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CRE Perspectives

What comes next? The uncertain post-COVID future

William Strange

SmartCentres Professor of Real Estate, Rotman School of Management, University of Toronto

March 8, 2021

The Rotman School was fortunate to partner with CityPost for a panel on housing markets on February 25th, 2021. It should surprise no one that COVID-19 dominated the discussion.One COVID-19 issue of first order importance is how Toronto and other cities will look in the future.

The panel was largely of the view that Toronto will return, after painful adjustment, to something fairly closely resembling the pre-COVID city. Toronto has delivered for its residents, creating enough value that households pay a huge premium to live here. If vaccines are able to restrain transmission and reduce severity -- both events that public health authorities see as likely -- then there would be no barrier to returning the city to as it was before COVID-19.

But could Toronto do better? In responding to COVID-19, the possibility of working from home has become a reality. Such a situation is certainly lonelier than working in a crowded office, and the loss of interactions with co-workers seems likely to have a cost in productivity as well. Even so, many firms, including Google, have announced that working from home will continue to a degree as offices re-open. Many workers, though not all, have expressed hope that working from home could continue, at least for part of the work week.

Why are employers and workers receptive? Because working from home has the potential to create value. A worker who stays home a few days a week incurs lower commuting cost. With fewer days commuting, it becomes possible to consider locating farther from the office, possibly even in a different metropolitan area. Working from home will tend to increase the demand for space, which tends to push households to less central locations. where housing is less expensive. Toronto's many appeals are counterbalanced by Toronto's high cost of living, specifically its unaffordable housing and long commutes. Even a partial switch to working from home can help alleviate these costs.

All of this means that, while Toronto could return to its fairly happy pre-COVID situation, it may be possible to do better by re-imagining the city. This is not a prediction that Toronto will empty out, rather that it will look different. Some activities that were downtown can be moved. This has happened before, and recently, as various "back office" activities such as filing and clerical support were moved out of expensive downtown locations to cheaper places, often in the suburbs but sometimes offshore. Households can spread out, taking advantage of new working-from-home technologies in the same way that previous generations took advantage of new commuting technologies.

It is not possible to know for sure exactly how the recovery from COVID-19 will play out, so it is worth considering empirical evidence of the initial responses. A recent paper of mine (Rosenthal et al, 2021) considers commercial real estate markets across a sample of large US cities. In large, dense, transit dominated cities, the pattern of commercial rents changes significantly in a way that is consistent with decentralization. Commercial rents typically decline as one moves away from a market's central business district. Our research shows that this rate of decline falls by roughly 20% after the onset of COVID-19. This means that businesses are willing to pay a smaller premium than previously to be near downtown. And these are long term leases, roughly five years in length, so this is not simply a temporary response. Perhaps, the premium will rise again when the costs of the disease itself have abated. But perhaps they will not. If fewer workers are downtown, there is less reason for any given firm to locate downtown in search of interactions and synergies. And if the work can be carried out effectively outside of the office, there is less demand for central business districts. The evidence so far is suggesting not an abandonment of central business districts, but instead a weakening of their appeal.

This pattern for commercial real estate markets is echoed in residential markets. Gupta et al (2021) estimate the amount that housing prices and rents fall as one moves away from a city's central business district. Looking across a sample of US cities, they find that the premium for being closer to downtown has fallen, and considerably. Pre-COVID, prices fell by 4% per mile. Post-COVID, the decline is only 0.5%. As with commercial leases, the reduction in the price of a long-lived asset suggests that this is not just a temporary response. And the change in price is larger the greater is the city's potential to expand working from home.  Again, the evidence so far is not in favor of a return to exactly what we had, but instead to a situation where cities and downtowns still matter but there is more decentralization.

Cities are centers of productivity, and firms and their workers are drawn to them for both their productivity and the "city lights" of their urban amenities. The post-COVID reset will not change this, and in fact, new capacities for interaction at a distance may make cities better able to accommodate growth with a smaller increase in housing unaffordability.



Gupta, A., V. Mittal, J. Peeters, and S. Van Nieurbergh (2021), "Flattening the Curve: Pandemic-Induced Revaluation of Urban Real Estate," Working paper.

Rosenthal , S., W. Strange, and J. Urrego (2021), "Are City Centers Losing Their Appeal? Commercial Real Estate, Urban Spatial Structure, and COVID-19," Working paper