Will the pandemic threaten the future of big U.S. cities?
For a variety of reasons, several of us in Marcellus have been trying to think through what will happen to the WFH-model of office work as and when the Pandemic becomes a non-issue. This blog from Capital, the world’s largest actively managed listed equities asset manager, provides useful perspectives on this issue. Whilst the blog is written in the context of the USA, it is not unreasonable to believe that “knowledge economy” jobs in India (in Media, Financial Services, Pharma, Tech, etc) will also follow the broadly the same working model as white collar jobs in the US.
The first point the analysts from Capital make is that small changes can have big impacts which can trigger de-urbanisation: ““Working remotely for the past year and a half, I’ve been buying coffee closer to home instead of my usual downtown coffee shop,” says Capital Group economist Jared Franz. “In my case, it doesn’t mean much, but if a quarter of the U.S. labor force does it one or two days a week, it has significant implications for the economy, financial markets and the future of large cities.”
While the data is short term and the jury is still out, there are early signs of a powerful deurbanization trend in the United States and other major developed economies. Since the start of the COVID-19 pandemic, migration from some big cities has accelerated while suburban home prices have soared. Moreover, national labor force surveys indicate an overwhelming majority of employees who have been working from home want to continue doing so one or more days per week.
By 2022, Franz estimates, roughly 25% of U.S. employees could be working remotely — up from just 5% prior to the pandemic — and many of them will choose to live in less expensive, less crowded areas. Assuming this shift persists, it would be the biggest change in US labor-force patterns since World War II….”
Then they cite opinion polls which suggest that most people are happy with the WFH model of work: “Surveys by the US National Bureau of Economic Research show that employees who are able to work from home definitely want to continue doing so. More than 77% said they would like to work remotely at least one day per week and 31% said they would prefer to remain there all five days. Not all jobs can be done remotely, of course, but 64% of respondents said their jobs are conducive to working from home at least part of the time.”
Thirdly, they dwell on what the long term sustenance of the WFH-model would imply for various sectors: “Many sectors stand to benefit if the deurbanization trend endures, including personal travel and leisure, technology and communications, cloud computing, and the home improvement industry and residential real estate — particularly in the suburbs and other outlying areas.
Changes in consumer behavior mean these trends could be durable even as we head back to the office several days a week. For example, home improvement stores such as Home Depot have clearly benefited from more people buying new and existing homes in the suburbs while the shift toward home fitness has boosted companies such as Peloton and Nike.
Exercise and outdoor activities are a potential bright spot, says Capital Group portfolio manager Lisa Thompson….
On the flip side, commercial real estate stands out as one of the hardest hit sectors, and the outlook remains challenging to say the least. Office vacancy rates nationally rose above 17% in the second quarter of 2021, up from roughly 13% in the first quarter of 2020 before government-imposed lockdowns brought the economy to a virtual standstill….
Within the wider real estate industry there has been a large disparity between subsectors that have been hammered — office, retail and hotel, for instance — and others that have rallied as the economy and stock markets recovered from the downturn. Those include storage, industrial and residential categories.”