London is on its knees – so can it survive the pandemic?
For the great cities of the developed world, the scars will remain. Boris Johnson’s outline of how the UK will reopen its economy does not, in truth, do much for London. Work from home if you can. Hospitality one of the last sectors to reopen. Air travel? Who knows?
Anyone who can remember London or New York in the 1970s knows what it feels like when a once prosperous metropolis is in trouble. The glitter is gone; the money is tight; the magnet for talent is weaker.
London is a good proxy for global cities, though New York has similar and in some ways more troubling messages. I will come to those in a moment. On paper, London pulled through the first downturn in rather better shape than the rest of the UK economy – down 16 per cent in the second quarter against about 21 per
cent for the economy as a whole. But that is not what it felt like, or indeed feels like now. Central London and the City, in particular, are deserted.
The explanation is that some sectors, such as government services, banking and insurance, were down very little and their relative resilience offset the collapse in tourism and entertainment. But those services were being done largely from home. The numbers looked not too bad, but the reality for city life was dreadful.
In New York, much the same has occurred. The city is slowly opening now but running a cinema with 25 per cent capacity and no more than 50 people per screen is not going to generate much of a fun feeling.
Thanks to the financial market boom, the New York economy appears fine. The largest bank, JP Morgan, had a good year with record trading revenue. But to an even greater extent than London, the wealthy had moved out, perhaps to their summer place on Long Island, or more troubling, to Florida. The less wealthy mass of people, who run the services that keep the show on the road, were stuck with a collapse of business.
Now to the most concerning part. If wealthy Londoners can work from a second home and that home happens to be in, say, Devon, then provided they keep their London address they go on paying the same tax. Their switch of base is bad for the economy of central London but the overall impact on the nation’s finances is small. If they move to Switzerland, that is a different game, but for most people this is not an option.
In New York, there is, in addition to the local impact, a blow for the tax base. If working from home means working from Miami, New York loses its local income tax and the nation as a whole loses revenue because Florida levies no income tax. What was a trickle suddenly became a flood, as the pandemic gave a huge boost to an already existing movement.
Politically, this is huge, particularly in New York, where Andrew Yang, a tech entrepreneur and CNN political commentator, is the Democrat frontrunner to become mayor. It will be a tough job. But for anyone thinking about the future of cities in general, it is probably more helpful to look at the economics rather than the politics.
So how quickly will the business come back? We cannot know but we can see two big questions, and the answers to those will give us a feeling for what will happen. The first is: how much does proximity matter? The second: what do the young want to do?
The first matters massively because if it really is as efficient to work from home, we do not need the central city offices. There is no consensus as to office occupancy once things settle down. Last autumn, people seemed to be drifting back to London offices but that fast disappeared with the current lockdown. In London, HSBC says it will cut office space by about 40 per cent. Noel Quinn, its chief executive, says: “There will be much more of a hybrid model of people working in the offices, but in a different way, but also working from home when they want to.”
In the US, average office occupancy is around 25 per cent, ranging from 36 per cent in Houston and 13 per cent in San Francisco. But current data does not give us much of a feeling for the future. If proximity actually produces higher productivity, then we will be back in the office.
Much less attention has been paid to the second question: “what do the young want?” We really have no idea. We know that, for generations, the most ambitious young people have flocked to the place where they
There will be much more of a hybrid model of people working in the offices, but in a different way, but also working from home when they want to
see the best combination of employment opportunities and social activity: jobs and fun. That has meant a boom for big cities the world over, and people have put up with limited living space and all the other downsides of city life.
Now it looks as though cities will be somewhat less pressured, and if the HSBC aim becomes standard, there will be a lot of real estate seeking new functions. Rents will come down. Cities will be more like Berlin – “poor, but sexy” – less like London or New York.
My guess is that big cities of the developed world will go a little way towards that vision of Berlin from its mayor Klaus Wowereit in 2003, but actually end up more like Deutsche Bank’s view of the city: “rich and innovative”.
Of this I am sure, though: it will be the young who save London, New York and the other great metropolises. The old can’t do it.