Imagine a negative economic spiral that begins with office workers leaving their jobs in central business districts to become remote employees. As office buildings empty, companies close their offices or move their downtown locations to cost-friendly suburbs.  Without workers filling the urban core, nearby retail businesses and restaurants close due to the lack of customers.

These factors result in declining municipal tax revenues, forcing the local government to offer fewer services. And the decline in amenities, coupled with cutbacks in city services, forces residents to abandon downtown neighborhoods.

“Workers and corporate leaders alike are beginning to realize that sprawling offices, especially in expensive city centers, are no longer as necessary.”

While such an urban nightmare may sound unlikely, three university business professors write that there is a risk of a version of this scenario occurring. The team of Arpit Gupta at New York University and Vrinda Mittal and Stijn Van Nieuwerburgh at Columbia University have coined this scenario as the “urban doom loop,” and they detailed it in their recent paper, “Work From Home and the Office Real Estate Apocalypse.”

The urban doom loop involves a series of interconnected events that can lead to economic declines in commercial real estate and beyond. As companies reevaluate leases or withdraw from them, vacancy rates increase and landlords face challenges in securing new tenants. This results in decreased property values and potential mortgage defaults. The ensuing economic downturn affects local tax revenues, stifles consumer spending and triggers layoffs, thus creating a cycle of economic hardship.

Far-reaching consequences

The landscapes of commercial real estate and commercial mortgages are undergoing significant transformations, driven in large part by the aftermath of the COVID-19 pandemic and the accelerated adoption of remote work. The emergence of the doom loop, characterized by the potential spiral of economic challenges in commercial real estate, has economists and business experts concerned about the implications for large and midsized cities along with the financial stability of lenders.

Definition

‘Urban Doom Loop’

A downward economic spiral triggered by remote work, which makes office towers less valuable and results in reduced city tax revenues. This begins a domino effect in which workers who no longer need to live in a city leave for cheaper housing, causing retail businesses to shutter. City services such as police and utilities are reduced by the cash-strapped municipality, causing even more residents to leave the downtown core.

Source: The New York Times

The pandemic has led to a seismic shift in how companies view office spaces. Workers and corporate leaders alike are beginning to realize that sprawling offices, especially in expensive city centers, are no longer as necessary.

Major corporations such as Salesforce are paring back their office footprints as remote work remains attractive, leading to concerns about declining occupancy rates. This trend, coupled with reduced demand for office space, has far-reaching consequences for the commercial real estate market.

According to consulting company Buildremote, 77% of the Fortune 100 companies operate on a hybrid work schedule, while 30% of these companies have announced reductions to their office-space footprints since 2020. Also, 13% of Fortune 100 firms do not require employees to have any scheduled office visits during a given week.

These large companies have traditionally been major driving forces of downtown office usage. With these firms reducing their office-space needs and having no plans to require workers to return to the office, the first major step in the urban doom loop may be starting for many cities.

Risk factors expand

While attention has been drawn to major cities such as New York and San Francisco, midsized cities are also at risk due to their limited capacity to absorb economic shocks. Unlike metro areas with diverse economic streams, midsized cities often heavily rely on one or two key industries. Consequently, the departure of a major tenant or a decline in property values can severely impact these cities’ revenues and employment prospects.

Not every city is equally at risk. Those with a high concentration of office space but relatively little residential space are more in danger. Those that are concentrated on one industry or have a small number of employers taking up a high percentage of downtown real estate also have an increased risk because other businesses or industries are less likely to absorb excess space. Also, cities that have poor transportation options (both public and private) will have a harder time avoiding this vicious cycle.

Some cities, including Provo, Utah; Boise, Idaho; and Austin have a more resilient core given that large portions of office space are utilized by a diversified combination of government agencies, higher education facilities, private corporations and nonprofit organizations. These are also locations where residents want to live, making them less likely to join the municipalities that suffer due to an exodus from the city center.

