s influence is also mounting. According to data gathered by LinkedIn on changes to members’ profile locations, smaller metro areas are gaining and some big cities are slipping. New York and the San Francisco Bay Area recorded the steepest net losses. Inflow-to-outflow ratios in those two cities declined more than 20 percent from April through August of this year, according to LinkedIn. By contrast, midsized metro areas with populations under 3 million like Sacramento and Jacksonville, Florida, saw gains of 8 percent or higher.
To be sure, some sales tax revenue won’t be recouped; we are not going to get two haircuts to make up for the one we skipped this summer, for example. But this occupancy shift does pose the possibility that smaller cities may benefit via more economic activity. A recent report from the Texas Comptroller’s Office shows that families across Central Texas are spending more money in their own neighborhoods rather than in cities. For example, Austin’s sales tax revenue is down nearly 10 percent for the year, but it is up by double digits in nearly every Austin suburb.
Whether these examples are leading indicators of permanent decisions remains to be seen. Particularly for families, uprooting kids who are spending the year at home distance learning anyway is one thing. Permanently changing their school and friends is another level. While data related to relocation companies and real estate has been mixed (CityLab reports that data from the moving company platform Hire A Helper in the early part of this summer showed an overall decrease in moving while existing home sales initially slowed then picked up again), these economic indicators are being watched closely by cities.
“Right now, we’re doing a lot of data gathering,” says DC Budget Director Jennifer Reed. “I do think the longer the pandemic goes, the more likely people [and employers] are to say, ‘Maybe we should invest the money in more permanent changes.’ And what’s the tipping point for that?”
While it is hard to imagine a residential exodus of cities to the proportions that were predicted earlier this year, the fact remains that downtown office and entertainment districts are practically devoid of life thanks to the virus and the efforts it has required to stop the spread. For example, 85 percent of office space is leased in downtown Washington, DC—but just 5 percent of that is currently occupied on a daily basis, according to a survey by the DowntownDC BID. “It basically makes the DowntownDC BID a ghost town,” says BID Executive Director Gerry Widdicombe, adding that he expects daily office occupancy to stay at or below 10 percent for the rest of the year.
In Manhattan, a survey of employers conducted by the Partnership for New York City found that about 10 percent of the borough’s 1.2 million workers planned on returning to the office in the summer of 2020 and only about 40 percent by the end of the year.
While the dramatic occupancy numbers we are seeing now are likely to soften after a vaccine, “let’s not pretend the world goes back to normal now that we know we can work from home,” says Kittle. “We’re standing on the precipice of massive greyfields in our communities.”
Beyond housing, cities have an opportunity to think more creatively about how their downtowns will be used for changes that may have seemed too far-fetched or economically untenable a year ago.
Commercial leases are long-term—generally around 10 years—and breaking them is expensive. So occupants are not making any changes now, but it is something they will be weighing in the coming years as employees and employers decide what their new normal will be. Over time, says Moody’s Investors Service analyst Eric Hoffman, that could have implications for downtown property tax revenues. “What does it mean for all those commercial spaces for high tech workers in San Francisco that are no longer needed? That is a longer-term stress or concern,” he says. It could also mean that more property owners appeal their assessed values, “so places like San Francisco are assuming longer-term reduction in property taxes going forward.”
A potential glut of underutilized commercial space in downtowns is daunting. But the extreme conditions of the pandemic and the sense of urgency it has created has also opened a window for cities to take on sought-after changes that previously did not have the required momentum. Converting downtown office space into affordable housing is a natural consideration and it is appealing to policymakers both as a way of encouraging population and tax-based growth, and as a means of putting a dent in a longstanding inequity problem with urban living. Creating new revitalization districts out of old industrial space is something cities have lots of experience at. But commercial space is very profitable and even a half-filled office building may not be enough to encourage a building owner to convert to residential or mixed-use. In fact, a study recommending just that was rejected last year in DC. But Reed says that is something that is “worth taking another look at because the dynamics are different now. Commercial office space may not have the same premium or demand.”
Kittle advises policymakers to think about very specific ways to help building owners and developers make a conversion worth their while without giving away tax breaks that hurt city revenue growth. For example, easing the regulatory process to speed up permitting or sharing some of the cost burden for installing the utilities required for converting to residential.
Beyond housing, cities have an opportunity to think more creatively about how their downtowns will be used for changes that may have seemed too far-fetched or economically untenable a year ago. Getting rid of parking spaces in favor of bike lanes or using autopark technology to shrink the footprint of city parking lots in favor of more public space are historically unpopular moves with commuters that may be getting ready to have their moment. DC’s Reed says she is thinking about uses of downtown space that are more geared toward families. That includes indoor public recreational spaces and playgrounds, dealing with overcrowded schools, and getting more childcare centers—which have not found it very cost effective to be in commercial districts—into downtown.
All of these considerations are of course just that for the moment. With finances still in disarray and population and spending trends still uncertain, city officials aren’t making any long-term decisions based on six months of experience. To be sure, much of the future of downtowns depends on the decisions of major office tenants regarding density, remote work, and relocation of operations out of the city. But it is clear that whatever the new normal becomes, urban policymakers must stay connected with their major employers and developers and all parties should start thinking now about how cities will evolve as hubs for culture, population, and entertainment in the coming decade.
ABOUT THE AUTHOR
Liz Farmer is a Future of Labor Research Center fellow at the Rockefeller Institute of Government.