The economic effects of the pandemic on the urban real estate market are well known: spiking rents and mortgage rates, a large dip in sales, and an overall mismatch between housing supply and demand. 

But the pandemic catalyzed some even bigger changes in Americans’ relationship with the real estate they live and work in, with consequences that could play out over the span of a generation for American cities — where 80 percent of Americans now live.  

The rise of remote work, the increasing power of technology in the professional sphere, and a diminished need for downtown office space are all forces now reshaping American cities, and where planners, business leaders and lawmakers are increasingly focusing their attention.  

“In terms of the postpandemic, it’s unresolved,” Christopher Hall, urban strategy leader with Chicago-based SOM, a leading architectural and urban planning firm, told The Hill.  

“It’s very dynamic in terms of how things are changing around employment, around retail, around demographics. We’re still seeing a lot, in terms of long-term processes, [on] household structure, size of households, when people get married, when they have children — all of those things are playing out on cities,” he said. 

The jolt to downtown housing fans a migratory trend out of cities 

The COVID-19 pandemic sent rental prices soaring in cities as the Federal Reserve cranked interest rates to fight inflation. 

While rents have begun to taper over the past year, urban rental inflation exploded from a 1.8-percent annual increase in April 2021 to 8.8 percent in March 2023. Last year, Moody’s Analytics described typical renters as “rent-burdened,” meaning they used 30 percent of the median income to pay for the average rent at around $1,800 in 2022. 

This, along with the rise of remote work and other pandemic-related constraints on gatherings,  contributed to a longer-term trend of people leaving big metropolises for smaller cities and rural areas. 

Research has shown that even after an initial surge of domestic migration toward U.S. rural counties dissipated immediately following the pandemic, the overall trend kept going through 2023. 

“Migration from large metro areas and counties to smaller metro areas and rural counties has continued across the country,” University of Virginia demographer Hamilton Lombard wrote in an analysis in May. 

Migration from counties with populations greater than 1 million people last year stayed at nearly double prepandemic levels, while movement into the country’s smaller metropolitan areas and rural counties increased from already near-record levels in 2022, Lombard observed. 

While there’s some conflicting research on both the prevalence and utility of working from home, there’s enough positive data on the shift to suggest that hybrid work may indeed represent a permanent shift. 

Many commercial property owners are reassuring prospective clients that their buildings are at full capacity based on their leases. But building occupancy data as measured by metrics like employee key card swipes and fob usage tell a very different story, one Wall Street investor told The Hill.

Weekly average office occupancy was 51 percent for the workweek ending Oct. 11, according to data from Kastle Systems, which averages data from roughly 2,600 buildings in 10 big U.S. cities.

This affects not only the businesses eschewing office work themselves but many ancillary businesses, such as downtown retail shops, fast casual restaurants and office supply stores. 

More than a quarter of all paid working days in the U.S. in May were remote work days, according to a survey of working arrangements and attitudes funded by the Templeton World Charity Foundation and Smith Richardson Foundation.  

While that number has been on the decline since the immediate aftermath of the pandemic, it has also been declining at a slower rate as time has gone on, potentially suggesting a hard-and-fast leveling-off point.  

Success of remote work is 'demise' of commercial real estate 

The diminished use and importance of offices has plunged the commercial real estate (CRE) sector into peril, raising serious questions about the physical makeup of cities and the purpose they are meant to serve. 

CRE has seen marked devaluations as work-from-home practices have become widely adopted, implicating the balance sheets of regional-tier banks.  

In March, Federal Reserve Chair Jerome Powell warned there would be regional bank failures due to the decline of commercial real estate. In June, ratings agency Moody’s downgraded six banks on CRE concerns, including Old National Bancorp, First Merchants Corp. and Peapack-Gladstone Financial Corp., according to media reports. 

The shift affects other parts of the financial sector as well, including the insurance business, corporate bond market and real estate investment trusts (REITs). The Fed highlighted the CRE sector as a potential threat to financial stability in a May report.

"CRE exposures could negatively affect the banking system, with vulnerabilities particularly high for smaller and regional U.S. banks," the Fed wrote.

Urban planners say they’ve been hearing about a coming “demise” of the commercial real estate sector.  

