Is NYC Avoiding the So-Called 'Urban Doom Loop'?
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( Mary Altaffer, File / AP Photo )
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Brian Lehrer: It's The Brian Lehrer Show on WNYC. Good morning again, everyone. The future of New York City has been left for dead a number of times now in the last 50 years during the fiscal crisis of the '70s, the crime waves of the '80s after 9/11 in 2001, and the financial crisis of 2008. Then came the pandemic of the 2020s, and a theory from a Columbia University Business School professor, who's about to be our guest, with a theory he framed as the urban doom loop.
Urban doom loop, you've probably heard that by now. Other cities have been caught in such loops before with decline of one sort or another, followed by many people leaving, which depleted the tax base, which hurt city services, which caused more people in businesses to leave and new people in businesses not to come on urban doom loop.
This one, the theory goes, would be caused by remote work becoming permanent for many people, herding small businesses near the half-empty office towers, and maybe a commercial real estate crash that could bring down local banks even, and further send the city into a doom loop of decline. More recently, Dr. Doom Loop, if I can call him that, has been singing a more optimistic tune, not totally, but a couple of years now after he coined the term, things are looking less doomy, even if still loopy, and with even the possibility that the pandemic economy and its long tail could offer the city new opportunities for growth and renewal.
Let's hear his take at whatever level of complexity he sees at this point in 2024. Maybe some of you saw him on 60 Minutes last weekend too. My guest is Columbia Business School Professor of Finance and Real Estate, Stijn Van Nieuwerburgh. Professor Van Nieuwerburgh, thanks for coming on with us. Welcome back to WNYC.
Stijn Van Nieuwerburgh: Thank you, Brian. It's great to be with you.
Brian Lehrer: First, how well or badly did I lay out the basic urban doom loop theory? Would you like to add or correct anything there to start out?
Stijn Van Nieuwerburgh: No, it was excellent. You did a great job.
Brian Lehrer: Okay, good. Are there some classic urban doom loop cases that you would cite as cautionary tales, cities in the industrial Midwest or upstate New York or anywhere?
Stijn Van Nieuwerburgh: Those are all good examples. Detroit comes to mind, also New York City in the 1970s as you mentioned. More generally, cities go through these large transformations. For example, with de-industrialization in the 1950s and 1960s, that took 20 years for the city to recover from that. Then we had 20 or 30 years of a positive spiral where interestingly, offices were the solution to our problem.
Brian Lehrer: There are cities that have not come back like New York has kept coming back that I wonder if they are better examples of the urban doom loop where it really winds up in a longer-term doom.
Stijn Van Nieuwerburgh: Absolutely. I think some of the cities in the Rust Belt come to mind, upstate New York as you mentioned. They're in some sense the industrial base left, and those cities never fully recovered. Even in those type of places, there are exceptions, Pittsburgh comes to mind that reinvented itself on the back of medical device industry and pharmaceutical industry. I think a lot depends on how policymakers respond to these shocks.
Brian Lehrer: We'll get to some policy options, but I think one of the things right off the bat that New York has going for it that some of those other cities didn't, that were really company towns for the one big company or industry that was there is that New York's economy is so diversified with a bunch of different major sectors. We're the number two tech hub behind Silicon Valley. I think you agree with that ranking plus the finance sector, advertising and media, education. There're big, big sectors of New York's economy that insulated to some degree more than let's say Rust Belt city that was a company town.
Stijn Van Nieuwerburgh: That's absolutely right. I think the other thing we have going for ourselves in New York is the fact that a lot of young people want to be here in part for jobs, but in part because it's a really fun city to live in. Of those amenities, these downtown amenities, the whole cultural sector that we have, that's also something quite special if you compare that with some traditional central business districts are very heavily office-focused and that are deserted at night. That's very different from the way Midtown and downtown Manhattan look and feel.
Brian Lehrer: Yes. Which is one of the things that the city did that I know you've pointed to after 9/11 that surprised me at the time, but it turned out to be so successful. Just when you'd think that people didn't want to be there in the shadow of the World Trade Center death and destruction, the city invested a lot of money in building residential spaces and having people want to move there and live there. That was one of the central keys to the revival of Lower Manhattan after 9/11, yes?
