Doom Loop or Creative Urban Reemergence?

For those not familiar, the doom loop theory is that since WFH has decimated downtowns values will drop, local businesses and real estate holders will pay less taxes causing cities to cut services, feeding into people abandoning business districts, and on and on. People have been calling this since COVID hit (remember all those headlines claiming cities were done?) but recently higher interest rates and the continued strength of WFH has taken some solid hits on real estate valuations and subsequently city budgets. Boston has recently unveiled plans to increase taxes to avoid cutting services (though Boston is uniquely constrained by the state in how they can generate revenue), which is a step a lot of people see as the beginning of the loop.  

An alternate theory that hasn't been brought up much is that as building values fall and distressed owners sell, the new owners are able to come in and price rents significantly lower. My understanding for why a lot of current owners aren't cutting rents to keep occupancy is the loan covenants prevent them and the psychology of admitting their values have dropped. Occupancy is down across the board but asking rents have actually stayed pretty level. I think as opportunistic buyers come in either all cash or at a lower basis than the previous owner they'll be able to lease at lower rents and still generate a good return. The former is being done by my current boss who runs a small family office. He's taken down a few office buildings that were totally mismanaged at a steep discount, all cash, and had several new leases within two months. 

There is still retail and office demand, and lower rents grows start-up and new business formation, which could revitalize downtowns. It'll take time for this transition to happen, but given that residents haven't fled cities (like the white flight of the 60's and 70's) I'm pretty confident that downtowns will be able to turn around faster than they have historically. 

Curious what other people think. 

 

I think it's totally market dependent. Some cities just have much more desirable CBD's where people enjoy being than others (think Austin or Miami vs. Houston or LA). Generally I think people will always like to live in the urban cores and it will iron itself out as time goes on. I always like the non-CBD urban areas for this reason. Like first ring around downtown that are much less high rise towers and more mid-rise neighborhood feel. 

I also point to trends that there are much more Millennial and Gen z folks that will forego having children than previous generations, and these type of people will tend to gravitate towards wanting to live in the city. 

 

“Downtowns are decimated” is one of the most overplayed tropes in years. 
 

There is so much more to downtowns than office buildings. 

Commercial Real Estate Developer
 

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