That Good Ol' Urban Doom Loop

I wrote about this once before.

Basically, the “Urban Doom Loop” is the idea that remote and hybrid work arrangements will kill downtowns. As they kill urban cores, cities will have a harder time collecting taxes, so cities will then tighten belts and core elements of a city’s infrastructure will suffer (I suppose this is in the absence of “public-private partnerships”).

Per Planet Money recently:

Nearly 20% of office space across the U.S. is sitting empty, a milestone that exceeds the vacancy rate following the 2008 financial crisis. It’s worse in downtown Los Angeles and San Francisco , where 28% and 29% of spaces were registered vacant in the first quarter of 2023, respectively.

Analysts worry that this trend could set off a domino effect: If companies continue to give up their office leases, their landlords may not be able to keep up with mortgage payments, increasing the risk of defaults and foreclosures. The unraveling of the office sector also poses risks for regional banks and the ecosystems of downtowns in cities around the nation.

The regional banks thing is obviously troubling. You probably remember a few waves of news headlines about bank collapses and bailouts, no? Planet Money continues in this way:

Office owner Columbia Property Trust defaulted on $1.7 billion in debt tied to seven buildings in San Francisco, New York City, Boston and Jersey City, N.J., in February. That same month in Los Angeles, Brookfield, the city’s largest office owner, defaulted on loans for two buildings downtown. In fact, if you were to take the 40 largest office spaces in downtown LA, landlords for roughly a quarter of them are said to be in talks with lenders about their own financing troubles, according to sources familiar with those discussions.

This distress in the office market is a troubling development for banks. The bulk of these debts — estimated to be worth $1.2 trillion — is owed to smaller regional banks. They’re already facing turmoil following a series of collapses and takeovers this year.

So basically, if the office market dies, there’s a domino effect where other elements of the economy also start to wither — as well as the potential dynamism of cities.

I think there’s a couple of different things happening here. There was a period in maybe late 2020 and early 2021 where some companies, especially bigger tech companies, seemed re-bullish on office space. Facebook bought a ton in NYC around Penn Station, for example. It seems like, much with the whole “we will all live in the metaverse” idea, Facebook missed the prevailing market wisdom on that deal. They assumed managers would eventually drag their peons back into offices, but the peons didn’t want to go — and while workers had some choice and now seem to have less choice because of inflation/recession, the fact is that a lot of companies still have job openings posted (some are fake, yes) and a lot of those postings are remote-first. If you live in LA, you don’t per se need to work in LA, which of course then begs the question of why you’d pay LA rent. That’s a whole different post.

For a while, it felt like “If you don’t come back to your cubicle, your city will be destroyed” was a managerial fear tactic of note.

It seems like over time, what happened was the best commercial real estate owners and brokers pivoted into finding space for manufacturing (“We will put America to work again!”) and warehouses. They just got out of having deals in urban cores. I know a broker guy in Fort Worth who seems successful on face. Big house, country club membership, you know the drill. He has some signs in downtown. Some of them have been there since 2019. A few weeks ago, I was cutting through downtown and I saw a homeless man pissing underneath one of his “Office Space for Lease” signs. I doubt it’s impacting that guy’s country club membership yet — but hey, maybe someday.

As for city taxes, the government likes to have money to spend, and I would assume a lot of cities will just cut deals with their corresponding county (especially if they’re the county seat) to take more of property taxes, or take more from ISD tax buckets, or whatever. A large city probably won’t go broke, although it’s possible.

I think the bigger fear would be that certain cities essentially just become playgrounds for the already affluent. That’s kinda what Dubai is already, and it seems like some American cities (coughcough NYC) want to follow suit. Just push everything so that only one tier of human being could possibly afford it. Class warfare, writ large, but it keeps a city afloat and keeps money moving through it. Right?

There are lots of other things happening in this discussion: it limits mobility of people (can’t move to NYC unless you want to starve; I think you starve when you even think about moving to SF), and American mobility was already teetering a bit.

It limits low-level entrepreneurship, i.e. starting a sandwich shop in a downtown because you know busy biz guys will love your meatballs. Who’s going to start it on a high rent when those guys are only downtown for lunch two days a week?

As noted above, it increases class divides.

And as noted above, cities won’t go broke per se — but they will cut corners on certain programs and concepts if they’re getting less tax revenue than they’re accustomed to.

So there is a dangerous loop here, and then we get into a generational divide because older generations will equate “WFH” and “avocado toast,” i.e. these two things ruined society. In reality, society is not ruined but there are a few things we need to fix, although it’s hard to agree on what’s working and what needs to be fixed.

You’ll get the screeds of “In my day, we went to the office and were over our desks for 12 hours, to impress the bosses!” In reality, a lot of those men went to the office for 12 hours to avoid their wives and fatherhood duties, but the narrative of work ethic is better at Thanksgiving and cocktail parties, so we ride with that one. It’s comical that we’ve allowed WFH to become a proxy for “lack of work ethic,” when in fact many WFH people are more productive than in-office people. Offices are riddled with distractions, busy for the sake of busy, “we collaborate here” but everyone has headphones on, and pointless “Hey, got a second?” projects. Offices are hellholes to many personality types. WFH or even hybrid is better, but culturally, many do view it as a proxy for laziness. “I bet Kenny watches Netflix all day.”

That doesn’t hold water — Kenny is probably top 10% in tasks achieved, which is the only way we know how to define “productivity” anymore — but the Urban Doom Loop does hold water as something to keep an eye on in terms of factors reshaping society and class lines in the background.

What’s your take?