Stijn Van Nieuwerburgh: Yes. Actually, it started a little bit earlier. All of this came out of the commercial real estate recession of the late 1980s that led into the recession of 1990, 1991. Starting in 1995, the city put on this program called 421-g, which was essentially a tax subsidy for the conversion of office buildings into residential. All the way through 9/11 but all the way until 2006, there were about 13,000 new apartments built under this program. Yes, you're right. This really revitalized downtown and turned it from a purely office into a much more mixed office and residential neighborhood.
Brian Lehrer: Getting back to the doom loop scenario for New York today, post-pandemic emergency period into now, it seems to me there are two different doom loop stories that I hear a lot. The effect on delis and restaurants and other small businesses in the business district with fewer people working in the nearby office buildings each day to patronize them. That's bad for those businesses, obviously, but the other one, maybe much more threatening, is about the value of the office buildings themselves with the mortgages that the real estate developers have on those buildings. Is it right to separate those two tracks, and if so, can you describe each in a little more detail?
Stijn Van Nieuwerburgh: Yes, I think that's right. There's the repercussions of the decline of office values for tax revenues for cities. That's what I've called the urban doom loop where when the values of these buildings go down, over time, the taxes collected from these commercial properties will go down as well. For example, in New York City, about 15% of our tax revenue comes from these commercial properties.
If those buildings lose, let's call it 40% to 50% in value in the long run, then over time those tax revenues will also go down 40% or 50%, so that's about $6 billion or $7 billion per year in tax revenue that we might be missing out on. Because the city needs to balance its budget, it's going to need to either raise taxes on other items or it's going to need to cut spending.
Brian Lehrer: The annual city budget is about $110 billion, right? If you are talking about $6 or 7 billion out of that, that's not nice, but it doesn't sound ruinous.
Stijn Van Nieuwerburgh: True. Again, a 7% deficit is a non-trivial deficit to make up, right?
Brian Lehrer: Yes.
Stijn Van Nieuwerburgh: You have to remember, a lot of our expenses are locked in, a lot of those are wages that are pre-committed. It's never easy to trim 6% or 7% of costs. In fact, the city has made some cuts that have been already pretty painful and that's just the very beginning. Another way to put that $7 billion number in context, that's roughly the cost of the entire migrant crisis that we have, so again, non-trivial.
Maybe not ruinous, but I think it's in some sense, the starting point because if the result of that cuts to government services and that makes people leave, then when there's fewer people here, obviously the values of these buildings are going to decline further, but we're also going to be missing out on some tax, on some sales tax revenue, on some income tax revenue. That's what sets off-
Brian Lehrer: That's the loop.
Stijn Van Nieuwerburgh: -that that doom loop cycle. That's point number one. Then the second cycle, as you pointed out, has to do with the financial spillovers of these declines in office values because mortgages against these offices are important assets on banks' balance sheets, especially the more local regional banks which got in some trouble earlier in 2023.
Basically, we've arrived at this situation where the values of these buildings are down, the cash flows on these buildings are down, and interest rates have roughly doubled. Now you have all these office owners that have to refinance their mortgage and essentially, they can't because of these reasons. Some of these office owners might decide to send the keys back to the banks and then banks obviously don't want to be sitting on these half-empty office buildings, and that might lead to fire sales and to further declines in prices and so forth.
Brian Lehrer: In a worst-case scenario, I'm thinking of the 2008 financial, which was essentially a mortgage crisis, so many bad mortgage loans and the way banks felt immune from any risk for those loans, so when the economy changed, and many Americans couldn't make their mortgage payments, it's not only that the individuals lost their homes, banks started going out of business. That helped cause the period known as the Great Recession.
Again, correct my description of that scenario, if I'm mischaracterizing it, but also, is something like that at risk of happening to the banking system here in New York if building owners start walking away from their buildings and defaulting on their mortgages in the way you were just describing?
Stijn Van Nieuwerburgh: I would say in general, yes, but there's a couple of buts. One is that the commercial real estate sector is not as big as the residential real estate sector. Instead of $20 trillion in residential real estate mortgage debt, we have about $6 trillion in commercial real estate debt. It's a bit smaller, the problem is a bit more contained. For our largest most systemically risky banks, commercial real estate loans are an even smaller fraction. That's the good news.
