Apr 12 • 27M

Is the Central Business District Doomed?

A conversation with Alex Yablon

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Bernard Gotfryd photograph collection (Library of Congress)

Citing research from economists, the New York Times this week claimed that “the average New York City office worker is predicted to reduce annual spending near the office by $6,730, from a prepandemic total of around $13,700,” which they called, “the largest drop of any major city.”

According to that same Times story, after the real estate website Zillow announced that employees could work anywhere in the world, the company saw a 15 percent increase in employees living in New York City.

New York, like America’s other large and prosperous cities, is plainly not dying. But the Central Business District might be. To help understand why that is, and what that might mean for the future of the North American superstar city, last week I chatted with the journalist Alex Yablon, who recently wrote for Business Insider about the future of white collar work and American downtowns.

This is the beginning of a series of regular interviews with authors and journalists who’ve recently written things I’ve found interesting.

Alex P: Welcome to The AP (Alex Pareene) Newsletter. This is our inaugural interview series, in which I am talking to other people named Alex who were quoted in a New York magazine feature about admiring Adam Tooze. So, Alex, thank you for talking to me today.

Alex Y: Thank you for also admiring Adam Tooze. I'm just so glad that the community is so strong. 

Alex P: We're going to talk about real estate today. You're one of a few writers that I know and that I read who, in the last year or so, have actually been influenced by someone else: Melinda Cooper, and her book, with her coauthors [Martijn Konings and Lisa Adkins], The Asset Economy, which you brought up in your really good piece about the mayoral election in New York last year. The thrust of that is, basically, that property ownership, and specifically residential home ownership, kind of determine the economic order in a lot of places now.

Alex Y: Right. The traditional understanding of class has been about one's relationship to work, and class solidarity is established through one's relationship to the means of production. The argument in The Asset Economy is that, increasingly, and especially in Western metropolises, it's really your relationship to ownership of financial assets, and in particular housing. The reason being that, if you own a home in a superstar city like New York or San Francisco—or, you know, Cooper is Australian, so in her case Sydney—your net worth is much more likely to increase from the appreciation of your home's value than it is from you getting a raise. This has been the case since the 1970s. 

Alex P: This is applicable to a bunch of large, wealthy cities. In the early days of the pandemic, there were a lot of pieces written, and a lot of things said, about this being the death knell for big cities. People were going to abandon them and go elsewhere. We’re in 2022 now, and New York has not died. People are not just here, but rent is rising and real estate prices are not really showing any sign of decline.

Alex Y: Residential real estate prices are higher than they've ever been. There was this kind of bizarre hiccup when the pandemic hit, when a lot of people didn't leave the city. 

Alex P: I know a bunch of people who've got really good rent deals during that period.

Alex Y: Right. Reality is smacking them in the face hard right now this year, as the city reopens, everyone kind of collectively decides that COVID is over, people are seeing their rents double when they renew this year.

Alex P: The city is not losing people. It's not draining population. There's enough demand to be here that residential rents are rising. Let's get to your Business Insider piece. Why is it so urgent for so many city politicians to demand that office workers in particular get back to work physically?

Alex Y: There's a caveat on the idea that the cities are doing OK. Residential neighborhoods in the sort of cities that were very dominant before the pandemic are doing—in terms of property values, in terms of retail spending—great. The problem is that these kinds of cities have been very centralized around central business districts.

The extremely high-end office district—in New York, that's basically Midtown and the Financial District; as much as residential neighborhoods have bounced back, these central business districts really have not. You see this in San Francisco, you see this in Seattle, you see this in Los Angeles: the places where, for a long time, lots of people worked, and, most importantly, lots of money was spent, and real estate was really at its most valuable—these places, because of work from home, have not come back in the same way that the rest of lots of other parts of cities have. 

That means that there's not as much spending on services in these places. And there's not as much spending on entertainment, not as much tourism and, crucially, commercial real estate values are pretty sluggish, even though every other kind of real estate, including residential real estate… there's never been a hotter warehouse market in New York city right now. There's a lot of buzz about a new fulfillment center in the South Bronx. It's one of the buzziest buildings in the city right now. 

You know, the flagships of real estate development for decades were big half-block sized office towers in Midtown and the Financial District, and those places are hurting. And for politicians who learned to work within the Development Regime that we saw pre COVID, this is really perplexing. 

You know, the rules of the game were you get to fund your services if you attract lots of office employment, and generate lots of tax revenue from commercial real estate. 

