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Urban doom loop explained: What it means for businesses

Offices are exceedingly vacant across major cities, and some experts worry it's indicative of an urban doom loop.

Remote work is making office real estate less valuable, and that spells trouble for American cities.

People have continued to work from home long past the end of the pandemic. Approximately 50% of workers are returning to in-person work, according to statistics from Kastle Systems.

There are more remote workers now than pre-pandemic. Because of this, many office buildings are now empty in large cities, and workers are leaving those cities because they don't need to be geographically close to work. Many offices are reassessing the way they use their office space and signing shorter leases, and many buildings are now vacant as tenants leave.

Some economists and banks worry this will spur a financial crisis.

Why is this a problem for cities?

When people leave the city, they take their dollars with them -- both tax and commerce. Older superstar cities such as New York and San Francisco build economies around the traffic that passes through downtown on the way to the office. The suburban commuter workforce increases a city's average daytime population by 19%, according to research from the Brookings Institution. A few cases -- Boston, Hartford, Conn., and Washington, D.C. -- exceed 50%.

Without people there, those businesses close and the city loses tax revenue from them. When the city loses tax revenue, it responds by cutting services and raising taxes. For example, the city may have to raise fares for public transportation, which drives more people and money away from cities. This closed, self-reinforcing cycle is known as an urban doom loop.

There are many types of doom loops. Any negative series of events that winds up causing the first negative event to worsen and perpetuate the cycle is a doom loop.

Why is this a problem for businesses?

As people stop frequenting the businesses that populate downtown business districts and urban centers, they will lose revenue.

Some say this shift away from in-office working turns office locations into consumer products, where landlords and businesses have to put more effort into convincing workers to come in when many are in favor of working remotely. One way to do that is through perks, such as food options and outdoor working spaces. Others are by emphasizing the positives of in-person work or even mandating return to office. Some businesses are also reorganizing offices to be more conducive to a hybrid setup. Many buildings have signed a multi-year lease and need to fill the space so they see a return on the money they're spending.

How could cities respond?

Some real estate experts argue that even though the dynamic looks like a doom loop, it might instead be a transition to a new economic model, where commercial properties are repurposed as housing.

Boston is one city trying to make this happen. Mayor Michelle Wu announced a program on July 11, 2023, that would offer property tax breaks of up to 75% for landlords that convert empty office space into residential spaces. Boston has a 14% office vacancy rate and rising housing prices.

Other cities have announced similar programs. Chicago announced a plan -- the LaSalle Street Initiative -- to repurpose 5 million square feet of open commercial space into housing. And Seattle announced a competition for building owners and design firms to come up with office-conversion ideas.

But conversion can be difficult, as residential dwellings need to meet different specifications than office buildings. In some cases, renovators drive a core through the center of the building to create room for more windows and access to light and air. Older buildings tend to be better for conversions -- especially since some of those were originally residences and hotels.

In some cases, new zoning laws have been passed to allow other tenant types to occupy commercial buildings. Arlington, Va., a city with a 22% commercial vacancy rate, revamped laws to allow universities and other business types to occupy commercial real estate they were previously prohibited from occupying.

How could businesses and landlords respond?

Owners of vacant buildings must find new ways to fill buildings that were once stably occupied by corporate tenants. Housing is a challenging option, but there are others.

New York City's largest commercial landlord -- SL Green -- is finding other ways to fill vacant buildings as the vacancy rate rises. The firm is working with Backlot, a company that connects New York and New Jersey landlords to TV companies so that their buildings may be used as filming locations. The firm says it will earn $3 million from film and TV shoots.

Another use for vacant office buildings is indoor farming. Area 2 Farms in Arlington, Va., and Agriplay Ventures in Calgary, Canada, transformed parts of an old paper company's office and office space in Calgary Tower Center respectively. Agriplay uses AI to convert and install modular growth systems ideal for hydroponic farming.

Other repurposing uses for abandoned office and retail spaces include university buildings, animal boarding, self-storage and pickleball courts. Some investors are also opting to repurpose old office buildings as data centers instead of building new ones. Office spaces in cities with revamped zoning laws could bring these tenants in to draw traffic back to downtowns.

The movement out of downtown areas and into suburbs also opens opportunities for new business types. On the podcast Plain English, host Derek Thompson speculated that, "It's kind of a weirdly ideal time for a suburban work sharing startup to get the same kind of buzz that WeWork had."

On the podcast, guest Dror Poleg responded, "We're seeing some experiments already of everything you just described. Suburban shared spaces, urban spaces, coffee shops, offices, hotels acting as offices, offices acting as day cares, apartments, adding offices. Everyone is trying to be an office."

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