Work-from-Where?
In the following series, I’ll examine the current status of “work” and how it impacts lives — from where people are moving to how they are spending their time — and various business models that support these new habits. First up: Where are people spending their time now compared to pre-pandemic?
For decades, most people’s existence revolved around a 9-to-5 workday with a lengthening two-way commute, (hopefully) bookended by some family time. Hobbies and friends were reserved for the weekend. While some wish for a return to pre-pandemic routines, the loosening of these patterns — which untethers work from the office — opens the door for more creativity in life choices. This shift in how and when we spend free time is allowing us to radically rethink where we spend this time. As Atlantic writer, Derek Thompson, recently noted — leisure is now “leaky” and doesn’t have to be concentrated within two weekend days. The trade-off is that work is leaky as well.
The pre-2020 artificial eight-hour workday forced most people to spend the vast majority of their time in two distinct places: home and work. Due to post-war suburban sprawl and decades-old zoning policies, these places were typically far from one another. Leaky leisure has blended these two places, as we work from home and watch Netflix while working¹. As a result of this blending, people are choosing new places to live, hang out, vacation, and work.
During the pandemic, while key urban amenities were closed, the value of density decreased. This led people to move away from expensive urban areas and towards cheaper places with more space. The most expensive markets lost population during 2020 and 2021 while more affordable cities such as Dallas and Phoenix continued to gain people. The metro-to-metro migration data favors the mid-sized, affordable “Rise of the Rest” cities as people trade density for space and “quality of life.”
Cities Compete for Talent vs. HQs
This trend² seems to have normalized in 2022. With a more mobile workforce less anchored to individual employers, cities need to change their economic development tactics. The old approach of offering tax breaks to attract headquarters is out, and appealing directly to the people is in. As shown below, there is a huge discrepancy in the ability to work remotely across cities. In San Francisco, roughly one-third of advertised jobs are remote or hybrid. On the other extreme, in tourist or port-drive cities like Miami Beach and Savannah, there are few hybrid options. Cities — in addition to companies — are in a war for talent, and it is too early to say who will win. However, cities that lean into their competitive advantages and appeal to people’s sense of “fun” will have an edge over those that merely offer a cheaper house to buy. Huntsville’s focus on music, Chattanooga’s spelunking culture, NW Arkansas’s mountain biking madness, and Myrtle Beach’s golf mecca all offer examples of mid-sized cities offering something to hardcore enthusiasts beyond simple affordability.
Conventional Wisdom: People have moved from California and New York to Florida and Texas. Miami and Austin have been the biggest winners.
Reality: Florida has indeed been gaining people, but Miami has been losing them. And while it’s true that California has been losing people, mid-sized, more affordable options like Sacramento and San Bernardino have been gaining. Data from CoreLogic suggests that both Miami and Austin had more outbound than inbound homebuyer interest in 2022, likely due to higher costs and congestion.
Within cities too, the value of proximity to pricey urban cores declined in a world of remote work. Arpit Gupta and others have shown that the historical rental curves³ have flattened in recent years, highlighting a shrinking of the premium paid for proximity to the city center. This movement towards the suburbs has been coined the “doughnut effect.” While growth had been slowing in urban cores in the years preceding the pandemic, the trend accelerated in 2020 and 2021. At the same time, growth in suburban counties continued to hold steady.
The migration from the Northeast and Midwest to the South shown in the map on the right has been happening for years, but the exodus from California became more pronounced recently. The doughnut effect is visible here, with counties directly surrounding metro areas drawing people at the expense of downtowns. Research from Stanford’s Arjun Ramani and Nicholas Bloom estimates that the largest cities have lost approximately 15 percent of their population and business to the suburbs. The value proposition offered by the downtown areas is lower today than it was five years ago, with residents voting for suburbs and mid-sized cities over downtowns with their wallets and presence. Companies are responding accordingly, with firms like Sweetgreen moving retail locations to suburban sites.
The movement of time spent away from downtown areas has created some economic losers, most notably downtown office landlords, shops, and restaurants. This has gotten significant publicity because the economic losers are large and concentrated while the winners are small and dispersed. But for every haircut appointment lost downtown, one is gained in a suburb. This is the essence of creative destruction. Using data from Placer.ai, WSJ reports a divide between office and residential districts. In Downtown Los Angeles and Chicago, visitor foot traffic is down 30.7% and 27.2%, respectively, compared to pre-COVID levels, while foot traffic in residential areas is roughly flat.
In response to this change in demand, suburbs can (and should) quickly add amenities available in downtowns such as restaurants and workspaces to cater to their growing populations. Being part of this shift is an opportunity for investors and operators. It is more challenging for downtowns to become more like suburbs, as building new housing is expensive, time-consuming, and often not allowed by current regulations. And for all the talk about converting office buildings into apartments, it is a daunting proposition.
KEY TAKEAWAYS: Places change as economies evolve.
Today’s creative destruction creates opportunity as people spend more time in their homes and neighborhoods and potentially miss the more diverse downtown amenity base. Suburbs have too much housing and not enough fun. Downtowns have the opposite problem. In response, suburbs need to evolve to be more like downtowns. This is happening, as suburbs and neighborhoods are upgrading their workspaces, opening new restaurants, and developing new fitness concepts and shopping districts.
Downtowns need to evolve to become more activated outside of the 9-to-5 window. Most effectively, this can involve incentivizing new housing via new development or conversion. Finally, cities need to see themselves as companies, looking to exploit their existing competitive advantage to draw more of the key scarce resource: talented, energetic people.
[1] Not me
[3] Simply that the rental premium people are willing to pay for proximity to the city center has decreased.
