I’ve previously written about the push to get more government workers to Return to the Office (RTO), notably federal workers. Given some recent announcements at the city and state levels, I’d like to focus this blog on the economic impact of government workers returning to the office as opposed to working from home (WFH) most of the work week.
In mid-July, a judge denied approximately 4,500 workers of the City of Philadelphia an injunction against an order by Mayor Parker. The order, issued back in March, required the remaining WFH employees and those on a hybrid schedule back to the office immediately. The Mayor promised the local business community in February that she would boost the city economy by bringing back all 26,000 city workers, which became a source of contention with city employee unions.
She also challenged private sector companies to follow the example of large employers like Independence Blue Cross and Comcast that have called employees back to the office full-time. The Mayor’s order was not solely for the benefit of the city’s business climate. Philadelphia lost tens of millions of dollars in commuter wage taxes each year when city-based employees worked remotely in both 2021 and 2022.
An almost identical situation is occurring in Seattle, where Mayor Harrell just announced a new RTO mandate for the city’s 14,000 workers. Starting in November, city employees will be required to work on-site at least three days a week. Once again, the reasoning was both economic and an attempt to boost the city’s tax base, although the Mayor also stressed the need for collaboration that occurs more seamlessly with in-office work.
Similar calls at the state level occurred late last year in Michigan, where certain Health Department and Corrections workers were asked to switch from fully WFH to a hybrid schedule in the hopes of boosting the downtown Lansing economy. The capital city is dependent upon state workers and many businesses have had to close since the pandemic. Specifically, the amount of vacant office space has skyrocketed mostly due to the lack of state workers commuting into the office.
Although they aren’t government workers, a shift away from a mostly WFH to a mostly in-office policy for Amazon employees boosted the surrounding businesses and local economy. Restaurants/bars, food trucks, parking garages, pet boarders, and fitness centers are all examples of businesses in the South Lake Union neighborhood of Seattle that have benefited ever since Amazon moved to an at least three days per week policy. While the shift in May 2023 was not popular with workers at the time, it clearly resulted in more foot traffic inside Amazon offices, and in nearby businesses.
Prompted by a 2023 General Accounting Office (GAO) report revealing very low occupancies in many federal office buildings, D.C. Mayor Bowser pushed for higher rates of RTO by federal workers last year. And, if that wasn’t going to happen quickly, she preferred for the excess real estate holdings within the city to be released for redevelopment.
Former New York City mayor and prominent Democrat Michael Bloomberg complained about federal employees working from home last year as well. The billionaire also mentioned the costs of empty office space and pointed out the difficulties faced by small businesses and citizens who rely on timely and efficient government services.
These calls spurred President Biden to act, culminating with his Chief of Staff asking agency heads in January 2024 for concrete plans on federal worker RTO. However, with strong worker protections, union representation, and individual department and manager discretion, the improvements have been slow. In mid-2024, restaurant and office demand are still struggling, the latter placing Washington, D.C. ahead of San Francisco for of office buildings with loans at risk of default.
What does a possible shift away from WFH for government workers mean from an economic perspective?
There are three main implications:
Economic Jolt to the Downtown Core
All of the downtown businesses that service daily commuters have suffered, first during the pandemic, and then after as workers largely shifted to and stayed WFH. The RTO of workers at higher rates will increase small business revenues and boost employment, which will boost the overall downtown economies of all the cities with high levels of government workers.
Stabilization of Office Space Demand
Eventually, small businesses will adapt and can always relocate if workers never come back at high rates. The bigger question is what to do with millions of square feet of office space that is now sitting mostly vacant. Landlords relied on the stability and predictability of government tenants paying their leases; ironically, these tenants currently have the most risk in terms of demand.
Government worker RTO will not only stabilize office space demand directly, it will also boost indirectly the demand from all the businesses that interact with the government like law firms. In addition, retail storefronts will also begin to be leased again from all the small businesses that cater to the 9 to 5 crowd during the work week.
Increased Costs to Individual Workers
There is no such thing as a free lunch. Commuting into the office isn’t free although many government workers get mass transit and parking subsidies. Higher expenditures on gas, clothing, and food among other items will be incurred from individuals now leaving their home office more regularly. But as one D.C. bar owner lamented, he wished federal workers saw the WFH “debate as more than a personal cost-benefit calculation.”
As more federal, state, and local government workers return to the office on a consistent basis, the economic impacts are mixed depending upon whether you benefit from downtown activity or are the individual who now needs to commute more often. But the long-term effect should clearly be beneficial to the downtown business core.
In many cities, government employees are a relatively large and well compensated contingent. Their lack of in-office presence set downtown areas back economically and in terms of vibrancy during the pandemic and their higher rates of WFH delayed or mitigated the impacts of commercial workers’ RTO. Perhaps most importantly, the demand for downtown office space will stabilize quicker if this large and influential group of workers finally head back into the office in large numbers most of the work week.