Nicholas Bloom: How COVID-19 and Remote Work Have and Have Not Reshaped America’s Cities

By TAP Staff Blogger

Posted on April 18, 2022


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What is driving the fall in city center real estate demand?

 

Four key factors are at play in creating the donut effect: the economic shock from the virus, the lack of access to city amenities due to lockdowns, the aversion to dense areas due to fear of virus spread, and the ability to work from home (WFH). The first three factors are likely temporary, suggesting that markets could rebound.
- from “The Donut Effect: How COVID-19 Shapes Real Estate” by Arjun Ramani and Nicholas Bloom

 

A year into the COVID-19 pandemic, “around half of American workers were at distant desktops,” reported a Wall Street Journal article from March 2021. “How Remote Work Is Reshaping America’s Urban Geography” (The Wall Street Journal, March 5, 2021) stated that “while forecasts differ, as much as a quarter of the 160-million-strong U.S. labor force is expected to stay fully remote in the long term, and many more are likely to work remotely a significant part of the time.”

 

This WSJ article went on to explore how remote work is affecting the economic fates of cities. Especially for smaller cities, “They can now develop and build their economies based on remote workers and compete with the big-city business centers and West Coast high-tech meccas that have long dominated the employment landscape.”

 

Now, over two years after COVID-19 triggered a work-from-home transformation, a recent Los Angeles Times article examining the geographic trends of tech employment, reports that new innovation hubs have not cropped up across the country. “That Big Tech Exodus Out of California Turns Out to Be a Bust” (Los Angeles Times, March 23, 2022) shares the expertise and research of Stanford economist Nicholas Bloom to explain why the established technology strongholds – Silicon Valley, New York, Seattle, and Boston – continue to retain technology workers and innovators.

 

Professor Bloom quoted in “That Big Tech Exodus Out of California Turns Out to Be a Bust”:

 

The value of concentrated ecosystems in nurturing innovation has been documented for decades. As Nicholas Bloom of Stanford and colleagues pointed out in 2020, elite academic institutions attract highly skilled innovators and spin off their learning into new technologies and new industries; their presence tends to attract others like them.

 

This hybrid system [working in the office two or three days a week and remotely the remainder of the week] “allows employees to move further from their place of work, such as from a city center to a surrounding suburb,” Bloom reckons. “But it does not allow an employee to move to another metro area entirely because they must still commute to work on some days.”

 

Instead, Bloom found increased movement within metro areas, rather than between metros — a trend he terms the “donut effect,” signifying movement out of the central city and into suburbs or exurbs.

 

Professor Bloom is widely known for his research on remote work and best management practices.

 

Back in 2015, along with colleagues James Liang, John Roberts, and Zhichun Jenny Ying, Professor Bloom conducted a 9-month working-from-home experiment with Ctrip, China’s largest travel agency. The resulting report, “Does Working from Home Work? Evidence from a Chinese Experiment,” published in the Quarterly Journal of Economics, called attention to several benefits of working from home. A few key takeaways: the experiment led to a 13 percent increase in performance and a 50 percent drop in employee-quit rates. It was so successful that Ctrip rolled out working from home as an option for the whole firm.

 

Fast forward six years, the global pandemic has numerous organizations well established with working-from-home (WFH) systems and routines for their employees. In May 2020, a few months after many countries and states began issuing “stay-at-home” orders, Professor Bloom joined with Jose Maria Barrero, Instituto Tecnológico Autónomo de México (ITAM), and Steven J. Davis, University of Chicago Booth School of Business, to establish the Survey of Working Arrangements and Attitudes. This research group was formed in response to the dramatic impact of COVID-19 on the economy and working arrangements. The professors and their colleagues conduct monthly online surveys to collect detailed information on WFH challenges and benefits.

 

More About the Donut Effect

From “The Donut Effect: How COVID-19 Shapes Real Estate” by Arjun Ramani and Nicholas Bloom (SIEPR Policy Brief, January 2021):

 

The pandemic has redefined how many Americans work, forced more of us to find refuge in our homes, and called into question the necessity of those dreaded commutes to a downtown office.

 

We are seeing these issues play out in real estate markets. Single-family home prices are on the rise — increasing 7 percent during the past calendar year. Meanwhile, commercial real estate demand has remained relatively flat — perhaps a surprise given the massive shift to working from home.

 

But underneath these aggregate trends lie a substantial reallocation of demand away from city centers toward city suburbs for the largest metro areas in the U.S.

 

This creates what we call the “donut effect”: rising prices in the suburbs and slumping prices in major city centers being hollowed out by a fear of crowds and the growth of working from home.

 

Nicholas Bloom is the William Eberle Professor of Economics at Stanford University, a Senior Fellow of SIEPR, and the Co-Director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research. His main research interests are on measuring and explaining management and organizational practices across firms and countries, and trying to use this to explain differences in firm and country level growth. He also works on innovation and IT, looking at factors that affect these such as competition, tax, learning and Government regulations. A third area of research is on the causes and consequences of uncertainty, arising both from one-off events like the 9/11 terrorist attack and the Cuban Missile crisis, and also from slower-moving uncertainty fluctuations over the business cycle.

 

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