How Commercial Real Estate Can Kill Cities - The Urban Doom Loop

In recent years, major American cities such as New York and San Francisco have found themselves caught in an increasingly concerning cycle known as the "urban doom loop." Characterized by declining tax revenues, vacant commercial spaces, and a reduction in public services, this loop poses significant challenges for urban centers. The COVID-19 pandemic has accelerated these trends, but a look into pre-pandemic patterns reveals deeper roots.

The Acceleration of Urban Trends

Pre-COVID Trends: Before the pandemic, shifts in urban economies were already underway, with e-commerce impacting retail spaces and signs of stress in commercial real estate.

Pandemic Acceleration: The advent of remote work led to a mass exodus from cities, drastically reducing commercial real estate income and thereby affecting urban tax revenue.

NYC Income Tax Revenue

In 2021, personal income tax accounted for 28.7% of NYC's total tax revenue. In Q1 of NYC's fiscal year, tax revenue was down $7 billion.

Why do we need Affordable Housing? 2.6 million Americans are cost burdened by rent, paying over 1/3 their income towards housing.

Public Services

Stijn Van Nieuwerburgh, a professor of real estate at Columbia Business School, highlights a critical repercussion: as tax revenues fall, cities are forced to cut spending on essential services such as public safety, sanitation, transportation, and education. This reduction in service quality makes cities less attractive to live and work in, further exacerbating the exodus and revenue decline.

Essential Public Services

1. Public Safety: Police, fire departments, and emergency services.
2. Sanitation and Waste Management: Essential for public health.
3. Transportation: Road maintenance and public transit systems.
4. Education: Public schools and community education.
5. Health and Social Services: Public hospitals and social assistance.
6. Recreational Facilities: Parks and community centers.

The Domino Effect on Urban Appeal and Economy

The deterioration of public services creates a domino effect.

• Decreased Attractiveness for Residents and Businesses: As services decline, cities become less appealing to both residents and businesses, potentially leading to further migration and revenue loss.
• Long-term Economic Impacts: The decline in public services can lead to a decrease in property values, further diminishing tax revenues. It also impacts workforce quality and economic productivity.

Fun Fact: Infrastructure projects date back to ancient Mesopotamia, when they built the first roadways in 4000 BCE.

Projections and Future Scenarios

A striking example of the urban doom loop can be seen in the office sector. MSCI Real Assets reported that the value of distressed US commercial real estate neared $80 billion in the third quarter, with office properties accounting for 41% of the total. This distress reflects a significant shift in workplace dynamics and poses a direct threat to urban financial stability.

Looking forward, the situation appears challenging. US commercial-property values fell 9% in the year through September, with transactions plunging 53%. Analysts project that without intervention, these trends could deepen, leading to further degradation of public services and urban livability.

A Glimmer of Hope in Urban Innovation

The challenges are real, but so are the opportunities. With innovation and imagination, our cities can transform challenges into stepping stones towards a more vibrant, sustainable urban future.

• Smart City Initiatives: Imagine cities that think like a computer, optimizing traffic flow, energy use, and even public safety in real-time. Smart city technology isn't just a concept—it's a beacon of hope in tackling urban challenges.
• Sustainable Building Practices: Green roofs, energy-efficient designs, and eco-friendly materials aren't just good for the planet—they're a breath of fresh air for our cities. These practices promise a sustainable, resilient urban future.
• Adaptive Reuse of Vacant Spaces: Picture abandoned warehouses turned into vibrant community centers or empty office buildings reborn as affordable housing. The adaptive reuse of spaces is not just creative; it's a practical solution to urban decay.

Why do we need Affordable Housing? There are roughly 40 million households in danger of becoming homeless.

Pre-Pandemic Housing Affordability

Political Policy Suggestions

Addressing the urban doom loop requires a multifaceted approach.

Local Policy Initiatives:

• Tax Incentives for Property Development: Local governments could offer tax breaks or incentives for developers to refurbish vacant properties, especially for affordable housing or community-centered projects.
• Zoning Flexibility: Adapt zoning laws to allow for more mixed-use developments, which can invigorate neighborhoods and make them more resilient to economic shifts.
• Public-Private Partnerships (PPPs): Encourage collaborations between the public sector and private entities to fund and manage public services and infrastructure projects.

Federal Policy Recommendations:

• Infrastructure Investment: Focusing new projects on public transit, green spaces, and digital connectivity. Significant investment in urban infrastructure can enhance the appeal of cities and drive economic growth.
• Educational and Workforce Development Funding: Boost funding for educational programs and workforce development, particularly in technology and green industries, to prepare residents for future job markets.
• Housing Policy Reforms: Revisit federal housing policies to encourage the development of affordable housing and combat homelessness, which is crucial for maintaining vibrant urban communities.