Quieting the Urban Doom Loop Narrative
CRE executives can look to history for a guide out of the current conundrum.
It is rare that academic research published in peer-reviewed journals breaks into the headlines. This is a sign that the subject has touched a nerve with the general public and is resonating with at least a significant number of influential commentators. Such a paper is “Work From Home and the Office Real Estate Apocalypse” by Arpit Gupta of New York University, Vrinda Mittal of University of North Carolina Chapel Hill, and Stijn Van Nieuwerburgh of Columbia University. The original paper, while provocative, is thoughtful, carefully grounded and duly circumspect in its claims.
The reporting on this thesis in the general press, the business press and popular media has, however, not been consistent with these academic virtues. Rather, the many features on “the urban doom loop” have been sensationalized and commit the all-too-usual sin of extrapolating a current condition indefinitely into the future. But both the original paper and the reporting share a similar blind spot: a reductionist and somewhat deterministic approach while minimizing the potential for innovative leadership and collaboration to tackle serious problems.
As one of a handful of real estate economists who was in the workforce during the 1970s, I can assure readers that the stresses on the office market today are modest in comparison with what New York faced in its fiscal crisis period. New York was not alone in facing an “urban apocalypse” during that decade. Riots, arson and civil unrest afflicted cities across the country. An NBER paper by William Collins and Robert Margo developed a “severity scale” measuring the impacts of those troubles. At the high end of that scale were Los Angeles, Detroit, Washington, D.C., Newark, N.J., Baltimore, Chicago, Cleveland, New York, Mobile, Ala., and San Francisco. Some of those cities suffered near-permanent damage. Others became avatars of the urban renaissance in the past third of a century. The bywords of the tabloid headlines of that time (“Ford to City: Drop Dead” and “Last One Out Turn Off the Lights”) stand with “Dewey Defeats Truman” as perspectives that failed to stand the test of time.
Minds over matter
The story of New York’s move from the brink of disaster to its eventual ascendency is often forgotten as new challenges present themselves. It is worth noting that it took vigorous leadership, starting with New York Governor Hugh Carey, to pull together a remarkable alliance and energize a turnaround. That alliance could almost be compared with what historian Doris Kearns Goodwin has called Abraham Lincoln’s “team of rivals.” In New York’s case, that team included investment bankers, such as Lazard’s Felix Rohatyn; political powerhouses John Zuccotti and Richard Ravitch; New York real estate owners, including Lewis Rudin; labor union leaders Albert Shanker and Victor Gotbaum and academics from Columbia University (Donna Shalala) and New York University (Dick Netzer).
It was not just the personalities but a determined “outside-the-box” set of actions. Rudin led commercial property owners to prepay real estate taxes to shore up the city’s cash position— not once but three times. The unions purchased, first, New York City municipal bonds and, later, Municipal Assistance Corp. bonds worth hundreds of millions of dollars when finance experts were, on the contrary, urging the city to declare bankruptcy. The lesson—not easily remembered much less replicated—is that common interests can work powerfully to address even extremely dire conditions.
However, the lesson was replicated after the Sept. 11 destruction of the World Trade Center in downtown Manhattan. Once again, there was widespread commentary that this catastrophe marked the end of the high-rise office market in New York City. It was thought that tenants would never again rent the upper floors of skyscrapers. Manhattan was considered too much a “target of opportunity” for terrorism. Businesses were deemed likely to flee to less dense areas, especially to more generic suburbs that were less ripe for violent attack.
Such predictions were profoundly mistaken.
Public and private sector collaboration was forged in the crucible of the 9/11 response. Leadership emerged at the federal, state and local levels. A grassroots determination to revitalize New York took hold, with the Regional Plan Association and the Civic Alliance to Rebuild Downtown New York organizing the effort. Architects and planners stepped forward. Public officials secured funding. The real estate sector, led by developer Larry Silverstein and Janno Lieber, and including experts like Scott Rechler and Frank Sciame, provided both entrepreneurial drive and industry competence to achieve the now-realized World Trade Center.
Back to the new office
I would submit that the COVID-era challenges of working from home and the return to the office now featured in the urban doom loop prognostication do not nearly approach the level of turmoil experienced—and overcome—in the 1970s fiscal crisis and the 9/11 terrorism disaster. On the contrary, seeds of a new alliance are already prepared to grow.
Who would benefit from a reinvention of office real estate—a return to office that would not be a return to status quo ante but a creative reestablishment of urban mixed-use core districts? I see motivations from local governments seeking to safeguard their revenue base and improve quality of life. Investors and operators have common cause with such governments. So do the holders of real estate debt, both in the primary and secondary markets.
Corporate tenants are actively seeking a return to office not out of civic altruism but because of economic self-interest. Developers have reason to embrace the repositioning of older buildings and the construction of new office assets directly meeting the needs of businesses after the pandemic. Labor unions such as building service workers, transport workers and those in allied forms of real estate including the hospitality industry are also potential members of a “team of rivals.”
This might be dismissed as speculative optimism, especially by those holding a jaundiced view of big cities. I see history as a guide to its possibility. I see the stirrings of leadership across that spectrum of market participants. No one welcomes the prospect of an urban doom loop, an office apocalypse, with enthusiasm. I would not bet against the grit and the imagination of the office sector to withstand the challenge, even to come back even stronger—and within the decade ahead.