The urban doom loop has yet to fully materialize, but warning signs are evident. Midsized cities are experiencing higher office delinquency rates and lower occupancy rates compared to larger metros. The trend could intensify as loans are due for refinancing, a situation that is anticipated to unfold over the next 12 to 24 months. The looming deadlines for commercial mortgage maturities could most acutely impact regional banks, which hold a significant portion of commercial real estate debt.

Overcoming difficulties

For commercial mortgage brokers, the path forward is somewhat opaque as interest rates have reached a point where the bid-ask spread is often too wide for buyers and sellers to close deals. Furthermore, for many properties, refinancing may not be an option as injecting more equity may not be feasible. Instead, many of these properties will be foreclosed upon by their respective lenders.

There are three areas in which commercial mortgage lenders and their broker partners can seek to weather the storm and possibly emerge even stronger. The first is to perform thorough surveillance and loss-mitigation efforts on portfolios and individual assets. By conducting stress-test scenarios at the property and portfolio levels, brokers can focus on loan workouts with many types of clients and lender partners.

The second step is to take advantage of gap equity financing programs. These are private loans that cover the gap between another loan and the total cost of a project. Whether through affiliated subsidiaries or joint-venture partnerships, lenders that continue to make market-rate loans and offer gap equity financing — also known as a bridge loan — have the highest probability of successful closings.

The third point is flexibility. Lenders and their broker colleagues who display patience, creativity and common sense on loan restructuring efforts will build plenty of goodwill with their borrowers, even after the market improves.

Conversion problems

The Federal Reserve recognizes commercial real estate as a risk to economic stability. The central bank’s recent efforts to control inflation through higher interest rates impact demand for loans and investments. In turn, this affects the broader economy and contributes to the challenges faced by the commercial real estate sector.

The decline in demand for office space is expected to impact other sectors of the commercial real estate market, such as retail, industrial and multifamily properties. Property owners are attempting to repurpose vacant offices into alternative spaces such as apartments, kitchens or spas. But such solutions are often costly and haven’t gained widespread traction. The transformation of office space is influenced by various factors, including location and property type.

Converting offices to residential buildings is expensive for a variety of reasons. For example, living spaces require natural light. The shape of an office building frequently doesn’t allow light to penetrate to an inner residence. Plumbing and electrical requirements for office buildings and apartments are also much different.

Another part of the problem is companies fleeing downtown areas. Where will these urban residents work? The number of people who live in these buildings is significantly smaller than the number of people who work in an office building. Their commercial needs are different, meaning that turning offices into apartments might not offer the same consumer support to existing retail stores.

While some commercial properties, particularly those in prime locations, may weather the storm better than others, the market is expected to see discounted rents and sales prices, especially for older assets. The repurposing of office space may also play a crucial role in determining the value and viability of other commercial properties.

This is a problem that needs creative solutions. Some answers might be found in places where office buildings are shifting to new industries rather than remaining empty. For example, insurance company Humana occupies a large amount of downtown office space in Louisville, Kentucky. When the company recently downsized, it donated one of its buildings to the University of Louisville to support the school’s Health Equity Innovation Hub. Other corporations may learn from Humana’s actions and find creative ways to reuse unwanted space.

● ● ●

Commercial real estate is in a current state of flux that is shaped by the dynamics of remote work, economic uncertainties and changing consumer behaviors. The concept of the urban doom loop underscores the interconnectedness of factors that can trigger an economic spiral in this sector and beyond.

While the worst-case scenario of declining asset values, lost jobs and failed city centers is not guaranteed, the signs are compelling enough to warrant attention from economists, policymakers and industry stakeholders. As commercial real estate navigates these challenges, innovation, adaptation and strategic planning will be needed to weather the storm and seize opportunities for revitalization and growth. ●

• Tim Wolski is a marketing leader with more than 25 years of experience. He currently serves as an adjunct professor at Bryant University, where he teaches new product development and entrepreneurial marketing. Wolski is passionate about making a meaningful impact. He stays ahead of marketing trends, ensuring his students and the companies that he works for deliver impactful, consumer-focused and data-driven marketing campaigns. Reach Wolski at (401) 965-2615.

