The Donut Effect

And what it means for your business

Nope this article isn’t about gaining wait from visiting the donut shop too often.  It’s a real term that describes what is happening to businesses in the post-pandemic culture.

So, what is it? The “Donut Effect” is the hollowing out of American cities.  Thanks to the increase in remote work fewer people are living in cities and urban areas. In a 2021 paper, Stanford scholars Arjun Ramani and Nicholas Bloom coined the phrase “donut effect” to describe how COVID-19 was transforming America’s major metropolitan areas. Before the pandemic, people paid top dollar to live in the cities. But when COVID hit, people stopped going to the office, bars and restaurants shut down, and the urban lifestyle became a lot less enticing. Some of this stems from the rigid pandemic related restrictions within cities. 

This would have dramatic implications for the future of American cities. White-collar jobs tend to pay more than other jobs. As remote work catches on, millions of affluent professionals will have the option to live outside the major metropolitan areas. The suburban towns will not be just bedroom communities anymore.  People will live, work, eat out and do other social activities within their own communities. Businesses in services such as food services and retail, will have to expand existing operation or open new ones outside of city centers and downsize or close some of their operations within the city. The geographical shift described here will make labor shortages more severe in periphery counties in large metro areas.

What does this mean for the future of work?

• It’s reshaping our real estate market
• Companies understanding there is not a “lock tie” of where you live and work
• Businesses evaluating if brick and mortar is necessary
• Retail and food service will need to expand either online or outside the cities
• Understanding the disconnect between unemployment and available job openings
• Reshaping of how specific jobs are performed
• Companies that adjust the geographical footprint of their work force before others will have a first-mover advantage, establishing brand recognition, customer loyalty, and early purchase of resources before other competitors enter the region.

This standoff between employers and employees has big implications for the future of urban geography. The two types of virtual work that will impact cities are hybrid work and full-time virtual workers.  If the norm is to drive to the office only 2-3 days a week it will increase the value of homes at the edges of major metropolitan areas and will accept longer commutes if they only have to do them a few times per week. On the other hand, fully remote workers will leave the cities all together.  This scenario exacerbates the continuation of the donut effect.

As one author wrote, “America’s superstar cities will become less important.”