I’ve been wanting to write for some time about the outlook for the economy in the coronavirus era, but the topic is too sprawling to fit into one post. I’ll start with the very much diminished prospects for American cities, based in part on a trip to New York last week.
The overarching theme is unless effective treatments and prophylactics go into service on a widespread basis soon (and by “soon” I means three to four months), the damage to productive capacity will be severe and lasting. As we said earlier:
The related point… is that Covid-19 will do far deeper damage than most experts anticipate because it is reducing productive capacity on a lasting basis in many sectors: restaurants, hotels, entertainment, air transportation, conferences, and conceivably higher education. In the days of the Spanish Flu or even the Great Depression, there were far fewer highly skilled and specialized roles, so it was easier for men to find work in new fields when jobs opened up, and for machinery to be retooled. What do sous chefs, bartenders, university administrators, and pilots, to name a few, do for their next act? Remember how malls have become white elephants? What happens to Class A office space in big cities now that WeWork is a thing of the past, and white collar employers are seeking to keep as many staffers as possible working remotely?
Before going into analysis, indulge me by starting with impressions. I wish I could convey adequately how deep and widespread the impact of coronavirus has been on New York. And as someone who has always strongly preferred living in cites and has chosen to live in high density areas, the new normal now means that density is a negative for most workers and residents.
Thinning out cities (which is clearly has happened already in Manhattan, witness the mass exodus of the well off and the plan of many employers to keep as many of their staff as possible working from home) is at odds with their raison d’etre: residents accepting more cramped dwellings as a tradeoff for ready and easy access to entertainment, services, and people, along with that mysterious quality of vibrant street life. Cities are about conducting most of your activities on foot and having those peregrinations be interesting. Having so many coffee shops and specialized food vendors and more broad-scale grocery stores die, IMHO, negates much of the rationale for living in a city. If you can’t forage on foot, and you are ordering in, and you aren’t much going to restaurants and bars (or theater and museums), why are you living in a city? If your job does not necessitate living there, it’s time to pull out a calculator and look at the cost of having a car and moving versus the housing and other costs of suburbs or even the countryside.
Some contend that people live in cities only for careers (and possibly mating) opportunities. But that is belied by the breathless press of the last decade plus about how more people wanted to live in urban settings for the vibrancy and convenience. And in New York City, despite it being child-hostile, when the city got cleaner and safer when it put the fiscal crisis, more and more upper income parents, chose not to follow the conventional path of moving to the ‘burbs before their kids hit school age; more and more, they remained in the city.
As an aside, yes, continuing population decline of American cities is a huge negative for global warming. The car is the enemy of the climate.
And the tragic part is that the high odds of what I saw in Manhattan becoming the new normal for US cities is a massive self inflicted wound. Hong Kong and Seoul have gotten Covid-19 infections down to impressively low levels through widespread mask-wearing plus aggressive contact tracing and testing.
I could discern many vectors of damage on a less than 72 hour stay, where I was not playing tourist or journalist and making a point of trekking about or interviewing a lot of natives. This was a particularly difficult and not at all pleasant trip due directly to the way Covid-19 has cut service levels on many fronts. Admittedly, this may have been a bit worse than conditions will be on an ongoing basis since I happened to arrive during Phase 1 of the unlockdown, or whatever the formal name is. But hardly anything seemed to be open, including businesses I was told by neighbors that were able to. Were they regrouping or had they already decided to close?
This was in keeping with how empty the city was. I can’t recall ever seeing so few people on the street in Midtown down to the Flatiron district, except on a hot weekend summer day, and even then, there would be more traffic than I saw. Most places were boarded up, and it was impossible to tell if that was due to the coronacrisis or the recent looting.
It was also extremely difficult to get taxis. The only time it was not bad was when I had to go all the way uptown to find an open bank branch; the Upper East Side on Third Avenue seemed a lot closer to the old normal
The state of my hotel suggests how hard it is going to be for a lot of businesses to adapt. I stayed at the Park Lane on Central Park South because the Covid-19 pricing made it affordable and its location ought to have been advantaged in terms of getting a cab (I’m badly injured and need to keep walking to a minimum, and I don’t do ridesharing services). I was warned they’d have reduced service but no service except for housekeeping was a more accurate statement. No help with getting my bags to the room, even after begging for it and visibly limping when pushing the trolley. Often I could not get an answer when I called the front desk. People trying to call my room similarly said they couldn’t get an operator to put them through. And even when they could get through, the sound quality was generally poor.