Alex P: We're mostly talking about white collar workers here. And if New York has a ton of these white collar workers living in neighborhoods in the city, still working, still contributing to the tax base—there's still a tax reason why the city wants them back in these commercial office buildings.

Alex Y: Right. So, commercial office buildings generally pay a much higher tax rate. Something like three quarters as high as residential taxes, as taxes on residential properties nationally. So they sort of disproportionately fund city services and operations. Even though a lot of those white collar workers are still spending money on food and stuff in their homes, they're doing it in properties that are not taxed as highly. If you're in charge of a city's budget, suddenly you're no longer capturing all that value. And to do something about that, you'd have to do some pretty politically unpalatable things.

Alex P: You'd have to raise property taxes on homeowners by quite a lot.

Alex Y: Right, you'd have to raise property taxes on homeowners. You'd have to say, instead of having sales tax, instead of taxing businesses that cater to office workers, you'd have to start taxing businesses that cater to residents. It's very politically unpalatable to pay them as a resident, as opposed to a commercial landlord. 

Alex P: It's funny because in the last several years, neighborhoods where people live—like around here where I live in Brooklyn—I was expecting a sort of mass die-off of all of these restaurants and bars and local businesses that relied on people visiting. And to a large extent, that didn't happen, because of some policy interventions, but also because when a bunch of my neighbors weren't going to work, they were going to these local places, instead of all of the lunch places in Midtown that they used to go to.

But that value that was worth less to the city coffers, right? All of that spending in my neighborhood was worth less to the city. 

Alex Y: Right. 

You know, also a lot of the spending in those central business districts, doesn't just come from the residents. It comes from commuters and it comes from tourists. If the commuters are working from home, they're not spending on lunch or dinner in Midtown or Manhattan. And the tourists, likewise, spend an enormous amount of money.

These central business districts that attract people from all over the region to spend money in properties that can then be taxed at a higher rate, they really do punch above their weight in terms of undergirding the city life. 

Alex P: So, the central business district—we're talking a lot about New York, but this is true in cities across North America. Basically, cities have always had downtowns, but the centrality of the central business district is actually not a natural, or not an ancient, development. It's kind of a more modern way of organizing.

Alex Y: I would say the dominance of white collar employment in a central business district as the engine of urban economies is something that has really mostly been around since the 1970s and 1980s. 

New York has obviously always been a center of finance and media. Ditto for Boston or Chicago or San Francisco. But when you had a robust industrial economy as well, or, say, a port that spread all over the entire massive waterfront of a big coastal city, you had lots of other forms of economic activity that were sustaining a city, that weren't so concentrated in one neighborhood. 

That really began to change with the offshoring of industrial jobs, with the containerization of shipping, which moved ports, basically, out of the center of cities, and to—basically, in New York, it's really in Jersey City, and in San Francisco, it's not really San Francisco itself that's a big port, it's like the East Bay. 

The thing that really generates the money now is all these elite service professions, which is a kind of “hourglass economy,” which a lot of people talk about a lot. Aservice economy, in contrast to a manufacturing economy, employs a small number of super highly paid professional service workers, and then vast numbers of poorly paid human service workers, who basically entertain you and feed you. Entertain the elite professionals and feed them and manage their households and deliver their packages and stuff like that. It’s a much more economically uneven kind of city. Within the superstar cities, it depends on the superstar earners to have their earnings trickle down to everyone else. 

Alex P: Right. So the hourglass economy, it's like, the highly paid workers—I guess, information workers, finance people, doctors, lawyers, things like that. And then at the bottom is all the people doing service work that is for them—delivery drivers, zipping through Manhattan. Manhattan sort of epitomizes this, in terms of what sort of people were there on any given weekday prior to the pandemic. But then it seems very precarious if you can't get thousands and thousands of people back in these Midtown and Financial District offices.

Alex Y: Right. This is kind of the peril of seeing the sort of Richard Florida-type creative class, elite professional class, as the engine of your city. Because when their consumer behavior changes radically, your city doesn't have an alternative. Work from home began as a COVID necessity, but at this point it's really more of just a preference, and something that workers have now come to expect, at least part-time, because it's convenient to be able to, you know, put in a load of laundry in between your Zoom meetings or be there for a delivery, or start your Blue Apron meal kit that you got.

Alex P: For white collar workers, and especially at big firms, it's going to be a perk that you get to choose your commute. Essentially. Jamie Dimon, the CEO of JPMorgan Chase, just said the other day that, even though they are building a new headquarters, which I'm sure the city is thrilled about, they're going to let a bunch of their employees choose their hours much more than they used to.

