There’s been a sudden spike in worrying about city problems created by declining commercial real estate (CRE) values, especially urban office buildings where increased working from home (WFH) has reduced in-office work. But instead of a CRE “apocalypse” or “urban doom loop” that some are predicting, we may just see increased economic and budget pressures, the latest chapter in America’s long-term neglect of its cities.
Although the “doom loop” argument highlights real challenges, it’s a mistake to suggest American cities were in great shape prior to the Covid-19 pandemic. This framing appears in a widely discussed recent essay in the New York Times by Thomas Edsall, “How a ‘Golden Era for Large Cities’ Might Be Turning Into an ‘Urban Doom Loop’.”
As my new book Unequal Cities (from Columbia University Press) points out, American cities have suffered persistent inequality for decades. It’s true that pre-pandemic, American cities were doing better in many ways — lower crime, growing populations, and appreciation from some scholars and policymakers that cities are important drivers of the nation’s economic innovation, prosperity, and growth. But it wasn’t a “golden era.”
Edsall relies on an excellent recent paper from Columbia University professor Stijn Van Nieuwerburgh, which views significantly increased WFH as permanent, with “broader implications for investors in equity and debt markets, productivity and innovation, local public finances, and the climate.” He contrasts a troubled urban future with recent decades, “which were in many ways…a golden era for large cities.”
The urban “doom loop” would start with increased WFH reducing urban jobs and commercial real estate values, leading to lower tax revenues and reduced city services (including police, transit, and sanitation), leading to more WFH, etc. Edsall seems to endorse the view “that the shift to working from home, spurred by the Covid pandemic, will bring the three-decade renaissance of major cities to a halt, setting off an era of urban decay.”
Van Nieuwerburgh also has a first-rate recent paper with New York University’s Arjit Gupta on falling CRE values in New York, where they introduced the concept of an “office real estate apocalypse.” As I discussed here in September, their strong empirical work is sobering, but also looks like a worst case scenario that doesn’t envision much potential mitigation from alternative uses of excess office space.
There’s no question WFH has slowed office use, especially in some central business districts, and that slowdown in turn is hurting commercial real estate values and city budgets. Of course, the Federal Reserve’s continuing interest rate hikes and apparent pursuit of a recession to fight inflation aren’t helping either.
But there are two problems with the “doom loop” discussion. First, real estate markets always fluctuate. Edsall’s essay quotes Harvard economist Ed Glaeser on potentially dire urban scenarios from CRE problems. But Glaeser also notes “conventional economic theory suggests that real estate markets will adjust to any reduction in demand by reducing price” and that’s not always a bad thing. If financial markets have over-valued CRE assets, then there will be a correction, but not necessarily an “apocalypse.”
Underused office buildings, including older and less competitive ones, still have value. I’ve written about how they can be converted into residential real estate or other uses. Edsall does quote the great urbanist Richard Florida, who notes that “downtowns and the cities they anchor are the most adaptive and resilient of human creations; they have survived far worse.”
University of Southern California economist Matthew Kahn (whose work should have been referenced in Edsall’s essay) sees expanded WFH as a force that can revive cities, especially older second-tier ones. This could lead to a more balanced national economy with wider opportunity not concentrated in a few superstar cities.
And contrasting a mythic urban “golden age” against the pending “doom loop” is dramatic, but misleading. America’s metropolitan form and politics are consistently biased against cities, and urban inequality has been persistently high for decades.
Cities anchor regional economic prosperity but are surrounded by literally hundreds of politically independent suburbs which reap many economic benefits without fully sharing costs. Cities bear a disproportionate share of those costs—education, poverty, crime, aging infrastructure, a constrained tax and revenue base—reproducing inequality and racial discrimination. Federal and state policies and aid also disfavor cities, making it very hard for them to fight inequality on their own.
Of course, a commercial real estate meltdown will make cities’ problems even harder to solve. A CRE meltdown and attendant city budget and social pressures would be another episode in how badly we treat cities and their residents. But America always has disliked and disfavored its cities, and we shouldn’t view current urban problems through distorting rose-colored glasses that see a lost “golden age” for American cities.