by Steve LeVine: From airlines to Starbucks, a massive part of our economy hinges on white-collar workers returning to the office…
or a decade, Carlos Silva has been gluing, nailing, and re-zippering shoes and boots at Stern Shoe Repair, a usually well-trafficked shop just outside the Metro entrance at Union Station in Washington, D.C. On a typical day, he would arrive at 7 a.m. and stay until 8 p.m., serving the crowds of professionals shuttling by on their way to work. But since the near-shutdown of office work and train travel, he has been closing the shop at 4 p.m. “There is no traffic, my friend. The whole station is dead,” says Silva. “Now it’s only a part-time job.”
In the five months since the coronavirus forced a lockdown of U.S. businesses, economists have focused much attention on the devastation of mom-and-pop businesses, brick-and-mortar shops, bars and restaurants, and massive chains. But they have mostly overlooked a looming threat to a vastly larger and more consequential galaxy of businesses, one worth trillions of dollars a year in GDP and revolving around a single, much underappreciated economic actor — the white-collar office worker.
As companies in cities across the U.S. postpone and even scrap plans to reopen their offices, they have transformed once-teeming city business districts into commercial ghost towns comprised of essentially vacant skyscrapers and upscale complexes. A result has been the paralysis of the rarely remarked-upon business ecosystem centering on white-collar workers, who, when you include the enterprises reliant on them, account for a pre-pandemic labor force approaching 100 million workers.
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These workers shopped at small businesses like Silva’s shoe repair shop: dry cleaners, gyms, food carts, florists, and pharmacies. But they were also among the most vital customers and source of revenue for a slew of larger, less obvious businesses — food delivery companies like Grubhub and Uber Eats, and companies like Xerox, the maker of printing supplies. Amid Covid-19, workwear destinations Brooks Brothers and J.Crew have filed for bankruptcy protection, with Brooks Brothers selling itself last month. And, on its quarterly earnings call in late July, Starbucks attributed the loss of some $2 billion year on year to deserted urban office corridors. Starting off their day at home, remote workers are simply not queueing up in the same numbers for a morning venti latte.
It will save these companies leasing costs and their employees their commutes, but at what cost to the rest of the economy?
Meanwhile, in the air, white-collar workers previously kept a parallel economy buzzing, with business travel accounting for 60% to 70% of all airline revenue. While leisure getaways have also been obliterated, it turns out the bigger punch is the Zoomification of business meetings, a cancellation of business travel that analysts expect to persist for up to two or three years.
And the move to remote work doesn’t show signs of stopping anytime soon. In recent months, many companies, including JPMorgan Chase, Ford Motor, Twitter, and REI have announced some version of a long-term or permanent work-from-home future. On Friday, Pinterest turned heads when it announced it would pay a $89.5 million contract penalty to cancel its lease on a flashy new 490,000-square-foot office building planned in San Francisco, citing a permanent shift to remote work. The pandemic has convinced these and other companies that their employees can perform their jobs, perhaps even more productively, at home, allowing a massive shrinkage of corporate America’s physical office footprint. It will save these companies leasing costs and their employees their commutes, but at what cost to the rest of the economy?
White-collar workers and coffee have been intertwined since the caffeinated beverage arrived in Europe in the early 17th century. Within just a few decades, some 300 coffeehouses had sprung up in London to serve merchants of all types, brokers, and others doing business nearby. It was the same in Austria, France, Germany, Holland, and Italy. The fledgling office economy had been born.
Of course, “office work” didn’t start with the Enlightenment, nor in an office — Roman scribes kept records in public squares bound by government offices and shops. But two centuries later, the fully integrated white-collar office became a necessity with the colossal economic boom of the Industrial Revolution. Enabled by a slew of late-19th-century inventions — the skyscraper, the internal combustion engine, and the electrification of lighting, elevators, and underground trains — workers could leave relatively distant homes for the city, and stay comfortably once they got there.
But who would maintain all this new machinery? If they were no longer lunching at home, what and where would all these workers eat? And wouldn’t they need serious sartorial services since they would now be frequenting each other’s offices every working day of the year? So it was that, around the world, cities saw the rise of a new age of immense yet compact office-centered economies.
Office-dwelling road warriors — a primary profit center for the travel industry — are now homebound Zoomers, resulting in a bloodbath for airlines and hotels.
But now, suggests MIT economist David Autor in a paper last month, the office economy is under threat. The pandemic, he and his co-author, Elisabeth Reynolds, a lecturer at MIT, write, has made a permanent shift to remote work for a large part of the office workforce a near certainty. And with that, tens of thousands of workers in the office support economy — those who “feed, transport, clothe, entertain, and shelter people when they are not in their own homes” — will lose their jobs.
The implications for the office economy are stark. Office-dwelling road warriors — a primary profit center for the travel industry — are now homebound Zoomers, resulting in a bloodbath for airlines and hotels. Business travel in July was down 97% from a year earlier, the Wall Street Journal reported, and an estimated $2 trillion in corporate travel will not happen this year. Last week, American Airlines said it will eliminate service to 15 cities in October, thus reducing its flying capacity by 55%, and that, unless it receives additional bailout cash from the government, it will furlough and lay off some 19,000 workers, about a third of its staff. Delta says it will furlough 1,941 pilots if it can’t get more money as well. In August, Virgin Atlantic outright filed for bankruptcy. In the longer term, current and former airline executives say the shift in office culture to Zoom means the decline in corporate passengers is likely to be permanent.
