Just one more reason to go north.*
From the Washington Post, August 28:
A commercial real estate apocalypse — especially in midsize cities — could spiral into the broader economy
In Indianapolis, the technology giant Salesforce is paring back a quarter of its office space in the tallest building in Indiana, where it has been a key tenant for the past six years. In Atlanta, the private investment giant Starwood Capital defaulted on a $212 million mortgage on a 29-story office tower. And in Baltimore, a landmark building sold for $24 million last month, roughly $42 million less than it fetched in 2015.
All across the country, downtowns, office spaces and shopping centers are at risk of becoming ground zero for a new economic hazard: the urban doom loop. The fear is that a commercial real estate apocalypse could spiral out and slow commerce, wrecking local tax revenue in the process. Ever since the pandemic drove a boom in remote work, hubs such as New York and San Francisco have drawn attention for their empty offices in previously bustling skyscrapers. But many economists are even more worried about 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 a downtown turns into a ghost town.
The worst-case scenario would go like this: With more people working from home, companies from Milwaukee to Memphis are rethinking their leases or pulling out of them altogether. That drives vacancy rates up and makes it harder for landlords to attract new tenants or sell buildings for a healthy price.
Then property owners might struggle to pay off their mortgages or clear other debt. Business districts would dry up, stifling tax revenue from commercial properties or employee wages. Shoppers and tourists would have fewer reasons to venture downtown to eat or shop, choking off spending and forcing layoffs at restaurants and retail stores.
“Once those offices are empty, there are few alternatives and not a lot of life after hours,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s Graduate School of Business who is one of the authors of a paper that coined the “urban doom loop” phrase. Midsize cities “have a much bigger chasm to cross than what New York City has to go through. The situation is worse in those places with so little else in place.” He added, “It is a train wreck in slow motion.”
Economists caution that such a train wreck is not guaranteed, and the spiral has not kicked into gear anywhere yet. There are a few reasons: Many cities are still leaning on historic levels of state and local stimulus aid from the 2021 American Rescue Plan, and those funds may not run out for another year or two. A large share of the outstanding business and mortgage loans are also not due for a few more years. Plus, the economy continues to defy the odds, dampening concerns that widespread layoffs or drops in consumer spending could trigger this dangerous loop.
Yet the Federal Reserve has highlighted commercial real estate as one of the risks to financial stability. And troubling signs are piling up, often in places that are already vulnerable. Midsize cities have some of the highest rates of office delinquency, where loan payments on buildings are behind schedule, and the lowest rates of office occupancy.
The average delinquency rate across the 50 largest metro areas in the country is about 5 percent. But in places like Charlotte in North Carolina or Hartford in Connecticut, it is almost 30 percent, according to data from the real estate analytics company Trepp.
Likewise, occupancy rates average about 87 percent. But in Oklahoma City, it is just 71 percent, and 76 percent in Memphis and St. Louis....
