The “Urban Doom Loop:” A Possible Economic Threat?
High inflation and continued talk of a pending downturn continue to impact commercial real estate – and not positively. In a recent article, The Washington Post introduced another potential hazard: The urban doom loop.
In this case, “urban” doesn’t mean only New York, San Francisco or Chicago. Instead, “many economists are even more worried about midsize cities that have fewer ways to offset the blow when a major company slashes office space, the sale price of a building craters, or a downtown turns into a ghost town,” the article said.
The article describes the worst-case scenario:
- More remote workers means companies might rethink their leases or pull out of them
- This would increase vacancy rates, making it more difficult for landlords to attract new tenants or to sell for an attractive price.
- Property owners would struggle to pay their mortgages
- Business districts would empty, with “shoppers and tourists (having) fewer reasons to venture downtown to eat or shop, choking off spending.”
- Restaurants and retail stores would lay off employees and shut down, adding to the problem
This specter is bad enough in a large metro area. But smaller cities “have a much bigger chasm to cross than what New York City has to go through,” Stijn Van Nieuwerburgh told the Washington Post. Nieuwerburgh, a real estate and finance professor at Columbia University’s Graduate School of Business, coined the turn “urban doom loop” in a late 2022 paper published by the National Bureau of Economic Research. “The situation is worse in those places with so little else in place,” he said.
The Washington Post acknowledged that the “spiral” has yet to kick into gear. Many cities still have a cache of stimulus cash from the American Rescue Plan 2021. Additionally, many mortgage loans aren’t due for at least another year or two. “Plus, the economy continues to defy the odds,” the article stated.
Additionally, not all metros will experience a spiral. On the other hand, some cities might be more exposed to a potential doom loop due to local tax legislation. “You can’t make a 100% true general statement about any class of cities because they each have their own bespoke revenue structure that has evolved over time,” Brookings’ commercial real estate expert Tracy Hadden Loh explained to the Washington Post.
But there are signs of concern. Midsize cities are experiencing some of the highest office delinquencies and the lowest occupancy rates. “You are going to see some trickle effects, but the downpour is yet to be seen over the next 18 to 24 months,” Lonnie Hendry, a senior vice president at Trepp, told the Washington Post. “It is very early in the cycle.”
Article courtesy of Amy Wolff Sorter of Connectcre
<< Back
