Remote work resulted in a mass exodus from urban office centers. In turn, other businesses dependent on foot traffic to and from these offices suffered greatly, forcing many to close or relocate. This is changing the landscape of larger cities in what experts are now calling the “donut effect.” In essence, the donut effect describes the migration of urban activity away from the core of city centers into adjacent areas. While downtown office buildings have notable vacancies, properties just beyond this core are increasing quickly in value. With remote and hybrid work still in place, workers are willing to live a bit outside urban cores. Thus, while a commercial real estate crisis looms as a result of vacant downtown buildings, other areas are thriving. This not only has important ramifications for cities and businesses but also for the evolution of the modern city. How these recent trends will affect long-term urban development and policies is certainly worth exploring.
The Donut Effect by the Numbers
Understandably, the pandemic affected downtown office space occupancy significantly as lockdowns and quarantines were put into place. Likewise, the rise in hybrid and remote work thereafter perpetuated these problems and contributed to the current commercial real estate crisis. Research statistics show that major cities on average had a reduction in city center employment by more than 10%. Even now, surveys show that fewer than 15% of workers currently work in these areas. However, at the same time, surrounding areas and suburbs have not been affected the same way. In fact, employment statistics show these areas experienced only 5% reductions during the pandemic. Likewise, these same areas have a much higher percentage of the workforce. Based on these figures, it’s evident that the urban landscape is changing.
Interestingly, the evolving donut effect affecting these cities was not what many expected. many believed remote workers might choose to relocate to completely different cities rather than moving to the suburbs. States with low or no state income taxes and cities with lower costs of living seemed like logical choices. While this has occurred to an extent, a larger number of workers decided to instead relocate to their city’s periphery. Why? In all likelihood, it reflects the notable percentage of workers who have a hybrid work schedule. As such, they’re willing to move away from city centers but not completely away. This reflects another wrinkle contributing to the existing commercial real estate crisis in downtown areas. Specifically, it would suggest that hybrid work alone is not the answer to revitalizing urban cores.
“The large gap in economic growth between city centers and other areas will require an adjustment to the geographical footprint of many companies’ workforces. Businesses in services such as food services and retail, will have to expand existing operation or open new ones outside of city centers and downsize or close some of their operations in city centers.” – Michael Papadopoulos, Associate Economist at The Conference Board
The Impact on Cities and Businesses
Notably, the donut effect is impacting cities significantly. The existing commercial real estate crisis triggered by these events is draining cities of commercial property taxes. As a result, many cities are increasingly relying on residential property taxes instead to maintain core city services. This is leading to an urban doom loop. In addition, the migration to the suburban areas has resulted in rising demand for houses in these locations. Rising prices of these homes help drive more residential property taxes. But at the same time, it is driving away working-class individuals and families. This has lasting repercussions for cities as well if affordable housing developments are not considered. Because of these shifts, cities are faced with tough decisions about how to proceed.
It should also be noted that the donut effect migrations have had effects on businesses as well. As mentioned, reduced foot traffic in urban downtown regions affected many local businesses and chains. Key sectors affected in this regard included retail, food, entertainment and fitness sectors. Consumer demand for these services and offerings fell significantly in urban cores, but they are rapidly increasing in suburban regions. This is encouraging many businesses to relocate as well, which will further impact city revenues. These events, as well as the demand in labor increases that will occur at the same time, show why suburban regions will continue to expand. And it explains why the hole of the donut will continue to fuel a commercial real estate crisis.
The Broader Picture
Understanding current trends involving the donut effect, it’s reasonable to ask what’s next? As we have already seen, the commercial real estate crisis is triggering a financial one as well. Closures of banks with high commercial real estate holdings highlight this fact. At the same time, municipalities must struggle with competing demands for resident housing, property tax revenues, and affordable living. This will require new policies and strategies that better juggle these issues. And it requires support of urban changes to encourage an eventual revitalization of downtown deserts.
Assuming hybrid work is here to stay, it’s likely it’s not likely vacant office spaces downtown will fill anytime soon. It can also be assumed that businesses will follow consumer demand and continue to fuel suburban growth. Therefore, the donut effect is not going anywhere anytime soon for major cities. However, there are solutions that could improve these trends. For one, investing in transit infrastructure to facilitate commutes back to downtown areas would help. Similarly, so would zoning and policy changes that make it possible to convert office buildings for alternative use. Urban cores still have much to offer, and it’s going to be essential that businesses and cities work together. Not only could this shift current migration trends but also help reduce the severity of the commercial real estate crisis.