How Remote Work and Household Formation Affect Apartment Rents
There is a tradeoff between how many people want space and how much space they need when forming households.
A new study out of the Economic Innovation Group considers a puzzling question that directly involved commercial real estate. As EGI Chief Economist Adam Ozimek and Associate Economist Eric Carlson wrote, “If remote work has reduced the demand for living in big cities, then why have their rents gone up so much?”
An excellent question for an industry that should want to understand a curious dynamic of an unusual time. Near the heart of the question, at least for Ozimek and Carlson, is the issue of extensive margins and intensive margins. Used in economics, the two terms refer to use of resources: how widely a resource is used (extensive) and how intensely or to what degree the resource is used (intensive).
In labor economics, extensive margin is the number of people working and intensive margin is the amount of effort workers put in. There is a balance between the two. More people can be available to do work (extensive), or people can work longer hours (intensive) to get something done.
The analysis suggests that remote work can have mixed effects and not a simple cause-and-effect chain.
“Consistent with the emerging literature, we show that remote work in expensive and dense places causes less housing demand through out-migration, which helps to explain why big cities have seen declining population and relatively weaker rents and house prices,” they wrote. “However, we show that is counterbalanced by remote work also causing a surge in household formation.”
That brings things back to the extensive and intensive margins. Big cities see a decrease of extensive margin—fewer people living in the city—but more household formation, which means higher consumption because households need more space than individuals.
The researchers looked at two classes of data. One involved detailed post-pandemic remote work rates and the other, local housing market data.
“We find that remote work has increased the demand for housing at both the intensive and extensive margins for households and individuals,” they wrote. “Remote households spent more on rent and mortgages than otherwise comparable non-remote households. In addition, remote households were more likely to have moved into their home within the last 12 months, and individuals who worked remotely were more likely to head their own households.”
Those working remotely tended to spend more on rent or home values, except for Public Use Microdata Areas (PUMAs) that had high population densities and expensive housing markets. “However, in these dense and expensive PUMAs, the positive effect on the household formation helped offset the population loss,” they wrote. “In short, one reason places that lost population nevertheless saw robust housing markets was that they had stronger household formation.”