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Roland Li-The Chronicle
Downtowns and Transit after the Pandemic
Office buildings are quiet and few people are taking public transit. We’re in the middle of an economic shock, and some cities may never be the same.
Economic shocks come in many forms, both positive and negative. Wars, technological advances, and political surprises can have a significant impact on the cost of what we consume, how we produce goods and services, and the way we live. Think of how World War II, the birth control pill, the 1973 Arab oil embargo, and the rise of the internet and social media have had dramatic economic effects over many years.
The pandemic is the newest example. The economic shock: the adoption of hybrid work schedules and their impacts on land use and transportation.
The future of remote work
Remote work that became prevalent during the height of the pandemic appears here to stay. Anecdotes appearing everywhere indicate private companies and public agencies alike will be implementing to varying degrees these hybrid schedules, affecting millions of employees and allowing them to work a material portion of their work hours from home.
Office workers of all occupations have become accustomed to using technology to “attend” meetings, communicate with far-flung colleagues and get work done. While not all prefer the working arrangement, surveys indicate a large proportion do, as it saves hours each week in lessened commute hours and dollars each week associated with commute and apparel costs.In addition, workers are finding greater flexibility in their day to exercise, run local errands, and manage household chores.
At the same time, employers have learned workers are just as productive – if not more productive – as they were pre-pandemic working in the downtown office full time. Cost savings associated with reduced floor space requirements are obvious and significant.
Have you called customer service recently? Most call centers are empty as technology routes the calls to the service agents’ homes. Have you talked to a government worker? Many agencies are being run by staff based at home. Facebook and Google have most of their workforces operating from home, as do investment banks, brokerage firms, and news organizations. Only about a quarter of office workers were back at their desks in mid-November 2020. Some have returned, but many for only a portion of their 40 hour work week. And that means fewer riders on transit systems and fewer jobs in downtowns serving the office workers.
Consider what’s happened to public transit. At the start of the pandemic, transit use plummeted everywhere, including here in the San Francisco Bay Area. Nationally, in April 2020 transit ridership was only 20 percent of the average ridership in 2019.
Monthly ridership data for all US transit operators are compared to Bay Area transit operators in the graph below. Monthly transit ridership is graphed as a percentage of the average monthly ridership in 2019 before the pandemic. Both U.S. and Bay Area transit ridership is graphed.
As indicated, while there are some minor differences in the two curves, they are more similar than different.
While transit operators like to point to the recent growth in ridership, a simple graph demonstrates transit ridership in the Bay Area remains around only 40 percent of the average 2019 ridership levels, while US ridership is only a bit better at 50 percent of the average national 2019 ridership levels. While the original drop was associated with lockdowns and health concerns, the slow return is far more related to where office workers are now spending their working hours.
Total Transit Ridership by Month Relative to Average Monthly Ridership in 2019
When the pandemic is over, to what extent will people continue to work significant portions of their workweek from home? It’s too early to tell, but it looks like all of the metropolitan areas with significant office worker jobs will be impacted. And this in turn will generate measurable impacts to transit operators and commercial real estate.
The post-pandemic shock is one that will not only be caused by the millions of people no longer working full-time in a centrally located office building, but also by people moving further away from their former workplaces so that they can live in cheaper and more desirable locations, simultaneously gaining more space for working from home.
The implications of such a change, particularly on cities, are enormous. As writer and television host Fareed Zakaria noted last November on Washington Week Extra:
“I think people are going to work two-to-three days a week (from home), maybe four days. Maybe they won’t go in at all one week. In a way, it’s a return to an older model when the shopkeeper lived above the store, the craftsman plied his trade in the garage [of the house] where he lived, the farmer always lived on the farm. So we might find that work and life become more mingled. And that will create a different city. It’ll create a city maybe of neighborhoods that are more complete and intact.”
Given the amount of time workers have already been working from home, employers have learned whether their employees are as productive virtually as they were in downtown or suburban office buildings. Simultaneously, employees working from home have learned “by doing” their preferences for the new working arrangement.
Certainly, not all employers will allow their entire workforce to work remotely full time. But if a substantial percentage of workers’ time is spent working remotely, the change will dramatically reduce the number of full-time employees each day based in central business districts and suburban office parks across the nation and, in turn, hurt the shops, restaurants, and other businesses serving those locations.
Do you wonder what this may look like? Just walk down Market Street in proximity to the San Francisco Ferry Building. Or, walk the downtown streets of most suburban cities with nearby offices. Have you noticed the many retail spaces continue to post “for lease” signs? The national economy is recovering from the pandemic. Many downtown retail establishments have not.