Medium-sized banks are most exposed for them, commercial real estate could be a much larger share of their lending $30, $40, sometimes even more. Do I think we might have some medium-sized banks fail in the next couple of years? I do. Some of that is, in some sense, something we can deal with. In the 1980s, we had 700s thrift institutions fail over the commercial real estate banking crisis. Could we have a few 100 banks fail this time around? I think we could.
Now, is that necessarily catastrophic for the overall banking system? No, it's not, because as long as these banks are not systemically risky, they're small enough, we could deal with that. I think there are darker scenarios where if that were to happen, people panic, and they start to withdraw their deposits from the banks, and you have another run on the banks. Now, that's a darker scenario where this could spill over.
Another risk is that if the economy starts doing worse in the next several years, this problem gets worse as well, but if the economy keeps holding up as well as it has, I think this problem might be containable.
Brian Lehrer: Yes, but it sounds like people may want to take this opportunity to remind themselves that FDIC insurance for money that you have in those insured regular banks is good up to $250,000 before you keep any more money than that in there for people who have that much money. Yes?
Stijn Van Nieuwerburgh: Absolutely. Very important to remember.
Brian Lehrer: Listeners, everything you always wanted to ask or say about urban doom loop theory, and why it might or might not apply to New York City in the post-pandemic emergency period, but you never had Dr. Stijn Van Nieuwerburgh from Columbia's Business School who coined the term urban doom loop over for dinner to ask, 212-433-WNYC, 212-433-9692, call or text.
We've been describing the urban doom loop scenario that you had originally, but you've been in the news lately for being more optimistic. Some of you may have heard your interview with Arun Venugopal on the station or read the Gothamist version, but I see as early as last February, almost a full year ago now, you were quoted in the New York Times saying New York City could improve its outlook greatly with the right policies. You cited that example that I touched on before post 9/11, the city spending a lot on housing in lower Manhattan to great effect. What do you see as potentially productive policies now?
Stijn Van Nieuwerburgh: I think there's three prongs here. One is we need to-- At its core, we have too much office. My view is that remote work is here to stay. Our office sector is built for a world pre remote work, so there's essentially too much office space. We could argue whether we have 100 million square feet too much, or 30 million or 300 million, I think we can discuss that. At the core, we need to repurpose some of that office.
Some of it is converting that office into residential. We have a housing crisis at the same time, too little housing, certainly too little affordable housing. We've done some research that suggests that in New York City, something like 25% of buildings are potentially convertible from offices to residential. It's not easy, it's not cheap. There's regulatory changes that are unnecessary. What are the policies that should be pursued here? Well, one part is, rezoning part of Midtown for residential where residential is currently not allowed. Another part is to make sure that there is as of right conversion to residential use for office buildings that were built before 1990. Right now, that's not the case, office buildings have to be much older than that, to be allowed to convert.
A third plan would be to allow for more different types of housing. Think of co-living spaces. We used to call the single room occupancy way back when, but I think there's a modern version of that. That would make for a great use of some of our office space. Then the truth is, some of these conversions are basically not going to happen without some policy, some property tax abatements, for example. Something like that 421-g program that we had downtown in the late 1990s that we were discussing earlier would be really important to have going forward.
Brian Lehrer: Oh, go ahead. Do you want to finish your thought before I take a call? You can.
Stijn Van Nieuwerburgh: One last thing I would say, make sure that the city apparatus works well, and that mid-level government workers are really empowered to make those approvals so that the actual approval process can be streamlined.
Brian Lehrer: Roduan in Manhattan, you're on WNYC. Hello.
Roduan: Hi, Brian. Hi. Good morning. From my own experience, I'm a restaurant owner. I opened a restaurant in 2003, and then like you said, the city keeps evolving, and this is the great thing about New York City. That's why it keeps surviving. People have to understand that and adapt. I adapted myself because I went from a sit-down restaurant with a bar to a take-out restaurant because the behavior of the consumer has also changed.
In the past, people used to go to a restaurant for two hours of entertainment, and they didn't have the iPhone, they didn't have these nice TVs and all these unlimited shows, HBO Max, et cetera, [chuckles] Netflix. Now, the entertainment moves from the restaurant to the house or to the apartment, and they are happy just ordering food. That, of course, has effects on the brick and mortars with the big stuff that now they're not doing much inside the restaurant, and more to take out.
Brian Lehrer: You convert more than the takeout business.
