Stories of empty office buildings left behind in struggling U.S. cities after the pandemic are well known. What’s less well known is that it’s actually a tale of two cities — downtown and everywhere else. While many business districts are struggling, their outer rings are often thriving. Call it the “donut effect.”
Academics Arjun Ramani and Nicholas Bloom – who named the phenomenon in a recent NBER working paper of the same name – show that most people who leave the city center do not move far, mainly to the suburbs of their urban areas and outer suburbs. already inhabited. New York is a good example: a heatmap from the NBER paper shows movement from Manhattan to the outer boroughs and Long Island.
Even though the “donut effect” is strongest in big cities like New York and San Francisco, you can see it in other cities like Chicago, which bears some unsettling resemblance to the original “donut” city, Detroit. The beautiful downtown Detroit buildings of the late 19th and early 20th centuries were all but vacant for decades due to racism, the loss of America’s auto industry dominance, increased crime and violence, and the flight of whites to the outer ring. City.
Downtown Detroit has recovered in recent years, thanks in part to the efforts of entrepreneurs like Quicken Loans founder Dan Gilbert to convert old commercial buildings into loft space and bring in new businesses, as well as stores, restaurants and hotels that appeal to younger workers . But rebuilding the city center on a large scale is difficult due to the lack of a well-functioning transit system.
That’s one of Detroit’s many lessons for the modern “doughnut” city: Commute times matter, especially in a post-Covid world where working in an office every day remains an option, not a requirement, for many.Tracy Hadden Loh, a fellow at the Brookings Institution who specializes in commercial real estate, infrastructure, racial justice, and governance, notes that while studies cities are failing Or the post-pandemic boom is still in its infancy, and one variable that seems to be important is ease of transportation. This may be one reason why central London and Paris appear vibrant compared to many American cities.
Not surprisingly, a public transit system like New York’s works well (albeit in decline), but there is more economic activity (as measured by cellphone usage) in the downtown core than in Chicago or Los Angeles, whose infrastructure is notoriously poor of. These latter cities are also hampered by highly segregated neighborhoods and downtowns that are not only impacted by the commercial real estate crisis, but also have fewer entertainment or amenities that draw people to downtowns looking for something other than work.
These problems are likely to get worse before they get better. The Federal Reserve’s Financial Stability Report last week identified financial institutions’ exposure to commercial real estate as one of the main threats to the U.S. economy as the bubble’s bursting has only just begun. The Fed warned that since mortgages backed by office and downtown retail properties tend to account for about one-third of CRE holdings, “with CRE valuations remaining loss holders of CRE debt”. As these dominoes fall, so do others in the financial system.
How to Avoid the “Donut Effect” a lot of? The shift from commercial real estate to residential or mixed-use spaces has helped revitalize parts of downtown Detroit.But as historian Tom Sugrue, author of The Origins of Urban Crisis: Race and Inequality in Postwar Detroit Note that the city’s 1920s office buildings were easier to retrofit than today’s skyscrapers. That’s one reason why rents and home prices in the outer rings of cities like New York have soared since the pandemic began. “There are a lot of middle-of-the-road neighborhoods that haven’t been hollowed out, and they’re often immigrant neighborhoods or more working-class neighborhoods that never really shut down,” Sugrue said.
Unfortunately, this is leading to a broader cost-of-living crisis for workers and higher rents for small businesses in areas like Queens or Brooklyn. Simply pushing the problems of Manhattan — or San Francisco’s Union Square — to the periphery is not the solution, especially if it leads to higher taxes on those residents who can least afford them. (Most major cities, including New York and San Francisco, already rely more on residential property tax revenue than commercial property taxes to fund public services.)
Then what should be done? I’d take a page from urban activist Jane Jacobs’ book and consider a mix. Office work may never be what it used to be, but movie theaters and Broadway shows are back, hotels are booming and service sector wages are well above pre-pandemic levels, according to Apollo data. People still want to live in and visit big cities—they just want to do it in new ways.
rana.foroohar@ft.com