There is so much wrong with America’s cities, it’s hard to see why any contributing member of society would live and/or work in one of them. Some of the issues arise from far-Left local governance while others are generated by more widespread Leftist policy. These are coupled with an organic workforce evolution, as the United States transitions from an industry-based to an information-based economy. The result is urban areas caught in a downward spiral — and, as with any sinking vessel, threatening to suck everyone nearby down with them.
First, a quick refresher on the compounding problems of urban areas. Chief among them is that big cities are dark blue, and thus they’ve become crucibles of Left-wing policy failure. Uncontrolled crime, roving drug and mental-illness zombies, and swarms of sanctuary-recipient asylum scammers are crowding out reasonable people and businesses. The normals who remain to take advantage of access to cultural events (such as they are) and restaurant variety are also subject to totalitarian social controls and two-tiered justice systems that punish them when they fight back against criminals. But no matter how desperate the situation becomes, city councils can be counted on to double down on woke policies, then double down again.
Businesses are fleeing. In the ones that remain, shopping for basic goods has become a frustrating exercise in waiting for an associate to unlock the case so you can grab a razor and some toothpaste. Add in today’s high interest rates, which make owning and running a business prohibitively expensive, and the writing is on the wall. PJ Media colleague Rick Moran reported last month that large San Francisco commercial businesses, like hotels and malls, are simply walking away from their obligations, handing the keys to the banks with which their real estate is financed. Concurrently, major retailers are declining to renew leases and are simply closing their doors, unable to break even in an atmosphere where retail theft is encouraged. This process is occurring to some degree in major cities across the country.
While we conservatives point and laugh at the plight of woke cities from the comfort and safety of our suburban and rural homes, we may want to take a moment to consider a sobering issue. The effects of the imminent collapse of the commercial urban real estate market will ripple out across the financial sector and affect just about everyone in one way or another.
Remember the mortgage-backed securities crisis in 2008? And how, even if you didn’t default on your mortgage or didn’t even own a house, the entire economy tipped into what the hyperbolic media tagged “The Great Recession” and we all suffered? So, this would be kind of like that, except the problem will start with a commercial real estate collapse.
An article in The Atlantic last month called “The Next Crisis Will Start With Empty Office Buildings” paints a grim picture of what’s going down. First, the demand for office space dries up:
During the first three months of 2023, U.S. office vacancy topped 20 percent for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates are as high as 25 percent. These figures understate the severity of the crisis because they only cover spaces that are no longer leased. Most office leases were signed before the pandemic and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in the 10 largest business districts is still below 50 percent of its pre-COVID level, as white-collar employees spend an estimated 28 percent of their workdays at home.
With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both.
Next, the loss of commercial tenants and landlords causes urban fiscal pain:
Property taxes underpin city budgets. In New York City, such taxes generate approximately 40 percent of revenue. Commercial property—mostly offices—contributes about 40 percent of these taxes, or 16 percent of the city’s total tax revenue. In San Francisco, property taxes contribute a lower share, but offices and retail appear to be in an even worse state.
Empty offices also contribute to lower retail sales and public-transport usage. In New York City, weekday subway trips are 65 percent of their 2019 level—though they’re trending up—and public- transport revenue has declined by $2.4 billion. Meanwhile, more than 40,000 retail-sector jobs lost since 2019 have yet to return. A recent study by an NYU professor named Arpit Gupta and others estimate a 6.5 percent “fiscal hole” in the city’s budget due to declining office and retail valuations. Such a hole “would need to be plugged by raising tax rates or cutting government spending.”
Cities must then make choices between cutting services and raising taxes — either of which will further drive out the remaining wealthy and productive residents and businesses. The cycle can be deadly. As in the 1970s, municipalities will start declaring bankruptcy — and that will add a drain on federal resources, which will have to be used to bail them out. This will be on top of the unemployment benefits to the urban retail and hospitality workers who lost their jobs.
And the pain for the rest of us won’t stop at the high federal price tag:
[T]urmoil in office markets threatens retirement systems and the portfolios of individual people. Public and private pension funds have traditionally kept their assets in stocks, bonds, and cash. However, in recent decades, they have shifted toward so-called alternative investments, including commercial real estate and private equity. These investments now comprise a third of their portfolios, with real estate comprising more than half of these assets for many pension funds.
Pre-COVID, this trend included significant investment in office space, particularly in major markets such as New York, San Francisco, Los Angeles, and Boston—which are now struggling. Pensions saw this type of investment as a stable source of income, mainly through rent, and a hedge against inflation. With public pensions already underfunded by an estimated $1 trillion, a decline in the value of commercial real estate could make this bad situation significantly worse.
Yikes.
Don’t start daydreaming that we’ll have a Republican president by then who will refuse to bail out imploding cities, either. When you realize that everyone’s pensions are involved, you understand that not bailing out these banks and cities was never going to be an option. They have us over a barrel. So we can expect a cool trillion or two to flow from Big G’s coffers. This, while we are still reeling from the inflation and high interest rates from the last crisis, the Great COVID Overreaction Rescue Plan.
Related: West Coast, Messed Coast™ — 9th Circuit Judges Promise More Tent Cities for Everyone!
Yes, the shift in work styles was inevitable to an extent, once people began to move their lives online. The process was accelerated by the COVID shutdowns, as work, school, and shopping all went online. Buildings and districts built around in-person interaction simply aren’t needed to the same degree they once were. But that doesn’t let idiotic Leftist city managers off the hook.
There is much to recommend city life: museums, entertainment, fine dining, varied shopping and cultural experiences, travel hubs, and excellent medical care are all steps away. A large segment of the population prefers such a stimulating and convenient lifestyle, and they would happily live in cities regardless of whether they worked at home. Enterprising landlords could convert less-used office space to living space and continue to run a profitable business. But so long as Soros DAs, activists, and city councilors keep making urban life unlivable, America’s cities will continue to circle the drain. And we’re all going to get sucked down with them.
Join the conversation as a VIP Member