The outlines of the next round of economic crisis are becoming ever more clear. There will be pockets of thriving, but it won’t be in the United States’ once-great cities such as New York, Chicago, San Francisco, Seattle, and Portland. Those cities are being pounded by a terrifying combination of factors, including high commercial rents, high prices, high crime, high interest rates, high taxes, long commutes, slow growth, and a growing refugee crisis.
All this adds up to cities where people don’t want to go to work. The digital technologies fully deployed in lockdowns that enabled remote work continue to dominate the service sector. The back-to-the-office movement has stalled. In general, about half the professional population in cities that once slogged to the office as a matter of routine has figured out how to prolong the period of lounging at home indefinitely.
This has created an enormous problem for commercial offices, which have generally leased spaces for five and 10 years. The leases signed in 2019 for large spaces went unused in the following year. The idea was that life would get back to normal after the pandemic controls ended and then the losses would be written off. But life hasn’t gone back to normal, and leases are soon coming up for renewal.
Large companies are rethinking everything about their office spaces, which puts huge pressure on the owners and developers of sky-high buildings, which had long leveraged up their holdings over 15 years of zero interest rates. There was never a downside to debt in the good old days. But those days ended once the Fed reversed directions. Now servicing this debt is a massive business cost.
The costs of this debt are now a scalding hot potato passed from banks to borrowers to leaseholders. In a classic display of the sunk cost fallacy, many companies figured that the only way to make the high costs worthwhile would be to force workers back. But that isn’t working in an environment dominated by worker shortages. As a result, we are looking at a large wave of nonrenewals, creating a serious crisis in urban commercial real estate that could profoundly affect not just cities but finance, too.
This of course will exacerbate the major hole in city finance, as the public sector gets slowly starved for revenue. The cities will then seek bailouts either from the state or the federal government, as they always do. They will likely get them, which will provide a short-term fix until the money runs out again. After several rounds of this, the reality will be obvious. These places are toast.
Amid all of this is a salient fact. These cities are losing residents. If you are Zooming anyway, why not do so from a safe suburban home or a nice country estate? Why not flee to a place where the cost of living is much lower, such as the American South? After all, these places didn’t lock down nearly as much as the other others dominated by blue politics.
The conventional wisdom, therefore, has been that many cities in the South will be spared the meltdown fates of New York City, San Francisco, and Chicago. They will be saved by vibrant economic growth and an influx of high-earning residents. And it’s true that cosmetically, cities such as Dallas, Atlanta, and Miami are teeming with vibrant enterprise and growth.
As a result, and largely under the surface, it too faces an office bust. “Vacancy rates are soaring and companies are competing to unload space in the sublease market. Office values and rents are falling. Developers are delaying new office projects, while office defaults are mounting.”
- Miami-based Banyan Street Capital gave up six office towers and an underground mall inside Atlanta’s downtown Peachtree Center in a foreclosure auction last year.
- Starwood Capital Group defaulted on an office-building mortgage that it was unable to refinance, according to loan documents.
- Arden Group defaulted last year on its $98.2 million mortgage on the Sheraton Atlanta, a convention-oriented property.
- This year, Ashford Hospitality Trust is handing back the keys to its lender on a portfolio of hotels including the W Atlanta, a luxury hotel near Peachtree Center.
- Microsoft earlier this year said it was pausing the planning process for a 90-acre project on the west side of Atlanta.
- Google also is slowing its expansion plans in the city.
This isn’t just about the advent of remote work, which has been possible for many years. It’s about how the lockdowns themselves utterly wrecked life routines and made the huge sacrifices people have long made to interact face-to-face with colleagues seem like a huge waste. Once people came back to the office, fully masked, the place seemed different, even oppressive, ruled by HR, and generally fraught with schemes and plots. Millions figured that they were better off working from home and have insisted on continuing to do so.
This whole scenario spells disaster not just for blue cities but for red ones, too. No one can escape the logic of the economic equation at work here. High-interest rates on real estate loads combined with intensifying work-at-home demands create an unsustainable situation.
What does it mean for the future of these cities? The large commercial office properties aren’t easily or cheaply repurposed for residential use. One really does wonder. Are skyscraper implosions really in the future?
If so, it seems to fit with the dystopian dreams of people such as Klaus Schwab and Dr. Anthony Fauci, who both agree that the city as we know it is a relic of past age. In their map of the future, we will eschew the commute, live in suburbs, avoid all crowds, reduce the size of our houses, have fewer children, socialize only on Zoom, and be entirely dependent on our digital overlords for information on the outside world.
It doesn’t take a conspiracy theorist to notice the relationship between the dream and the crisis soon to envelop the office economy in large cities. If this goes far enough, the great skylines of the United States’ best cities will eventually look very different.