It had been important to me in booking the hotel that there be a coffeemaker in the room. An agent at the reservations number had assured me that there was, but when I got there, there was none, and I was treated as a fabulist when I called asking where was the coffeemaker. The breakfast joint that would deliver not surprisingly had a minimum, but also wan’t offering a lot of items it had listed on its menu like oatmeal and salads, so I wound up with an awful lot of bottled water. Ordering dinner in was similarly a lot of work for little payoff. Hardly any places were delivering. Par for the course, one that said it did insisted I order online. When I tried, I could not enter an address but had to choose from a dropdown and my hotel’s address wasn’t on it. I wound up eating all three nights from a mediocre Japanese restaurant.
The point of this shaggy dog story is that if this is typical what nominal four star and lower hotels need to do to slash costs in light of low occupancy, who is going to want to stay at one even at a bargain price? The only reason might be having greater confidence in the regularity of their cleaning than an AirBnB, or perhaps access to a hotel gym. And this means that traveling for business or nominal pleasure is a hell of a lot less fun (and don’t get me started again on the airlines) at least until hotels start closing so the survivors get more bookings.
Now let’s look more surgically at why cities are in trouble. The concern about them being dangerous to health isn’t new; recall how Shakespeare fled London during one of its plague outbreaks. In the days of tuberculosis and polio, fresh air and clean water were seen as conducive to health; I’m told that one of the reasons New York City types are so keen on sending their kids to summer camp is that it’s a long-standing tradition, dating to the time when swimming pools were seen as possible transmissions mechanisms for polio.
The decision of so many companies to keep workers at home when they can isn’t just for their health; it’s likely even more for the benefit of their managers and the execs.
A partial list of some of the things now working against cities:
Elevators. People are now afraid of taking elevators with others, which makes going back to the old normal of crowded lobbies and packed cabs a no-go zone for most. Megan McArdle, in a recent Washington Post op-ed, predicted that “If you used to work in a high rise, and are now working at home, then odds are that, come Dec. 31, you will still be someone who used to work in a high rise, and now works from home.” Elevators were the first reason why; in skyscrapers, there’s not ready way to space out arrivals and exits enough to prevent crowding.
And this applies to residential buildings. One of my friends claimed she was having a great lockdown because skipping the elevator and regularly climbing four flights, sometimes with groceries, had gotten her in great shape. Manhattan has had decades of tearing down small old townhouses and putting up residential high-rises. Those are now looking like albatrosses.
Mind you, these fears are not well founded if people are wearing masks.
Yes. The contact tracing in South Korea suggests that elevator risk with masks is essentially zero. Worrying about this is not scientifically based.
— Sebastian H (@Sebastian_Hols) June 10, 2020
Even back in 1997, the one time I visited Seoul, there were many blocks of residential high rises (20+ floors) on the way in from the airport, so the South Koreans have a more than adequate sample of elevator riders.
And when you think about it a bit, this result makes sense. You aren’t waiting in the lobby next to or crammed in an elevator with others for very long. The passengers seldom talk to each other, so that eliminates a high-risk event. So what you are left with is the occasional cough or sneeze. Going out for a drink or being in a cube farm next to someone who is on the phone most of the day is far more hazardous, but that isn’t how most people see the risks.
Mass Transit. New York City had already seen declining ridership on its subways before coronavirus thanks to investor-subsidized local transportation services like Uber sucking passengers away. Fares plunged during the lockdown since no one was supposed to be out and about; I had no feel as to how much activity had rebounded, but the death of activity in business areas says “not much” even before allowing for reservations about getting into subway cars. I did see more bikes out than when I lived there, but not considerably more.
Communters show a much clearer picture. Remember that nearly two million people used to come into Manhattan daily, with the suburbanites the biggest group, using the Metro North and the Path and to a much lesser extent, busses.
Yet even with the number of people in Midtown visibly very low, the word from execs and top managers who have to trek in for a deemed-to-be-necessary in person meeting say transportation is strained. Why? Anyone who has the option is driving rather than taking mass transit in. Yet Manhattan has been designed on the premise that most people who commute in would take public transportation most of the time. My contacts say that the garages and parking lots are packed. Supporting their claims, I noticed when I left, at around 11:15 AM, that the inbound lanes on and approaching the Queensboro Bridge were packed.
The Coming Thinning Out Reduces Density and With It, Attractiveness. Friends in the New York area estimate that half its restaurants will die. In the business areas, that number looks low. The same is true for all the little retail shops that depended on lunch time or after work traffic. And it’s also in order for hotels. Many need to shutter so the survivors will have high enough occupancy levels to be able to provide at least adequate service.
