The City, Growth, and the Virus

If you live or work in a city, you have a greater chance of being exposed to them. It could happen at the office coffee machine, or at Starbucks, or while waiting at the bus stop. They can be transferred from one person to another whenever there is contact between people. And not only that, but they tend to mutate at lightning speed. Once they are rampant, there’s no way to contain them. Face masks don’t help. Vaccination is futile. But fortunately, none of this necessary. I’m not speaking about virus particles. No, I’m referring to something else, with an equally viral impact: ideas.

We owe our wealth – for a significant part – to the “contagiousness” of good ideas and their tendency to “mutate”: to merge with other good ideas. There was no need for Elon Musk to invent the wheel, and Steve Jobs didn’t have to go through the bother of developing the internet before he launched the iPhone.

Still, every new idea needs a springboard in order to evolve and be disseminated. And what better place for this than a city? The presence of universities, cultural institutes and venues, as well as restaurants and cafés where people can meet – whether by chance or not – plays an important part in this. Like they say in Silicon Valley: “Knowledge travels at the speed of coffee. Cities are a determining factor in economic growth: the bigger the city, the higher the productivity.”

The circumstances that facilitate the exchange of ideas are, unfortunately, also those in which the novel coronavirus easily spreads. Cafés, bars, and restaurants have once again closed their doors because of the virus, and many people are working from home.

Will cities still serve as an engine of economic growth in the post-COVID era? The virus has caused us to break quite a few ingrained behavioral habits. The thirty-day period apparently needed for habits to be broken is easily reached by most people who work from home. Once the big teleworking experiment is over, not everyone will want to return to the regimen of five days at the office. You may have missed your co-workers, but seeing them only a few days a week is probably more than enough.

Teleworking can structurally decrease the demand for office space, as well as the demand for housing in cities. Commuting becomes less important while space becomes more important. An exodus from the city can only reinforce this trend. Coffee corners and bars were already having a difficult time due to the debts they incurred during the lockdowns. A decrease in spending by residents and commuters doesn’t make it any easier. If the range of facilities diminishes in terms of diversity, this will also impact the attractiveness of a city.

Whether this is an ongoing trend still remains to be seen. The fact that there are television shows these days about how much you will benefit in terms of space and housing when you leave the city is illustrative of this. Architect Rem Koolhaas – creator of numerous urban landmarks – made the following remark on the Dutch TV show Buitenhof: “If you live in the city, you’re a loser.”

How does this affect the investment portfolios of pension funds? First of all, the relative attractiveness of different types of real estate can change within a real estate portfolio – examples include distribution centers in favor of offices. At the same time, this is a trend we’d been anticipating, and which is only accelerating due to COVID.

If cities become a less prominent platform for the exchange of ideas, an important growth engine will disappear. This ultimately translates into lower returns, or a more expensive pension.

But the question remains, of course, whether or not this will be replaced by something else. Perhaps we’ll find new ways of cross-fertilization while spending part of our time working from home – possibly with the aid of new technology. Ideas about this are more than welcome now. So, if you have a good idea (preferably a bit contagious and sensitive to mutations): please share it!

Charles Kalshoven is a senior strategist at APG