According to the “urban doom loop” hypothesis, reduced demand for office space would lead to a collapse in commercial real-estate values and, in turn, a decline in city revenues and services—which would then push even more businesses and workers out of the city.
The Urban Doom Loop Could Still Happen
City economies are booming, but the risk of a commercial-real-estate crash remains as real as ever.
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...For decades, office demand has been correlated with macroeconomic indicators, meaning that when the economy is strong, so is demand for commercial real estate. A model developed by the Commercial Real Estate Development Association (commonly and confusingly known by the acronym NAIOP) has done a pretty good job of predicting and explaining office demand based on GDP growth, corporate profits, employment, and other economic indicators since the early 1990s. But starting in 2022, that historic relationship broke down. As the economy emerged out of the pandemic, the model predicted that net office demand would increase by 43 million square feet. In reality, net demand was nearly 90 percent lower than expected and, by the following year, had turned negative, meaning more space was vacated than leased.
What explains the divergence? The obvious culprit is the rise of remote work. . .
What explains the divergence? The obvious culprit is the rise of remote work. . .
Within the academic community, there is some debate as to whether factors besides remote work, such as interest rates or recession expectations, are also to blame for persistently high vacancy rates.
- One thing is clear: Even if the economy continues to grow and unemployment remains low, high office vacancies will have an adverse impact on municipal budgets and residents’ quality of life. Lower crime, a rebound in tourism, and a slight increase in population won’t be enough to offset the loss of revenue from commercial property and business taxes because of lower rents and lower spending from regular commuters. Cities can diversify their tax base, but that would require changes to the physical environment that take years to materialize, plus direct investment and tax incentives. It would also necessitate a sense of urgency and determination that has been lacking in many cities—particularly in light of the recent “comeback.”
Uploaded: Jul 4, 2023
🔥 𝐅𝐑𝐄𝐄 Newsletter: Understand What’s Moving Markets — In Minutes! http://www.realvision.com/rvdb , Looming catastrophe in U.S. commercial real estate is nothing new, but now the stakes are even ...
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