I guess I have two questions. What about Eric Adams makes him particularly adamant that people should get back to work, and what can he actually do about it?

Alex Y: I don't want to necessarily single out Adams, because politicians in New York are generally, by their nature, extremely close to the real estate sector. [Bill] de Blasio was very close to the real estate sector. [Rudy] Giuliani was, [Ed] Kotch certainly was. It's an extremely powerful business interest group that is particularly wedded to this place.

And this is the case in every big city where commercial real estate is very politically powerful. They make lots of campaign donations. They're the ones paying the taxes, because local government in America is funded by property taxes, rather than income taxes. It’s the owners of these assets who ultimately fund local operations, not as much the businesses that pay income tax. Real estate is a sector that depends a lot on coordination with local government, and approval and permitting, so they are naturally deeply engaged with the business of local government. But Adams is particularly close to the real estate industry—

Alex P: —I think there was a real sense that like, all right, the party’s back on when Adams won, and I think you see that allyship in his repeated, very public effort to almost shame and berate people into going back to work. But he doesn't really have a lot in his toolkit he can use to make that happen, though.

Alex Y: Right. And I think there's a sort of a story here of a breakdown of a longstanding alliance within the business community, between real estate and corporate employers. They had, for a long time, a very symbiotic relationship. White collar employers, in the pre-remote work days, needed office buildings in which their employees could do white collar work. And that meant they worked very closely with big commercial real estate interests to develop those places, to pressure city governments to get the services they wanted, to kind of “clean up,” quote, unquote, parts of the city that were considered unsavory, but that were say near transportation infrastructure that could get commuters into their offices.

Sort of the epitome of this is basically the rebirth of the 42nd Street corridor in New York from Times Square over to Grand Central. Times Square, for a lot of the mid 20th century, and Bryant Park, were known as these dens of sin, and they were very deliberately transformed into, kind of, playgrounds for tourists and office workers. And all around Times Aquare in Bryant Park, these enormous glass and steel office skyscrapers went up. And that takes a lot of coordination between sectors of the economy, and with government, to undertake that kind of massive transformation. 

But, now, if the business class decides—they kind of weigh their interests and say, okay, we need to be less wedded to our real estate because we need to retain our talent, that's more important right now—they're not going to come to the city's rescue like they would have, once upon a time. 

But the commercial real estate interests, they don't have a kind of easy adjustment they could make. And the city depends on the revenues that they generate much more directly, but there's not really pressure they can bring to bear on these employers and their staff. In a tight labor market, employers are going to be pretty concerned about their employees leaving, and so that's why you have even these notoriously brutal employers like Morgan Stanley, or Goldman Sachs, that are thought of as requiring people to work in their office, like eighty to a hundred hours a week, going soft, and allowing on work from home, and responding to junior employees saying that these conditions suck. If they stay wedded to remote work, to please the mayor and commercial real estate… there's not a clear upside for them, why they would do this. 

Alex P: It's a funny confluence of things, right? Because it also requires this sort of really hot labor market, because I think if we were in a recession right now, if it was more like the post-financial crisis and a bunch of these big employers who sunk a lot of money into these leases for these giant offices, they would have been like, we declare the pandemic over, everyone back to work. But I get the impression large employers feel like they have no choice but to allow much of their workforce to choose to commute much less often if they want.

Alex Y: Yeah, quits are still very high, which is something that's hard to fathom—that people are leaving their jobs because they don't like them? That’s preposterous!

Alex P: Yes, no, I know.

Alex Y: And there they're obviously still sectors of the economy that have not really recovered. The leisure and hospitality employment numbers are still down quite a bit. 

Alex P: Yeah, although I saw that cruises are making record money again, which I find to be insane. Like how did that industry survive? 

It reminds me too how things have changed. First of all, we're recording an interview via video conferencing, even though we could have just met at a coffee shop or something. But I remember—speaking of Times Square and the strangeness of that place, where, as you say, it simultaneously was built for tourists and for office workers—I remember going to Times Square, I think to the Reuters HQ, to do like a TV hit, and they would send town cars to take me from like Flatiron to Midtown, to be on TV for like five minutes. And then the drivers would be like, yeah, if you want me to take you to Westchester after this, they pay me to take you to Westchester.

People are actually just going to do all of those things at home, on the computer now. I just don't see that coming back. I see that being, I think, a permanent change.