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• 

  James Gosse is a commercial real estate technology thought leader with more than 20 years of experience in negotiating commercial property sales. Gosse is a co-founder and senior adviser at OakEx, an online marketplace for commercial real estate. Gosse is driven by his passions for technology and commercial real estate, and he has been instrumental in the development of numerous online commercial real estate marketplace platforms and related businesses.

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Of more than 40 types of clocks, warnings and advisories issued by the National Weather Service, one stands out. The severe thunderstorm warning is issued more often than any other warning, but it could also be the most misunderstood.

Most people don’t know it, but the presence of frequent lightning or heavy rain does not affect whether a thunderstorm is classified as severe. The weather service only issues a severe thunderstorm warning if it produces winds of at least 90 km/h or hail at least 2.5 cm in diameter.

How well the public understands severe thunderstorms plays a big role now as they begin to progress from their winter lull to a summer peak. According to consumer research firm ValuePenguin, many states conduct severe weather awareness weeks in March to educate people about these storms and their warnings, which are issued more than 80,000 times a year on average across the United States.

To better understand what the public knows about severe thunderstorm warnings, researchers from the University of Oklahoma surveyed more than 1,400 U.S. adults about the hazards considered by the Weather Service when issuing severe thunderstorm warnings. Eighty percent of respondents correctly identified wind, but only 58 percent correctly identified hail. Perhaps more worryingly, 77 percent identified lightning, 76 percent rain and 67 percent flooding, none of which form part of the criteria for a severe thunderstorm warning.

Understanding Storm Warning Confusion

The confusion surrounding severe thunderstorm warnings “isn’t particularly surprising,” said Makenzie Krocak, a researcher at the University of Oklahoma, during a presentation at the American Meteorological Society’s annual meeting in January. “If you see [forecasts] Speaking of severe thunderstorms, what symbols do you see often? A lightning bolt and a raindrop. So it is not surprising that people associate these warnings with lightning and water.”

To add to the confusion, severe thunderstorm warnings are sometimes issued for showers that produce strong winds but no lightning or thunder, like the warning issued Wednesday by the San Francisco and Monterey Bay Area Weather Service Office for winds up to 80 km/h.

Despite misunderstandings about what hazards play into severe thunderstorm warnings, Krocak isn’t necessarily proposing a name change.

“In general, I would say that we do not yet have evidence that changing the name of the alert would affect understanding or response,” Krocak said in an email. “There’s also a lot of accumulated knowledge with the current name, so we would need to understand if and how a name change would affect people with that institutional knowledge and their intended response.”

How to choose the best weather app

Chris Wirz, who studies weather risk communications at the University Corporation for Atmospheric Research, notes that the alerts include descriptions of expected impacts and recommended safety precautions.

“Even if people are confused about what hazards are covered, the alert tells them what to expect and what they can do to stay safe,” Wirz said in an email. “There is also a lot of other communication that is taking place before these warnings are ever issued. So if warnings are needed at all, many people have an idea of ​​what to expect and how to respond.”

Barring misunderstandings, about 80 percent of survey respondents said the weather service issues “the right amount” of severe thunderstorm warnings, and most said they plan to take action to protect themselves if they receive a warning.

Why lightning isn’t among the criteria for a severe thunderstorm warning, meteorologist Jim Duncan explained in a story he wrote for the Washington Post last year that it only takes lightning to kill or to hurt, and lightning strikes may or may not a storm is considered violent. That’s why the weather service and security experts advise: “Go indoors when there’s thunder” and stay there for 30 minutes after the last clap of thunder. Lightning has killed an average of 23 Americans and injured hundreds each year for the past 10 years.

