High inflation and continued talk of a pending downturn continue to impact commercial real estate negatively. The Washington Post recently introduced another potential hazard: The urban doom loop. This concept does not only apply to large cities such as New York, San Francisco or Chicago, but also many 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 downtown turns into an abandoned area.
The worst-case scenario would include more remote workers causing companies to rethink their leases or pull out altogether; this would increase vacancy rates making it difficult for landlords to attract new tenants or sell at an attractive price; property owners struggling with mortgage payments; business districts emptying due lack of shoppers and tourists resulting in less spending on restaurants and retail stores which could lead them laying off employees and shutting down – further exacerbating the problem.
Stijn Van Nieuwerburgh from Columbia University’s Graduate School of Business coined “urban doom loop” in late 2022 paper published by National Bureau of Economic Research noting that smaller cities are particularly vulnerable due having little else in place if they experience such spiral effect. However there is some hope as many metros still have access stimulus cash from American Rescue Plan 2021 plus mortgage loans aren’t due for at least another year so economy might yet defy odds while not all metros will experience this spiral – some being more exposed than others depending on local tax legislation according Tracy Hadden Loh from Brookings’ commercial real estate department who noted each city has its own revenue structure evolved over time . Midsize cities are however experiencing highest office delinquencies & lowest occupancy rates according Lonnie Hendry , senior vice president at Trepp who warned it’s very early cycle & trickle effects may be seen over next 18-24 months but downpour yet come .
