Across the country, downtowns, office spaces and shopping centers are at risk of becoming ground zero in a new economic crisis: the urban doom loop. The concern is that the global commercial real estate catastrophe could spiral and slow economic growth. commerce, destruction Local tax revenue is also increasing. Since the pandemic sparked a boom in remote work, locations such as New York and San Francisco have drawn attention for vacant offices in previously bustling skyscrapers. But many economists say more about medium-sized cities that have fewer means to offset the blow if big companies cut office space, building sales plummet, or downtowns become ghost towns. Are concerned.
Worst case scenario would be: As more people work from home, companies from Milwaukee to Memphis are reviewing or canceling contracts altogether.This increases vacancy rates and makes it difficult for landlords to attract new tenants or sell their buildings. at a healthy price.
When that happens, property owners may struggle to pay off mortgages and settle other debts. business district is depleted, squeezing tax revenues from commercial real estate and employee wages. shoppers and tourists Less reason to go downtown to eat and shop, curb spending and coercion fired at a restaurant retail store.
“Once the office is empty, there are few places to replace it, and the after hours are less enjoyable,” said Stein van Neuwerberg, a professor of real estate and finance. He is a professor at the Columbia University Graduate School of Business and one of the authors of the paper that coined the term: The phrase “City Ruin Loop”. Medium-sized cities “have to cross a much larger chasm than New York City has to cross. In areas where little else is being done, the situation is even worse.” , added, “This is a train wreck seen in slow motion.”
Economists warn that train wrecks like this aren’t a certainty and the spiral isn’t starting anywhere yet. There are several reasons. Many cities are still relying on historic levels of national and local stimulus aid from 2021. American Rescue Plan, these funds may not run out for another year or two. Most business balances and mortgages aren’t even coming due in the next few years. Moreover, the economy continues to run counter to expectations, alleviating fears that large-scale job cuts and lower consumer spending could trigger this perilous loop.
Yet the Federal Reserve highlighted Commercial real estate is one of the risks to financial stability. And often in already vulnerable places, troubling signs pile up. Mid-sized cities have the highest office delinquency rates, where building loans are behind schedule, and some have the lowest office occupancy.
The average delinquency rate in the nation’s 50 largest metropolitan areas is around 5%. But in places like Charlotte, North Carolina and Hartford, Connecticut, the percentage is almost 30 percent, according to data from real estate analytics firm Trep.
Similarly, uptime averages around 87%. But just 71 percent in Oklahoma City and 76 percent in Memphis and St. Louis.
Experts warn that the trend could easily escalate, especially as real estate refinancing begins. “We’re going to see some drizzle effects, but we haven’t seen any heavy rains for the next 18 to 24 months,” said Ronnie Hendry, senior vice president at Trep. He is “very early in the cycle.”
Continuing from last year, the concept of Doom Loop the study Originally from Van Neuwerberg. Then came the kind of story that rarely follows academic papers, a flurry of media inquiries, and at least one inquiry. headline He called Van Neuwerberg the “Prophet of Urban Ruin”. But all research reveals that the doom loop is not inevitable everywhere.
While some cities will not face a downward spiral at all, others may suffer differently from vacant commercial space. Tracy Hadden-Law, a commercial real estate and governance expert at the Brookings Institution, said: He said some cities were already struggling with office vacancies before the pandemic and were not facing an entirely new phenomenon. How cities have used their stimulus funds, and when they will run out, is also important.
Importantly, volatile tax regimes mean that certain locations are more at risk than others. For example, Chicago and Boston have large office spaces and are heavily dependent on property tax revenue. Philadelphia, on the other hand, relies more on wage taxes from commuters than on real estate, and income could dry up if people don’t make it to their offices. “It really depends on the city,” Lo said. “Local tax structures are very important in the United States. You can’t make a general statement that is 100% correct about any class of city because each city has its own bespoke revenue structure that has evolved over time. because there is.”
Yet every day, with new mortgage defaults and failed building sales, it’s clear how few solutions there are. In cities large and small, some property owners are turning empty offices into something else entirely: apartments, kitchen spaces or even spas. But these workarounds, even if they work, can be prohibitively expensive. In addition, these solutions are not widespread on a large scale.
In Minneapolis, many of the stressed loans are concentrated in downtown buildings that are struggling to attract new customers. In March 2021, Target announced plans to vacate the main complex there and cut leases on about one million square feet, roughly three-quarters of the total available space. building. Major retailers kept other large Minneapolis leases, and the 3,500 office workers who worked in City Center instead Other major headquarters in town.
Brian Anderson, director of market analysis at Koster Group, said the move was a big blow to downtown Minneapolis. Due to the vacant space, there has not been much interest from prospective tenants. “The more these companies choose to leverage remote and hybrid work, the more important it will be. It will make a big difference,” he said.
Downtown Washington is in a different kind of predicament. The district experienced a historic low in office leasing activity in the first quarter, with only 900,000 square feet of office leases signed.This is down from the 5-year quarterly report average According to Trep, the area is 2 million square feet.
Bottom line: Demand for office space is getting weaker, with little sign of a turnaround. Much depends on what happens to the more than $5 trillion in commercial real estate debt around the economy and the $2.75 trillion in commercial real estate debt. Housing loan It is expected to reach maturity by 2027.
A looming wave of deadlines could hit local banks the hardest. Regional banks hold roughly two-thirds of the nation’s total commercial real estate debt (excluding office space alone), making them more vulnerable to what happens in individual cities. Economists have been concerned about regional financial institutions since the banking crisis earlier this year, when the economy plunged into a sudden crisis after the collapse of two medium-sized companies.
what else What happens in the broader economy is also important. The Fed is still trying to keep inflation under control, promising to keep rates high for as long as necessary. The aim is to slow the economy by cooling demand for loans and investment. seems to be working. The July report stated that lender Demand for commercial real estate loans is declining as banks tighten their standards.
As such, Hendry said he fears the doom loop could be caused by factors large and small. “If you have a 3.5% mortgage and want to refinance it at 7%, it’s inevitable, regardless of geography,” he said.