The travel pain is broad. The hotels that typically cater to business travelers are in a crisis, with some poised for bankruptcy. As of July, 23.4% of mortgage-backed loans extended to hotels were delinquent at least 30 days, amounting to $20.6 billion. That compares with $1.15 billion in pre-pandemic delinquent loans, and $13.5 billion at the peak of the 2008 recession. Last month, in a letter to Congress, hundreds of hoteliers, led by the American Hotel and Lodging Association, asked for forbearance on the debt. In early August, Marriott reported its worst loss ever in the second quarter, and MGM Resorts on Friday laid off 18,000 workers, a quarter of its pre-pandemic workforce.
Meanwhile, a less conspicuous victim of the remote revolution is companies such as Xerox, whose revenue fell 34.6% last quarter as many offices locked down and did not proceed with planned or possible equipment purchases. The lockdown also caused a 45% drop in quarterly revenue for Aramark, which provides food catering to big sports stadiums, schools, and offices. At 3M, too, for whom a sizable chunk of sales are to industries reliant on the office economy, sales fell 13% in the second quarter year on year. One culprit was the hit to airlines, which cut into 3M’s bread-and-butter abrasives and adhesives business, and a 25% plunge in demand for supplies such as Scotch tape and Post-it notes, perhaps the most iconic signifiers of the corporate workplace.
The shift in the office ecosystem is rattling the status quo in some of the most expensive cities known for potent and prestigious white-collar jobs. A conspicuous example is real estate markets. Untethered from the office, many workers are electing to leave. In an August 19 note to clients, Goldman Sachs said that droves of people are leaving New York in search of much cheaper and more spacious digs in the Carolinas, Georgia, and Florida. In Manhattan, the flight has created double the apartment vacancies of a year ago, at about 13,000 in July, and an average 6.1% drop in rents, the largest decrease in nine years, according to a report by Miller Samuel, a real estate appraiser. Tech and other white-collar workers are fleeing San Francisco, too, where rents for one- and two-bedroom apartments are down by 11% from last year, according to Zumper, an apartment listing site.
This flight is visible in smaller cities too, particularly in the restaurants that relied on lunch and cocktail hour traffic from the sprawling offices. Dan Georges, the owner of Lexi’s on Third, a New York-style deli in downtown Columbus, Ohio, says he has lost around half his business to Zoomification. Prior to Covid-19, Lexi’s buzzed with business from Chase Tower, the 25-story office building in which it’s located. But since March, the building has been all but empty, and now he relies on business from hard-hats working on nearby construction sites and longtime loyal customers from the suburbs. He knows that some or many of his regular white-collar clientele will not return once the pandemic has passed, but hopes Lexi’s will survive based on its quality and prices. Other restaurants will close, he says.
This is the scenario in downtowns across the country. Goldman Sachs says that the number of seated diners across the country was down by 54% the week ending August 16 compared with the prior week. In New York, more than 1,200 restaurants are closed permanently, and analysts estimate that a third of the city’s small businesses as a whole may be shut for good.
The problem is so big that it is imperiling the economies of the cities themselves. The pandemic, MIT’s Autor and Reynolds write, will bring “a decline of the economic centrality, and even the cultural vitality, of cities.” According to a survey by the National League of Cities, 90% of cities expect an average 13% decline in revenue next year — mostly income and sales taxes, the revenue associated with white-collar workers. It’s the highest decline in the survey since the financial crash. Houston, for instance, had a 13% drop in sales tax in May, 17% in April, and 10% in March. “This has been a 50-state natural disaster of sorts,” says Mark Hamrick, chief economist at Bankrate, “where the buildings have been left standing and largely vacant.”
Yet the implosion of the office economy is not necessarily a black-and-white story of ruination. The resilience of cities is a pillar of economic history. Wars, economic downturns, and catastrophic natural disasters have come and gone, but very few major cities have outright disappeared or even been permanently held down. On the contrary, most have revived themselves in much the same economic and demographic shape as before their respective crises.
Regardless of the length of the recovery, it looks likely that airlines and hotels will have to shrink, die, or reinvent. And, in a profound forced makeover, the cities will have to reimagine themselves as well.
In World War II, the U.S. firebombed Tokyo and other major Japanese cities, obliterating much of the economy. But within about a decade and a half, most had essentially recovered, and in another 15 or so years, local companies and workforces were challenging the U.S. for the commanding heights of key global industries like automobiles and electronics. In an influential 2002 paper, Donald Davis and David Weinstein, both professors at Columbia University, said the Japanese recovery showed that long-lived cities undergoing great temporary shock tend to bounce back. Such cities, Davis and Weinstein asserted, have an almost innate persistence that confounds outside shocks.
Of course, 15 years is a long recovery, a protracted period that would have its own devastating and irreversible impact on a generation of entrepreneurs and many of the workers employed by them. Regardless of the length of the recovery, it looks likely that airlines and hotels will have to shrink, die, or reinvent. And, in a profound forced makeover, the cities will have to reimagine themselves as well, with a severe potential hit to years of national GDP for the country as a whole.
But even if offices do not reopen at their same scale, many of their white-collar workers can move to less expensive places, notes Lee Branstetter, an economics professor at Carnegie Mellon. That will relieve congestion and reduce office and housing rents in so-called superstar cities like New York, San Francisco, and Boston. Businesses and middle-class white-collar workers currently priced out of these markets could then afford to live there. Many current restaurants, bars, pharmacies, and dry cleaners may not survive, but others would replace them, targeting this different clientele — perhaps “less shi shi,” Branstetter said. “But definitely not emptying out. And that doesn’t sound like the end of the world.”
