The Last Thing San Francisco Needs Is More Home Offices

(Bloomberg Opinion) -- For a decade, Americans have endured rising rents in the cities where the best jobs are. Some hoped that the post-pandemic era would reverse this trend, as people moved out to the suburbs and worked from home. But in fact, remote work is likely to exacerbate the rent problem rather than relieve it, because of demand for larger houses.

The pandemic has been an economic disaster, but it offered a glimmer of hope for urban residents squeezed by sky-high rents. If only some of those high-value workers could be persuaded to move out of the city center, the thinking went, places like San Francisco would become affordable for the masses again. And the pandemic trend toward work-from-home seemed to be a way this could happen. American workers have gotten used to the lifestyle of remote work, and it also carries many productivity benefits.

But this future is a mirage. The vast majority of remote work won’t be fully remote; people will still come into the office at least one day a week in a hybrid model  that leverages both the flexibility of remote work with the benefits of face-to-face human interaction. And if workers still need to commute at least part of the week, then they'll still want to live near their offices and the high demand for city living among the well-heeled will persist. Already, rents are rising again as Americans flock back to cities.

In fact, the rise of hybrid work will put even more upward pressure on demand for urban living space. Because if you work from home two or three days a week, you probably want a dedicated study in your home. For many, this requires a larger house. Real estate brokerages report that this shift is already happening.

The report predicts that this will increase demand for big houses in the suburbs. Some of that will surely happen, which will continue a trend we’ve seen during the pandemic. But there are a couple reasons to think the desire for bigger homes will extend to urban areas as well.

First, because transportation infrastructure isn’t going to get magically better overnight, the people who do move out to the ‘burbs for that extra study room are going to have to endure punishing commutes on the two or three days that they do go in to the office. The wealthier people are, the less they like spending hours out of their week stuck in traffic.

Second, the distinction between city and suburb in the U.S. is not as clear as in other countries. A lot of urban space is zoned for single-family housing, and these houses will be attractive to people who want to have a home study while living near their office buildings.

And third, there’s the possibility of remodeling. Wealthy urban homebuyers or landlords looking to attract well-heeled renters can knock down walls and combine smaller units to make larger ones.

So instead of moving out, many of the very well-heeled are likely to spend the extra money for a larger place in the city. That’s going to mean rising prices at the high end. But that price pressure will trickle down to the lower end of the market. Rich people paying a premium for bigger places will price some people out of existing large units, despite rent stabilization. And remodeling to combine small condos and apartments into bigger ones will put a squeeze on available space. The people displaced by these changes will move into housing that’s currently occupied by lower-income residents, and so on, in a cascade. Eventually, demand will filter through to all segments of the market, and the urban affordability crisis will continue.

So what can be done to head off a second decade of America’s affordability crisis? The only real solution is what reasonable urban residents were already trying to do before the pandemic: build more housing supply.

Fortunately, there has been some progress on that front. The California Senate just passed a pair of bills to allow duplexes and other modest increases in density throughout the entire state, overriding local zoning rules. It’s a small victory, but it could be only the start -- there are measures in the works to expedite environmental review for new homes and use state funds to build public housing.

Meanwhile, the federal government may finally get involved. The Biden administration has announced a plan to build and sell 100,000 homes cheaply to the private sector -- a mini-version of the approach Singapore uses to keep housing affordable.

This is all very encouraging. It will take many years to push significant supply expansion to full fruition, and even more years to actually build the structures. But with demand for urban space set to rise even more, increasing supply is still the only way forward.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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