During the height of the pandemic when remote working was forced on many of us, there were concerns about the impact widespread remote working might have on cities, especially in city centers. Stanford’s Nick Bloom coined the so-called “donut effect”, and it’s the subject of a recent study looking into the hollowing out of central financial districts and the growing popularity of suburban neighborhoods.
The study shows that the 12 largest cities in America have lost around 8% of downtown residents since the pandemic, with most of those moving to the suburbs. This has had a corresponding impact on the number of city center businesses, which have also declined. Interestingly, however, it’s a phenomenon that is largely confined to bigger cities.
Lack of bounce back
Bloom suggests these findings are likely to be a surprise for policymakers who had assumed that city centers had recovered from the pandemic and regained their vibrancy. Instead, the study suggests that the pandemic-era changes have endured and resulted in lasting change to our cities.
“The good news for these cities is that the donut effect isn’t getting bigger,” the researchers explain. “Longer term, the evidence points to the donut effect as their new normal.”
The resilience of the donut effect is predominantly because the allure of working from home has remained, despite high-profile efforts to force workers back to the office. The suburbs affords workers the chance to get larger and more affordable properties, which in addition to the lack of commute makes remote work highly valued.
Hard choices
Bloom argues that this is going to force urban planners to make some hard choices, with the flight of high-earners to the suburbs resulting in a closure of businesses, an emptying of offices, and a reduction in public transit volume. They found that this has resulted in a sharp fall in home values, which will have a knock-on effect on property tax revenues.
“The donut effect has created a lot of fiscal stress for major U.S. cities that is going to be very difficult to overcome,” the researchers say. “Tax revenues have gone down, and spending has gone up. Meanwhile, the suburbs are making hay while the sun shines.”
They track the changes to city centers using real estate data, change-of-address forms from the US Postal Service, GPS data from an automaker, and Mastercard records on consumer spending. This allowed them to discover that the donut effect is far from an American phenomenon but is also evident in other large cities around the world.
Moving out
The data reveals that people leaving downtown areas, defined as a 2-mile radius around the city center, typically relocate 10 to 15 miles away. Beyond that distance, the effect fades because hybrid workers want to live close enough to make commuting two or three days a week manageable.
In mid-sized cities like Cleveland, Indianapolis, and Nashville, where fewer people work from home, the donut effect is much weaker or doesn’t exist at all. Smaller cities such as Des Moines, Iowa, or Boulder, Colorado, also show no signs of the effect, since more jobs there, like retail and manufacturing, require workers to be on-site.
For America’s largest cities, this trend brings tough choices: cutting spending, raising taxes, or rethinking the role of downtowns.
“Remote work is often seen as a win for businesses, employees, and society,” the researchers say. “But the losers are big-city centers.”
It’s unclear whether this shift will ultimately benefit places like Manhattan or San Francisco. One potential upside? As housing costs in the suburbs rise, essential workers and others with lower-paying, in-person jobs may find it affordable to live in the cities again. That, the researchers suggest, could breathe new life into urban centers while solving long-standing affordability issues.