Roduan: I did. I still have another restaurant, but I see the same thing. Not only this, this is just one of the many reasons. Also, I noticed many big companies or many companies now they're refusing to deliver to Manhattan. They say, "No, I don't need to waste time in the traffic, I get tickets, we lost lanes to buses, and we lost links to bicycles," so they really don't want to come to Manhattan. That alone also adds to the cost of businesses because now, you're only stuck with big companies like Cisco, et cetera, and those prices are very high. There's so much going on that--
Brian Lehrer: For that trucking.
Roduan: --are driving businesses out of New York City, especially from Manhattan.
Brian Lehrer: Really interesting, Roduan. I'm going to leave it there to get some other folks on, but a lot of insight from a restaurant owner there. Yes, professor?
Stijn Van Nieuwerburgh: I agree. Businesses have to keep adapting to the new environment.
Brian Lehrer: To some of what he was saying, does the remote work economy even itself out in a certain respect? Like if people aren't spending money at delis and restaurants near their office buildings as much, are they spending at delis and restaurants near where they live, and maybe that way, they're even more business is doing well, they're just more dispersed geographically around the city and around the region rather than concentrated in Manhattan below 60th Street?
Stijn Van Nieuwerburgh: That's right. That's exactly what we see. We see retail moving to where the people are. To give you one example, Chipotle opened hundreds of suburban locations in the last couple of years just following where two people went.
Brian Lehrer: Chipotle. Yes. Kathy Wylde who represents major businesses in New York City was quoted in that Times article last February that you're also quoted in saying "Historically, blight precedes resurgence in New York City." I was interested in that turn of phrase, blight precedes resurgence in New York City. If Midtown is suffering, or let's say, if real estate values are suffering, could it be that a bit of real estate crash is exactly what the city needs to bring down rents and home selling prices to make the city affordable again for the next generation of creatives and immigrants seeking opportunity who historically have moved here and kept making New Yorker a cultural and business hub?
Stijn Van Nieuwerburgh: It's certainly the case that lower office values would open up all sorts of alternative use for those properties. At $1,000 per square foot, it's really hard to imagine doing anything else but charge a lot of office rent for these buildings, but at $200 per foot, there's lots of other things you could do with these buildings, potentially. I certainly believe in that creative destruction aspect of this crisis.
Now, so far, rents haven't fallen at all. In fact, apartment rents have been rising throughout this period. Housing has certainly not crashed in Manhattan so far, so there hasn't been a little relief. I do think that if we were to convert a substantial share of these offices to residential, more supply would help to put a lid on these rent increases that we've experienced.
Brian Lehrer: As a professor of real estate, how do you explain the fact that rents have kept rising even as presumably there's less demand to live close to the central business district?
Stijn Van Nieuwerburgh: Part of it is that there was more demand. In the pandemic, everybody wanted more space. People wanted a home office, people didn't want to double up for health reasons, and so forth. We had this major increase in the demand for space per person. That has pushed up prices and rents. That is, I think, the most important factor at play here over these last few periods.
The other thing is that a lot of young people did come back to the city in 2021 and 2022. There has been strong demand, especially for smaller units. I think at the higher end of the market and the family-size apartments, that segment of the residential market has struggled in the last year or so.
Brian Lehrer: The generational aspect of this is really important. As I move around Manhattan, and when I'm in the business district and places like that, it seems to me, young New York is here, and young New York is going out and doing things. Young New York is regenerating the city in a way that defies the urban doom loop scenario to some degree. It's much more older generations who are retreating.
Stijn Van Nieuwerburgh: Sure. We have to remember, New York City has always been a city of young people. Over the last several decades, we've always had young people moving in and older people moving out. That has always been the case. Here's a remarkable statistic for you. You could look at the people that were here 20 years ago and ask, how many of these people are still here? The answer is about 10% of people who moved here 20 years ago are still here. It's always been the case.
Now, what happened in the pandemic is that more people moved out, more of that 30 to 40-year-old crowd moved out and didn't come back. We still had a lot of young people moving in, we still have a lot of young people moving in today. The other point to make is that those people on average make less money, pay less taxes, have smaller apartment buildings, so for the overall economic well-being of the city, we need those slightly older middle-class households to pay their taxes.
