For major U.S. cities, the ‘donut effect’ persists

What is the shelf life of a freshly baked donut? Two days, tops.

But when it comes to an entirely different kind of donut – one that Stanford economist Nicholas Bloom described early in the pandemic when he measured the exodus of people from city centers to city suburbs – there appears to be no expiration date.

That’s the key takeaway of Bloom’s research of the “donut effect,” a term he helped coin that refers to the hollowing out of big-city financial districts, the rising attraction of surrounding areas, and the impacts on local economies. Since the pandemic, the country’s 12 largest cities have cumulatively lost 8 percent of their downtown dwellers. Three-fifths of the households that left moved to nearby suburbs, according to the study, which was published recently in the Proceedings of the National Academy of Sciences (PNAS).

Bloom also finds a steep drop in the number of businesses located in the business centers of these major metro areas, which include New York, Boston, Atlanta, Chicago, Dallas, Los Angeles, and San Francisco. Meanwhile, the donut effects for other U.S. cities have either been much smaller or haven’t happened at all.

For policymakers and business leaders in large urban centers, the study results may come as a surprise given widespread perceptions that their downtown economies are bouncing back to pre-pandemic health.

But Bloom and his co-authors – using rich data on real estate demand, migration flows, commuting patterns, public transit use, and consumer spending – conclude that’s not happening. And the flight from city cores promises to reshape America’s largest cities in the long run, they say.

“The good news for these cities is that the donut effect isn’t getting bigger,” says Bloom, a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR) and the William Eberle Professor of Economics in the Stanford School of Humanities and Sciences. “Longer term, the evidence points to the donut effect as their new normal.”

The reason, according to the study’s authors, is because of the staying power of working from home – particularly for high-skilled workers who made up the bulk of downtown exits during the pandemic. Having discovered suburban life to be more spacious and affordable, they aren’t coming back, Bloom says. They won’t have to: His ongoing research – with Steven Davis, a longtime collaborator who is also a SIEPR senior fellow, and others – about remote working consistently shows that the future of work is a mix of in and out of the office.

For big-city urban planners, Bloom says this means that hard choices will have to be made. As suburbs boom from the influx of new, higher-income taxpayers, city centers are reeling from the steep drop in public transit riders, shuttered shops, and the now-vacant office and residential spaces.

For example, in their study, Bloom and his co-authors – Arjun Ramani, an MIT doctoral student in economics, and Joel Alcedo of the Mastercard Economics Institute – calculate a sharp divergence in home values between city centers and the suburbs that began with the pandemic. Using data from Zillow, they show a 40-percentage-point gap as of last year. That’s bad for city 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,” says Bloom, who is also a professor of economics, by courtesy, at the Stanford Graduate School of Business. “Tax revenues have gone down, and spending has gone up. Meanwhile, the suburbs are making hay while the sun shines.”

The future of downtown districts

Bloom and Ramani, then a SIEPR research assistant, first measured the donut effect – and introduced the term – in 2021, about a year into the COVID-19 pandemic. In a SIEPR Policy Brief, they identified COVID-19 fears and working from home as the key drivers of the phenomenon, and said it could reverse once the pandemic subsided.

Their PNAS study revisits that early analysis using both updated and new data. For example, on top of Zillow real estate values, the researchers track United States Postal Service change-of-address forms and GPS data from a large U.S. automaker. They also introduce Mastercard records on consumer spending for 118 cities around the world, which not only allowed them to show for the first time that the donut effect has also occurred in Sydney, Berlin, Toronto, and other global metro areas, but also to shed critical light on the economic impacts on city centers versus city suburbs.

Looking at U.S.-specific data, they find that, of the households that left big-city downtowns, 58 percent migrated to surrounding suburbs, 9 percent went to other top 12 cities, 29 percent relocated to smaller cities, and just 4 percent moved to rural areas.

Bloom and his co-authors find that the donut effect not only has persisted, but also is driven by working from home. This is especially so for the biggest metro areas, which have large numbers of skilled workers with high incomes and the flexibility to work from home. The data also show that workers who left city centers – which the researchers define as a circle with a 2-mile radius – moved up to 10 to 15 miles away. The donut effect begins to deflate more than 15 miles away because, the researchers conclude, hybrid workers want to live close enough to their jobs to the lessen the costs of commuting to work two or three days a week.

In U.S. cities where hybrid work is less common, Bloom and his collaborators find significantly smaller or even non-existent donut effects. For example, medium-sized cities like Cleveland, Indianapolis, and Nashville have lower working-from-home rates and haven’t lost large numbers of downtown dwellers to surrounding suburbs. And in the country’s smallest cities – think Des Moines, Iowa or Boulder, Colorado – many more job categories, such as retail or manufacturing, require workers to be in person. In these cities, Bloom and his co-authors don’t detect donut effects.

What does this mean, then, for the country’s biggest cities? Painful choices that will likely involve cutting spending, raising taxes, and restructuring their downtowns, Bloom says.

“I often say that work from home is a ‘win-win-win’ because businesses, employees, and societies are better off,” Bloom says. “But there are some losers, and the most obvious ones are the centers of big cities.”

It’s not clear yet whether the donut effect will ultimately be good for Manhattan or San Francisco’s financial district or any other big U.S. city, Bloom says. But he says there could be at least one silver lining.

“As essential workers and others with lower-paying, in-person jobs get priced out of the suburbs, they might be able to afford living again in the big cities where they need to be every day,” Bloom says. “That would probably be good.”

“Stanford University, officially Leland Stanford Junior University, is a private research university in Stanford, California. The campus occupies 8,180 acres, among the largest in the United States, and enrols over 17,000 students.”

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