The national office vacancy rate reached 15.5% in the fourth quarter of 2020, the highest level in six years, according to commercial real estate services company Cushman & Wakefield. More than 90% of the cities and regions covered by the survey are experiencing more vacancies, with San Francisco suffering the largest increase on a percentage basis.
Some of the regions and cities covered by the Cushman and Wakefield survey are in the graph below. San Francisco and the North Bay are highlighted. But what is apparent is that the impacts of remote work are happening in every region of the country and in most metropolitan area, with those in the western region impacted more than the other regions of the US.
How long will the commercial buildings’ vacancy rates remain high? Much depends on the specifics of the building and its convertibility to other uses. Some buildings may be converted to residential use, while others may have floors too large to be converted easily to apartments. These impacts are only going to be understood over time, most likely on a property-by-property basis and, in part, determined by how specific employers decide to configure their workforces in their companies.
Percent Increase in Vacancy Rates 2019 Q4 to 2020 Q4
Commercial real estate owners are already evaluating how the migration of much of the workforce will affect occupancy rates and rents. They’re already on the receiving end of this change. By contrast, Bay Area regional and local government agencies’ plans for public transportation and land use appear to be in denial of what’s heading their way.
For instance, the recent adoption of the Plan Bay Area 2050 by the Metropolitan Transportation Commission and the Executive Committee of ABAG demonstrates that these bureaucracies are looking in the rearview mirror. Their assumption is to guide future development into “transit-oriented” locations and pushing higher densities into lower density suburban neighborhoods.
It is easy to see that within a year and the final ebbing of the pandemic, the impacts of hybrid work schedules will be obvious to all, including the local and regional planners because they’re assuming transit ridership will increase far above 2019 levels in the coming years.
In the meantime, they are faced with a significant financial challenge associated with the financial structure of the transit agencies.
Fewer transit passengers mean lower fare revenues. According to the National Transit Database, in FY 2020, ending in June 2020, fare revenues covered just under a quarter of Bay Area transit operators’ operating expenses, with a range from 7% (Petaluma) to 56% (Caltrain). Closer to home, fare revenues covered 11% of SMART’s operating expenses.
Except for those pre-pandemic operators with limited fare revenues like SMART, a reduction of 10 percent of their riders will require proportional cutbacks in operations since buses and trains don’t operate for free. This means that the operators will have to cut operating frequencies, which in turn, will further constrain transit ridership. The agencies may try to hide these realities but they won’t succeed, because transit ridership is reported each month on the Federal Transit Administration’s website.
Within about six months from the end of the pandemic, everyone will know whether what we’ve all witnessed will continue for the foreseeable future. Any change will be reflected in public transit ridership, the number of empty storefronts and boarded-up businesses in downtowns, and, most of all, office vacancy rates and rents. And regardless of the forecasts, we’ll also know because the new working arrangements will be experienced by friends and family members.
In the near term, we should expect that many mass transit advocates to focus on passing additional tax measures to further support the existing operators. For instance, Measure RR, which proposed a sales tax increase in Santa Clara, San Mateo, and San Francisco counties to support Caltrain passed easily last November.
By contrast, just as the pandemic was beginning in March 2020, SMART was trounced at the polls and one of the main reasons was pre-pandemic SMART was spending over $50 per boarding passenger. During the pandemic year (FY 2021) this figure more than tripled to $189 per passenger in the many near-empty trains it operates. This figure far exceeds any other operator in the Bay Area.
For SMART to survive past March 31, 2029, it must pass a tax extension measure. And therein lies the rub.What SMART’s operating expense per passenger looks like when the next tax extension measure is on the ballot remains to be seen. In the past two years, SMART primary funding source has been sales tax revenues and due to remote work those revenues are exceeding 2019 levels.
What is it doing with the $40 million in revenues it earned last year? It is preserving staff and increasing rail frequencies, despite having limited ridership. Thus far, the SMART Board has ignored the financial realities associated with hybrid work schedules and not even considered that 2019 ridership levels may not return before it must place the next funding measure on the ballot. This means when it does they will have exceedingly high operating expenses per passenger.It is betting that voters won’t care. They lost that bet in March 2020.They are more likely to lose it next time if they face the new realities associated with hybrid work schedules.
Mike Arnold is a PhD economist, currently lecturing at the Fromm Institute (USF) and in the Osher Life Long Learning Institute (OLLI) at Dominican University and Sonoma State University.