Post-Pandemic Recovery of Cities Starts with Transit and Housing
It has been two and a half years since the pandemic began, but cities have a long way to go before reaching a "new normal."
The COVID-19 pandemic dealt a serious blow to many American cities. Changing population patterns, shifting financial profiles, and questions about the recovery of transit ridership beleaguer the recovery of metropolitan areas. Cities are still a vibrant and attractive place to be, but as office workers leave — and in some places never really return to their pre-March 2020 level — a new value proposition is needed:
To sell cities to new residents, more focus needs to be on affordability and ease of movement. This starts with reshaping transit and housing.
Transit Ridership was Declining Before the Pandemic
One of the most important changes that has taken place is the decoupling of work from location. Pre-pandemic, most Americans went to an office every day, regardless of where they lived. But with the advent of remote work, many people have realized they can live anywhere and still do their job. For many cities, public transit is the lifeblood of the economy. It's how people get to work, go to school, and access essential services. COVID was never going going to bring about the end of cities, but a failing transit system could.
According to an S&P Global report, by the end of 2022 transit agencies may recover around 60% of pre-pandemic passenger numbers and around 70% to 75% by the end of 2025. But while some agencies are reporting improved ridership in the weeks after Labor Day (and improved revenues), there are lingering concerns if the momentum can be sustained. The New York City area has been slow to recover a return of office workers, but things picked up noticeably in recent weeks:
Offices in the New York City area were nearly half full this week, leaping from about 38 percent during the prior week, the biggest increase since Labor Day of any major metropolitan region, according to Kastle Systems, an office security firm.
While recent news is good, the recovery has not been that substantial, creating what we called a “summer of discontent” for transit. But transit ridership has been in decline for years. The pandemic only made this problem worse, as people avoided public and enclosed spaces. It was only a couple weeks ago that New York State dropped its requirement that transit riders wear a mask while traveling.
In the coming years, we are likely to see a sustained decline in transit ridership. This will present a major challenge for cities, which will need to find ways to generate revenue and cut costs.
One longer-term question is whether local or regional taxpayers who increasingly do not use mass transit will continue to view it as an important public service worthy of financial support.
But expenditure reductions and revenue increases have their limits before they impact service or place too heavy a burden on commuters. In a recent interview, the CEO of Citigroup said they are considering providing “additional facilities” in New Jersey and Connecticut as the bank’s New York City staffers contend with rising commuting costs. In a recent interview the Governor of Connecticut commented an estimated 50,000 people who moved from New York City to Connecticut are staying put and New Jersey is looking at tackling the complicated issue of how remote workers are taxed.
Financial Challenges for Cities Don’t End at the Farebox
The past two years had a profound impact on city finances: whipsaw stock market returns challenging already stressed pension systems, declining sales tax and tourism related revenues, increasing health and education costs, and changing revenue profiles.
Some recent news on city budgets:
New York City Faces Potential Fiscal Crisis as $10 Billion Deficit Looms New York Times
Chicago’s High Property Taxes Pay for Squeezed Retiree Benefits Bloomberg
Milwaukee mayor pushes for more state aid following release of $1.7B proposed budget WI Public Radio
City of Detroit Reports Revised Revenue Estimates for Fiscal Years 2023-2027 City of Detroit
While Chicago has done a commendable job putting more revenue into is poorly funded pension system, there is still more difficult decisions on the way. In fiscal 2022 more than 80% of the city’s property tax collections went toward city pensions according to the Civic Federation. The Windy City has the highest fixed cost of any U.S. metro and the Mayor is proposing adding more revenue — in the next few months the city will decide whether to enact a 2.5% property tax increase to go entirely toward pensions.
There's no question that the COVID pandemic has been a major setback for New York City, both in terms of health and economics. And the challenges are likely to continue in the years ahead. City officials are predicting a decline in business tax revenue for the first time six years. They expect personal income and related tax revenue will drop 7.7 percent—the most it has fallen in twelve years.
Creating Affordability: Office and Hotel Conversions to Apartments
Since the beginning of the year we’ve commented on how cities need to recognize and face the challenges of losing daily commuting office workers. As the return to office picture comes more into focus, perhaps some cities —New York City in particular — can finally start to accept this new reality.
Across the country a quarter of downtown offices are considered vacant. Gallup Group has reported the number of vacancies is at a 30 year high. As cities grapple with office vacancies, and a housing crisis, there is a push to covert more office space to apartment units.
Last week the NYC Mayor commented:
Central Manhattan will remain our business district, but we are going to have to do a zoning rethink the way we did with downtown after September 11.
According to RentCafe, 420,000 new apartments are expected nationwide in 2022 — a 50 year high — and New York may surpass the Dallas-Fort Worth metro area in apartment construction, claiming the top spot for the first time since 2018. Increasing housing units should help affordability; as supply increases prices should decrease.
The current average monthly rent for an apartment in Manhattan is more than $4,000, a new record. If some of the vacant office buildings were turned into apartments, it could help ease the housing crisis. There has been a push in cities to convert hotels and offices to apartments, but so far it has had limited success. However, there is an expectation that under the right circumstances things can take off.
Residential is Inn Baltimore Business Journal
Developers rush to convert run-down hotels and offices into shiny new apartments Business Insider
This company just bet $60M against the future of business travel to convert a hotel Capitol Hill Seattle Blog
DC metro ranks No. 9 for new apartment construction this year WTOP News
More Los Angeles landlords convert offices to apartments Los Angeles Times
In August 2021, New York State enacted the “Housing Our Neighbors with Dignity act,” establishing a $100 million program to help fund hotel conversions (adding another $100 million in June). But the initiative failed to pique developers' interest, largely because zoning and building code requirements made conversions either logistically complicated or expensive.
Cities Will Recover, but it Takes Time
The pandemic has upended life in cities around the world and the United States is no exception. We have seen a slow recovery in transit ridership, an increase in office vacancy rates, and a decrease in tax revenue. As more people return to work and life in a new way, we expect to see an increase in transit ridership – but cities will need to find ways to adapt if transit ridership never fully recovers this decade.
In the coming years, we are likely to see a renewed focus on city-building driven by the need to address the challenges of income inequality to a lack of affordable housing. One thing is certain: cities will continue to be the engine of economic growth in the U.S. Despite the challenges they face, cities will show their resiliency and emerge from the pandemic stronger than before.
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