Brian Lehrer: New York is like this huge vacuum cleaner and centrifuge contraption. It sucks people in, and then it spits people out-
Stijn Van Nieuwerburgh: Absolutely.
Brian Lehrer: -over decades. Mike on Staten Island, you're on WNYC. Hi, Mike.
Mike: Good morning, Brian. Good morning, Professor. A concern I have regarding the city and property values and so forth is the effect of climate change, specifically on property insurance. Down in Louisiana, Texas, Florida, and big chunks of California, the property insurance market is abandoning those markets. This may be the first sign that America's property insurance market is beginning to collapse.
If insurers stop insuring, then banks won't lend. If banks won't lend, then property values are likely to erode and then eventually crater. If that happens, you're likely to see our economy reverse into one of recession, even depression. Most important of all, if that happens, then that will cut off, that will dry up the finance necessary to fund things like wind farms, solar farms, building electric vehicle factories. In other words, we won't be able to fight climate change anymore.
Brian Lehrer: That's the climate change doom loop. In fact, we're looking to do a segment next week, specifically on changes in the insurance markets right now. Professor, I know you talk about sustainable ability as part of the opportunity to avoid the worst urban doom loop scenarios. How does that intersect with what the caller Mike is talking about?
Stijn Van Nieuwerburgh: These are important issues. Close to home, we have local law 97, which basically kicked in on January 1st, and which essentially is going to impose taxes for buildings that are not environmentally friendly. On the one hand, you could say, for office buildings, that's the final nail in the coffin of some of these Class B and Class C defunct office buildings. On the other hand, you could say, well, we really need to start get going on improving the energy efficiency of our built environment. After all, the built environment is responsible for 30% of all greenhouse gas emissions in the world.
I think the issue of property insurance is slightly different, but I agree, that's where climate change is going to be felt the first and the most and most directly, and it's already happening. The cost of commercial real estate property insurance has already doubled last year alone in places like Florida, homeowners insurance has doubled in the last five years in places like Florida. That's Florida, but at the end of the day, a lot of these insurance companies are national. There are limits to how much costs they can pass through to their policyholders in Florida.
What happens is the New York policyholders end up bearing some of the cost for that, because they'll basically charge us more to recuperate their lack of being able to charge more in Florida. This is being felt here, and climate change is increasing in importance. The caller is right, if that homeowner insurance market were to collapse, it would be really problematic for values. I don't think the government will let that happen. I think in Florida already, there's been a Florida State government bailout essentially of the homeowner insurance sector. I suspect that we would get something like that nationally if it were to come to it.
Brian Lehrer: We're just about out of time. Mike, thank you for your call from Staten Island. If we had a whole other segment, we could devote the whole thing to these two questions I'm going to ask you on your out the door but do your best. One, how do you think the migrant surge affects the doom loop scenario long term? We know their resettlement costs in the short term that are closing libraries and other things, but maybe lots of young migrants seeking a better life here is a good thing for the city's economy in the longer term.
How do you see congestion pricing intersecting with commercial real estate valuations right in the same central business district that the congestion pricing tax is trying to keep people out of the central business district, but you're worried that too many people are away already working from home?
Stijn Van Nieuwerburgh: Two good questions. I would say on the migrant crisis, I do think that in the long run, an influx of young, competent workers will benefit the economy. I would say on the congestion pricing, we really needed to find a financial solution for our transit system, which had a deep hole and New York City doesn't function without a good public transit system.
Congestion pricing, if that can be the funding for our transit system, I think that's really, really important. Maybe it'll pull some more people in who don't want to commute because the cost of commuting has gone up now with congestion pricing. Maybe they'll come back and rent an apartment downtown. Maybe it'll also allow for more biking and so forth. I could imagine this being potentially a positive for the quality of life inside New York City.
Brian Lehrer: Columbia Business School professor of finance and real estate, Stijn Van Nieuwerburgh, most well known for coining the phrase urban doom loop, which I think you can tell from this conversation has its limits, and its potential upsides are ways to avoid the worst of the doom loop that he first imagined a couple of years ago when this scenario first occurred to him. Thank you for having these levels of complexity conversation with me and our callers. I really appreciate it.
Stijn Van Nieuwerburgh: Thank you, Brian. It was a pleasure.
Brian Lehrer: Brian Lehrer on WNYC, more in a minute.
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