As his nickname suggests, Columbia Business School professor Stein van Neuerburg is crazy. the gray woman herself, new york timescalled him a “prophet of urban doom” last year for his predictions from years of research on remote work and the economic impact on real estate and finances.
now he says luckHe is an economics expert who sees an “event horizon” of a 1970s-style downward spiral known as the “loop of doom.” And it's only the first inning.
We all know that office buildings across the country have been hit hard by the coronavirus and the rise of remote work. Perhaps only San Francisco is a better example than New York City. In New York City, the number of offices gathering dust is at an all-time high, with nearly 20% sitting vacant, draining money and shrinking the city's tax base.
More economists than Van Neuerburg say the impact could reach far beyond the real estate sector. Without dramatic changes, he says, New York City could be stuck in a permanent “loop of doom” that affects everything from home values to public service budgets. Even the crime rate. The most famous example was in the 1970s, when “white flight” and the financial crisis plunged New York into a recession that lasted more than a decade.
It's a simple equation, Van Neuerburgh said in an interview. luck“When governments cut spending, they have less money to spend on transportation, education, sanitation, and all the things that make cities attractive.”
Van Neuerburgh, who joined Columbia in 2018 just a few years after winning an award for his research on housing market shocks that impact the macroeconomy, believes that the “event horizon” of this destructive loop is I see it coming soon. He says New York is in the “first innings” of what could become a full-blown urban crisis, as federal aid runs out and tax benefits begin to lag.
“Over the next three to five years, this is really going to start happening. This cycle is out of control.”
delay effect
Remote work has upended the traditional market for urban office space. Research shows that around 30% of paid days are spent working from home, and this number tends to be even higher in urban sectors such as technology, media and advertising. Commercial property owners are struggling to break even as demand for office space declines and rents and property values fall.
The shape of offices that companies require is also changing. Fred Cordova, CEO of real estate consultancy Corion Enterprises, said companies are building smaller, newer offices with more amenities and benefits in order to bring employees directly back to work. He said he was looking for it. luck. That's putting pressure on mid-tier (and newly vacant) office buildings, which have long been the backbone of the urban commercial real estate sector. The timing couldn't be worse.
“Many of these buildings were purchased in 2013 and 2014 after the Great Financial Crisis. Most of those loans were 10-year loans. So almost $1 trillion in loans are coming due. “It will be,” Cordova said. “There's no way to refinance…Most of them probably won't be able to repay their debt.”
On top of that, federal funds pumped into the sector during the coronavirus pandemic are starting to dry up, which could lead to a wave of defaults. And because of the gradualism built into the tax code, auditors are just beginning to feel the full effects of a wave of defaults that began a few years ago, Van Niewerburg said.
That's what has city budget watchers so concerned. Falling commercial real estate values are already reducing the tax bill for building owners. But if beleaguered commercial owners are unable to repay their debts, or in some cases taxes, the impact could spread far beyond the real estate industry. New York City derives just under 10% of its tax revenue from commercial real estate, and a significant reduction in that source would have a negative impact on overall budget spending, Van Neuerburg said.
send a shock wave
The banking sector, which has high exposure to commercial real estate, is also under pressure from weak real estate values. While most major banks are safe, much of New York's commercial real estate debt is held by small to medium-sized regional and local banks, which lack the capital to hold them for the long term if vacancies increase and real estate values continue to fall. are doing. Van Neuerburg said banks own about half of the $6 trillion in U.S. commercial real estate debt, but of that half, 70% is owned by small regional banks.
“Some regional banks, overly exposed regional banks, will be killed,” Cordova said.
The crux of the “loop of doom” theory is that it persists. If vacancies rise and property values fall, cities won't be able to collect as much tax revenue, and overexposed banks will have to cut back on lending. This means less public spending on things like transport, sanitation and security, and less investment in small and medium-sized businesses. Dirtier, more dangerous, and less accessible downtowns are less likely to attract businesses and remote workers, meaning more vacancies and further declines in real estate values. Wealthy residents could take the plunge and move their families (and taxes) to lower-tax states like Texas or Florida. And thus the cycle repeats.
“The money is running out, or is gone. This is the first year we haven't seen any additional federal dollars. It's starting to bite…[And] Vacancy rates are already at an all-time high,” Van Neuerburgh said. “This combination packs a pretty strong punch.”