Mind you, what you’ll have is much like the Wall Street area of my youth, when there were only three restaurants good enough for recruits, where most ate at their desks and the order-in options were limited in number and merely OK in quality, and the near-office shopping was sparse. But this isn’t what urban workers have come to expect, and the absence of all that store stuff will feel like a degradation.
So while this kind of thinning of nearby businesses won’t make a business district unworkable, just boring and not very hospitable, it’s a different matter entirely for residential neighborhoods. Most people expect to have a decent grocer, a pharmacy, and say a bank and dry cleaner not too far, meaning a five to ten minute walk. Big bonus points for amenities like a good bakery or coffee shop. Who wants to live in residential blocks with nothing nearby and rely entirely on ordering in? That’s the lockdown lifestyle that most were desperate to see end.
Next Order Effects Will Further Damage Urban Life. It’s a no-brainer that municipalities will face big drops in tax revenues, which will lead to service cuts and make cities grubbier and nastier.
We already have commercial tenants, even ones that can afford to, not paying landlords. The bigger ones are very good at fighting to get their assessments lowered, so bye bye a big chunk of property tax income. The same is true on the residential side. Owners that can’t pay their property taxes and mortgages will default and face foreclosure. Even if banks leave the borrowers in place (which they did in some locales like Las Vegas in the crisis just past because it was cheaper for them to have the to-be-ex-owner maintain and secure the house), that does not solve the city’s tax arrearage.
Let’s continue down the list. Sales taxes stay down due to diminished restaurant bookings and lower retail spending generally. Older consumers and those with compromised immune systems will be particularly reluctant to go out and shop. Hotel taxes have plunged and will stay low. User fees for public transportation will also stay depressed, forcing systems into schedule reductions and fare rises, risking putting their systems in a death spiral.
And municipal jobs will be cut, leading to more losses of local sales and property tax revenues.
My write-up is if anything far too anodyne. From Mike Hiltzik’s column last week in the Los Angles Times, An apocalyptic collapse in state and local government employment is already upon us:
Employment by state and local governments has fallen off a cliff….
The employment report issued June 5 by the Bureau of Labor Statistics showed that state and local government employment fell by 571,000 jobs in May. The month before, the loss was 964,000, for a two-month total of 1.535 million public sector jobs lost.
And the disaster may just be starting. Estimates of the size of the deficits faced by state and local governments through 2022 from the combination of heightened public health spending to combat the coronavirus and sinking revenues due to the economic shutdown and its continuing reverberations range from a catastrophic $500 billion through fiscal 2022 to a cataclysmic $959 billion through the end of next year….
“No state will escape the financial black hole created by this crisis,” Zandi told CNN last month.
Hiltzik is looking at both state and local governments broadly, as opposed to just cities, but the general point holds: a lot of damage has already occurred, and more is baked in unless the Feds ride into the rescue. How likely is that on anything other than a token scale? And you can be sure that any relief will be designed to be stingy with blue cities.
Before you think the severe downside is limited to particularly dense, lotta tall building cities with good public transportation, think twice. Other cities have gotten in similarly exposed positions via making tourism-related businesses important to the local economy. Consider Polar Donkey’s report last week:
I work at a very large restaurant in Memphis. Our business is predominantly tourists when there isn’t large events happening downtown (baseball game, concert, etc). Very few people are working in offices anymore. The hotels are at 20% occupance. No large events. We are allowed to seat at 50% capacity and on Monday will be able to go to 75%, but it will not matter because only doing 25% of our normal business. Restaurants in other parts of town that have local customer base have been able to switch over to take out/delivery pretty well. One restaurant I know was able to maintain its sales volume with half its staff.For decades now, Memphis has been focused on building it’s downtown. NBA arena, AAA baseball stadium, offices, resataurants, condos, and bunches of hotels. Baseball team hasn’t played a game this season and will most likely move to Peoria. NBA team trying to go to Seattle or Law Vegas. 5 new hotels will likely fold. Several restaurants will go under. Office space is empty and new construction halted. Covid19 is neutron bomb for downtown Memphis.
And the power struggle with police forces may prove to be another negative for commerce and budgets (and do not forget that we think making the police need to be brought to heel even if the short term cost looks high). I’ve heard from a few people on the ground that the police in Manhattan are refusing to pursue reports of crime in progress. The perception that cities might become dangerous isn’t a plus.
As I so often say, I wish I were wrong, but I can’t see a reason to be optimistic.