The Urban Doom Loop

by Zain Jaffer

In many large cities abroad and in the US, the Work from Home (WFH) trend has become entrenched. Although many Fortune 500 companies have been asking their employees to come back to work for at least some days of the work week, the fact is that many have been resistant. Some who originally bought homes far from their offices during the COVID pandemic are now forced to sell those homes to move back closer to work.

Nevertheless, WFH is a trend that will stay. Although affluent companies, law offices, architecture, engineering, and consulting firms are still renting high end Class A office space to show their success, other companies have now reduced their office floor space footprints, which results in lower lease revenues for building owners.

Less workers means less customers for all types of retail and restaurant stores, whether these are luxury high end establishments or ordinary retailers. Real estate taxes drop, thus reducing state and city budgets for basic services.

Experts like Columbia Business School professor Stijn Van Nieuwerburgh call this the Urban Doom Loop, where eventually the homeless see the empty office and retail spaces and move in. This also attracts more street criminals and drug users and creates urban blight.

The banks that will foreclose the loans on these building owners, many of whom took out loans during lower interest periods, know that many of these developers will simply agree to foreclose if a renegotiated lower extended payment scheme is not possible. So the situation is just as bad for banks as it is for building owners. Everyone gets affected badly in a high interest rate and recessionary economy.

Because many downtown city areas have been zoned mostly for office and commercial use, the addition of residential areas to retain people there during weekends and holidays is key. Affordable public housing that blends in with the area is key, since just retaining affluent people to reside in an area will not be enough to support the local economy in that area.

Converting whatever old office buildings that are adequate to become residential buildings is one solution. First the city or state government has to allow this in their local laws, and possibly offer some financial assistance, whether grants, low interest loans, or tax incentives.

Not all office buildings can be converted into residential buildings. Office floor footprints are often large, and only have one or two male and female bathrooms per floor. Electrical, air conditioning, plumbing, sewage, and other facilities need to be added in. Toilets and bathrooms have to be added for each unit. To create windows for the units near the middle of the floor, an empty column void has to be created. Each developer has to figure out whether the cost of conversion is worth it based on expected future rental revenues.

The office space vacancy problem in our big cities is something we all need to pay attention to. It can turn into an urban doom loop, but if we are creative enough and act together on it, we may actually end up with badly needed residential spaces and economic activity in our floundering big cities.