High inflation and continued talk of a pending downturn continue to have an adverse effect on commercial real estate. In a recent article, The Washington Post introduced another potential hazard: the “urban doom loop.” This term refers to many economists’ worries about midsize cities that lack the resources necessary to offset major losses in office space, building sales prices or downtown activity.
The worst-case scenario involves remote workers causing companies to rethink their leases or pull out altogether; this would increase vacancy rates and make it difficult for landlords to attract new tenants or sell at attractive prices. Property owners would struggle with mortgage payments while business districts empty due lack of shoppers and tourists spending money at restaurants and retail stores which could lead employees being laid off further exacerbating the problem.
This specter is particularly concerning for smaller cities as they may not have enough resources available compared larger metros like New York City according Stijn Van Nieuwerburgh, professor at Columbia University’s Graduate School of Business who coined this phrase in late 2022 paper published by National Bureau of Economic Research . However there are some mitigating factors such as stimulus cash from American Rescue Plan 2021 plus mortgage loans not due until next year/two years from now along with economy continuing its current trajectory despite odds against it.. Additionally local tax legislation can also play role in whether city experiences spiral effect or not according Tracy Hadden Loh , Brookings’ commercial real estate expert .
Midsize cities however are experiencing highest office delinquencies & lowest occupancy rates so Lonnie Hendry , senior vice president at Trepp believes we will start seeing trickle effects over next 18-24 months but downpour yet be seen..