“I have been hearing about a forthcoming commercial real estate sector demise, or neighborhoods seeing a lot of challenges as buildings are not being filled,” Alice Shay, a U.S. cities principal for Buro Happold, an engineering and design firm, told The Hill.  

Conversions from commercial space to residential units are one of the main ways that the architectural field is responding to atrophying demand for office space, Shay said.  

Urban central business districts that have long defined the general contours and movement vectors of American cities could give way to more mixed-use downtowns in what planners are calling “central social districts.”  

“There’s this concept and a lot of research around moving beyond a central business district to a central social district,” SOM urban design and planning partner Doug Voigt told The Hill. “[It’s about] really expressing the capacity our urban centers have in terms of livability, quality of life, and diverse mix of uses.”

One feature of city planning that has developed in recent years that is not going away, supported by legislation at various levels of government, is sustainability, Voigt stressed.  

Whether it’s new building projects in the southern Sun Belt region or retrofitting existing structures in the older cities of the Northeast, environmental concerns are now a part of the brick and mortar of U.S. urbanism.  

“As you retrofit and upgrade these buildings for new uses, can that be paired with new ideas around urban sequestration, greater energy efficiency, sustainability, quality of life?” he said. “This is important, because it’s really about putting life at the center of urban design.”  

Losses in worker productivity, which  have been noted by researchers at the University of Chicago and the Instituto Tecnológico Autónomo de México, may be offset by savings of office leases and international hiring.  

The widespread adoption of large language models and other types of artificial intelligence (AI) into business practices may further accelerate this trend. 

“Looking ahead we predict working from home will continue to grow because of the expansion in research and development into new technologies to improve remote working,” the Chicago researchers found in 2023. 

Are there legislative solutions?

Policymakers are working to design laws that accommodate these changing economic dynamics. But with so many moving parts and large sections of the U.S. tax code set to expire at the end of the next year, clear new directions on incentive structures and taxation have yet to emerge around cities.  

“We’ve been going around on this for almost two years,” Rep. David Schweikert (R-Ariz.), head of the Ways and Means Committee’s working group on the “new economy,” told The Hill recently.  

“When the nature of work changes, artificial intelligence steps in as a labor replacement … and they don’t actually need a traditional office space anymore,” he said.  

Ways and Means Democrats have been working to shore up issues around housing and infrastructure, placing emphasis on the physical infrastructure of cities while also signaling interest in higher levels of taxes on businesses.  

“I don’t have any problem with … money going to real estate, but maybe we ought to put some conditions around it where we at least have some mixed use of it, so that if you’re going to build some gorgeous luxury apartments, maybe a third of them ought to be affordable housing,” Rep. Gwen Moore (D-Wis.) said at a field hearing of the committee in May in Erie, Pa.  
 
Inventories are now beginning to rise after some of the thinnest years for U.S. housing supply on record, with enough homes on the market to satisfy almost eight months of demand, according to Census Bureau figures released in September, the most recent month for which data exists.

“A lot of these projects effectively got backed up during the pandemic, and then they were all going forward as things started to move again,” Mike Fratantoni, lead economist with the Mortgage Bankers Association, told The Hill. 

Last year, there were 1 million multifamily units under construction, more than the number of single-family homes, which is a historical anomaly, Fratantoni said. 

At the executive level, the Biden administration has been working to support the conversion of commercial office space to residential space, announcing $35 billion in Transportation Department initiatives “for transit-oriented development projects at below market interest rates.”  

By contrast, the Trump campaign has made U.S. suburbs a policy priority, taking issue with what they see as unfair zoning requirements on the part of the Biden administration.  

Former President Trump wants to repeal the Department of Housing and Urban Development’s Affirmatively Furthering Fair Housing (AFFH) rule, which he believes “[destroys] property values by building giant multifamily apartment complexes in the suburbs” while “[forcing] communities to pay for low-income housing developments.”  

“Joe Biden is crushing urban America with inflation, tax hikes, and violent crime, forcing investors, businesses, and residents alike to flee Democrat-run cities for Republican-led states,” a Trump spokesperson said in a statement to The Hill.  

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