The CBD will survive: Forecasting the impacts of the Covid-19 pandemic on long-term firm location preferences

Agglomeration is typically used to explain the benefits of central business districts (CBDs) in large urban areas, but the pandemic has called into question the primacy of CBDs. Previous studies have relied on observational data that uses past behaviour as a predictor of future behaviour. Instead, we conducted a stated preference experiment with 789 businesses to generate robust predictions about the likely future behaviour of firms. Controlling for differences between our sample and the target population in terms of firm size, sector, revenue, and location, we estimate that the average compensating rent differentials for CBD locations are positive and estimated to be $875 per sqm per annum, higher than current market rent differentials in most Australian urban areas. We take this to mean that a substantial proportion of firms strongly value CBD locations and are willing to pay a significantly large premium for the same. Our findings indicate that the changes that were observed in relation to firm location preferences during the pandemic, sometimes characterised as the “donut effect,” are unlikely to be sustained in the long term as the underlying demand for commercial real estate in CBD locations is still strong.