Because severe weather is not just severe weather, the Weather Service has introduced “damage risk” categories for severe weather warnings starting in 2021, with the aim of better communicating the strength and potential impact of thunderstorms and hail. The three categories are defined as:

• Base – Thunderstorms expected to meet only the minimum criteria of winds of at least 58 miles per hour or hail one inch (about as much as a quarter) in diameter. Expected impacts include damage to vehicles, trees, roofs and sidings.
• Significant – Thunderstorms expected to generate winds of at least 70 miles per hour or hail at least 1.75 inches in diameter (about the size of a golf ball) causing injury to people and wildlife outdoors. Other anticipated impacts include damage to roofs, sidewalls, windows, vehicles, trees, RVs, and outbuildings.
• Destructive – Thunderstorms expected to produce winds of at least 80 mph or hail at least 2.75 inches in diameter (about the size of a baseball), creating life-threatening situations and seriously injuring people and wildlife outdoors . Other expected impacts include power outages, broken windows, and extensive damage to trees, roofs, siding, vehicles, and RVs.

Only severe thunderstorm alerts marked as destructive will now trigger emergency weather alerts, which are delivered via cellular carriers.

The introduction of severe thunderstorm damage threat categories is part of a larger effort by the Weather Service to simplify and clarify its monitors, alerts and advisories by reducing the number of alert types and refining the alert language.

For example, the Weather Service is preparing to replace alerts such as “wind alert” or “coastal flood alert” with “plain language” headlines that convey the threat more clearly and quickly. Planned for no earlier than 2025, the change is based on social science research pointing to a public misunderstanding of warnings issued when hazardous weather is occurring or imminent, but the expected impact is less severe than a warning.

What to do if there is a severe thunderstorm warning?

Social science research has found that not only do people not understand the criteria for a severe thunderstorm warning, but they often confuse a storm warning with a gale warning, two very different things.

A severe weather warning is issued when severe weather is possible but not certain. If your area is under surveillance, experts advise sticking to trusted sources for weather information and being ready to act when an alert is issued. This is usually a good time to secure outdoor objects that could be blown away or cause damage or injury, transport light objects inside, and consider postponing outdoor activities.

A severe weather warning is issued when severe weather is imminent or is already occurring. If you receive an alert for your area, stay in a sturdy building or shelter and stay away from windows and doors, bring pets, pull shades and blinds over windows, and avoid electrical appliances and plumbing. It’s also a good idea to turn off the air conditioner and unplug appliances, computers, and other electronic devices to prevent damage from power surges.

The Gulf of Mexico is very warm. That could mean a bad tornado season.

If you can’t make it safely to a stable building or shelter, a hard-top (non-convertible) vehicle can offer you some protection with the windows closed. (However, in the event of a tornado, cars are not at all safe.) Avoid open spaces, high ground, water, picnic shelters, shelters and bleachers, and tall, pointed objects such as trees and flagpoles.

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“There were dozens of hypotheses and basically no one took any of them seriously.”

That is, until Berkeley scientists – led by Luis Alvarez (a Nobel laureate in physics) and his son geologist Walter Alvarez – came up with the idea that the earth was struck by a meteorite or comet the size of San Francisco.

The theory and its supporters received a major boost a few years later with the discovery of a 110-mile-wide crater on what is now Mexico’s Yucatan Peninsula.

“With the discovery of the smoking weapon, the fact that there was a large meteorite became widely accepted,” Marshall said. “So it started to develop into the two hypotheses on meteorite versus volcanism.”

Charles Marshall examines a cast of a bird related to puffins and the great auk found in the Monterey Formation in southern California. (Daniel Potter / KQED)

In fact, volcanoes have been difficult to keep off the list of known suspects. Hundreds of millions of years ago, every other major extinction (with the exception of today’s) was associated with volcanism.

Around the same time as the meteor strike and the disappearance of dinosaurs from the fossil record (along with many species to tiny marine life), there was also a massive wave of volcanic activity in India – in a place known as the Deccan Traps.

Scientists have been arguing back and forth for years: Impact! Volcanoes! Impact! …

Until recently, when Berkeley geophysicist Mark Richards offered this idea: “I realized that the size of the impact is probably large enough to have triggered volcanic systems around the planet.”