So what does a city do about that? 

Alex Y: Yeah. It's a very open question. I mean, I want to be clear: It's not great to have the center of your city be underutilized, you know. The most infrastructure-dense transit-dense parts of your city—

Alex P: —should have activity in them.

Alex Y: Right. They should have activity in them.

And I think a lot of the sort of unease we feel about homelessness and crime is that those kinds of most central parts of the city are less full of the normal throngs of office workers and tourists. As a result, unhoused people are much more visible. There’s fewer eyes on the street, in the Jane Jacobs formulation of the sort of ambient social pressure and force that discourages crime. It would be a good thing to get people using these parts of the city again. 

My feeling is that you can—not easily—but you can sort of kill two birds with one stone by trying to build a ton more housing in these parts of the city. That's a way to both address the outrageous cost of living in these cities, which has only gotten worse after the kind of pandemic blip to residential real estate prices, and it'll get more people back into these places and spending money and using public space. Like you said, we both live in central Brooklyn, and, in these more residential parts of the city… Flatbush is hopping at all times. Prospect Park has never been more thronged than it is the past couple of years. It's almost difficult to walk through at times it's so packed. 

And even after the rollout of vaccines and boosters made that somewhat less of a necessity, it's persisting as a choice. So if you get people living in these places, downtowns—by increasing the amount of housing you'll reduce costs overall, you’ll also have people living in places where they don't need to use cars so much, and you'll also get people using public spaces and patronizing businesses that have been neglected for a couple of years. 

Alex P: Yeah, I think that's a really great point. It has seemed, for years, like New York City politicians, and city politicians in cities across the country, prioritized improving infrastructure, improving even aesthetics, improving neighborhoods, for commuters and tourists, while neglecting residents.

And I think that's a complaint I've often had, and it's a complaint lots of city dwellers have had. And it's because that was the financial engine of the city. As you say, that was—what is the book you cite, City Power by Richard Schragger?

Alex Y: Yeah. 

Alex P: That was just seen as the only way to make a city work.

Alex Y: From this sort of fiscal point of view, a commuter or a tourist is kind of like a perfect urbanite, because they come and spend tons of money, but they don't demand any services, you know? 

Alex P: You don't have to fix a pothole in front of their house.

Alex Y: Right. They only come to a few neighborhoods. So you only have to keep a few neighborhoods nice and shiny. They don't send their kids to school there. They don't place demands on your social services, on your hospitals. They only want things to look nice and to have fun things to do, in a few easy to reach places. So, from an efficiency perspective, it would be great if everyone was just tourists or commuters. And you kind of outsource—you make all that human needs stuff an externality that somebody else, in some other jurisdiction, has to deal with. 

Alex P: Yeah, but I like your vision of the future here, because if we reorient our cities—all of our cities, not just New York—we reorient our cities around serving the needs of people who live in them, allowing more people to live in them, and taking these neighborhoods that got all this investment to attract the commuter and made them neighborhoods, like actually made them neighborhoods, with people living there and interacting—I think that would be, I mean, it'll take a lot of work, but it would be a much better outcome than a sort of forced commute back to the office.

Alex Y: Right. And there's a climate aspect to this as well. There's a sort of life pattern that takes hold for your average white collar worker. They come to the big city and they have three or four roommates and they live in a crappy apartment and pay out the nose. And then they kind of work their way up the professional ladder and they date. And then they find a partner, then they move back and they buy a huge American suburban house, and pay a ton to heat it and drive everywhere. And that kind of pattern of life, that geographic pattern of life, is really destructive and unsustainable. If we can get people to live in denser, more centrally located places, you know—urbanites, adjusted for their income, have much lower carbon footprint than suburbanites. 

Alex P: Yeah. Honestly, it will be easier in every other big American city to make this happen, to densify, to put more housing downtown, to make them neighborhoods, to invest in them and to actually make them livable. That's something that everyone I think should be working on.

Alex Y: Right. I see it as kind of an inflation fighting thing. You know, like it's a lot easier to put up some apartment buildings than it is to install tons of new infrastructure going out to the exurbs. You know, the cheapest thing is not to switch over to electric cars, but to just not need cars. 

Alex P: Alex Yablon, a writer covering policy topics and a fellow at The Jain Institute. Thank you so much. You can read “Actually, forcing people to go back to the office isn't the way to save big cities” at Insider.

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This audio post was produced by Tommy Harron.