Bigger than big

Richards calculated that the energy of a rock the size of Mount Everest from space was enough to trigger an 11-magnitude quake. This is not a typo. When I told Richards that I thought the scale would only go up to 10, he told me that it was actually not true.

In terms of earthquakes, 10+ is a nightmare. Such a quake would be a hundred times worse than the “big one” that hit San Francisco in 1906. Richards says it shook the globe – even the volcanoes on the other side of the world in India.

A relative of today’s Komodo dragon, the owner of this skull (left), wore flippers and could grow to be more than 20 feet long. To the right in Charles Marshall’s laboratory sits an Allosaurus foot. (Daniel Potter / KQED)

“So the idea is that the impact may have put the system into high gear.”

Richards carefully says that if he’s right and the two events are linked, we still don’t know exactly what killed the dinosaurs. Rather, the proposal points the way for a new investigation, says Paul Renne, director of the Berkeley Geochronology Center and co-author of Richards’ paper.

“We just have to give up the thought that it is one thing or the other,” said Renne.

Both the impact itself and a volcanic wave would have the potential to trigger massive eruptions of noxious gases that lead to sharp temperature fluctuations.

One factor could have been the release of CO2, for example from so much vaporized limestone, which, along with other greenhouse gases, leads to a long-term warming effect.

India’s Deccan Traps, described by geologists as a “great igneous province,” were formed over hundreds of thousands of years as layer upon layer of lava flowed and cooled, around the same time the dinosaurs died. (Paul Renne / BGC)

Renne says there could also have been an abundance of sulfate aerosols, “which, when released into the atmosphere, can actually reflect enough sunlight, causing cooling.”

In fact, one could argue for a double event – first sudden cooling, followed by a long, hot period from the greenhouse effect. Whether the dinosaurs died in a single bad weekend, or the lifespan of an animal when the food web collapsed, or several millennia, remains unclear.

“The potential effects of an impact or massive volcanism can be the same in many ways. The symptoms would be indistinguishable, ”says Renne.

Increase in precision

In order to better understand the effects and their possible connection with the eruptions in India, a narrower data range will be determined in the next step. For Renne, this means using a basement room full of mass spectrometers to test rocks from the Deccan traps. In the hallway in front of his office, canvas sacks full of such stones are piled up.

“I am a rock lover and I have a lot of beautiful rocks and large crystals. These are some of the ugliest rocks you will ever see, ”said Renne, pulling out a sample that, to my untrained eye, might as well have been gravel from a nearby quarry.

A fossilized pteranodon hovers over the Tyrannosaurus Rex in the Museum of Paleontology at the University of California at Berkeley. (Daniel Potter / KQED)

Dating these rocks is a slow process, with a few tens of milligrams shipped from the state to be irradiated and then sent back for testing. It can take months.

Nearby is a wood-paneled room that houses a magnetometer – another tool for dating prehistoric rocks. This is the Courtney Sprain’s specialty; She is a Ph.D. Student who also wrote Richards’ paper.

Sprain spends part of the summer in Montana collecting samples from coal seams and has told me that at the end of each day she resembles a chimney sweep.

When the Earth’s magnetic core shifts (we’re not sure why this is happening) it leaves a record in the rock. Sprain teases these cues to refine the timescale.

“We get an accuracy of 20,000 years,” she says, “while before it was 500,000, a million.”

Really ideal, albeit unrealistic, would be the accuracy up to the day of the week the impact occurred. But it would be helpful to bring it under 10,000 years.

Geologist Eldridge Moores, a distinguished professor emeritus at UC Davis known for his role in the John McPhee book “Assembling California,” says it is like a detective trying to find out the exact time someone died.

“You have to know that – this is essential information before you can answer the next question, that’s why. The same goes for the dinosaurs. “

Moores was sitting with me in his Davis house, a copy of Mark Richards’ newspaper on the dining table in front of him, when I asked him: Do we know what killed the dinosaurs?

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