Panel: Cities Face 'Doom Loop’ but There’s Hope

NEW YORK – Real estate experts from around the world held a virtual seminar on Wednesday to discuss how to mitigate the impact of expanded work-from-home opportunities created by the COVID-19 pandemic.

The Volcker Alliance, a nonprofit think tank started in 2013 by former Federal Reserve Board Chairman Paul A, Volcker, hosted the event titled "Doom Loop or Boom Loop – Work from Home and the Challenges Facing US Cities."

The discussion centered on how to deal with changes wrought by the growth of work from home and hybrid positions during the pandemic, and the resulting challenges to office space value and related businesses and services that thrive on the traffic of commuters going to work.

The seminar was the companion to a paper released by the Volcker Alliance early Wednesday morning that laid out the challenges and opportunities facing cities in greater detail. The paper focused on New York, Philadelphia, Miami, Chicago, and San Francisco.

"Ever since the arrival of the COVID-19 pandemic in the US in 2020 led to a surge in people working from home (WFH), cities across the country have been forced to reckon with the possibility of a 'Doom Loop' scenario of vacant offices, depleted central business districts, declining economic competitiveness, and fiscal stress," the paper states. "However, given the right set of policies, cities can reverse their fortunes and embark upon a path to a 'Boom Loop' of greater productivity and economic growth."

Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University's Graduate School of Business, sees potential in converting unused office space into housing.

"We have an excess of offices, and we also have a major housing affordability problem in pretty much all of our major cities, and we have a problem with the climate transition," Van Nieuwerburgh said during the panel discussion. "So at the end of the day we need to convert 'brown' offices into 'green' apartments. That's easier said than done."

Van Nieuwerburgh pointed out that there are physical and regulatory hurdles that must be overcome to facilitate conversion, but he said that generally speaking, 10% office space across the country is ready now for conversion into housing. For cities with older office stock such as Chicago and New York, that figure may go as high as 30%.

The greatest obstacle to conversion though, he said, is the financial one. Nieuwerburgh lays out three variables that are necessary for successful conversion.

First, he said the building needs to be bought at a substantial discount, as much as 60%, from its pre-COVID valuation. Second, the conversion costs must be reasonable. And finally the apartments must enter into a strong market that supports their high market rates.

"To be clear, we're talking about a luxury market conversion, where we're going to take an office building and produce very high-end apartments, the sort of places that in New York City would rent for $7,000 a month," Van Nieuwerburgh said.

He also acknowledged that this would do little to address the affordability crisis in housing and called on local and state governments to provide subsidies, tax abatements, and other incentives to support some of the units in conversions becoming available at affordable rents.

Kathryn Wylde, president and CEO of the nonprofit Partnership for New York City, looked at the issue from a different perspective, trying to highlight what employers can do to entice workers to return to the office.

"In terms of what's been found by employers to get people back to the office? They all say free food, in addition to moving into fancy new offices," Wylde said, adding that 20 million square feet of new office space has been built in New York since the pandemic, successfully bucking the trend of office space vacancies while charging the highest commercial rents the city has ever seen.

"There's been a flight from old, dingy office buildings to brand new buildings, and employers have shown they're willing to pay the cost," she said.

Wylde also argued that remote work may not be the biggest problem facing cities despite the empty buildings and other woes that cities are facing.

"There have been a lot of dynamics that are affecting [New York City]. I don't think that remote work is the most significant one in many respects," she said, adding that one of the biggest impacts on cities came in 2018 with the tax cuts passed by former President Donald Trump.

Part of that legislation, she said, capped local and state tax deductions at $10,000, and she said that change hurt urban states in particular such as New York, California, Illinois and Connecticut.

While the work of The Volcker Alliance focuses on larger cities across the United States, smaller cities like those found in Connecticut are facing similar issues. Commercial leasing saw ups and downs throughout 2023 in Hartford County, according to data gathered by CBRE Group, which is the world's largest commercial real estate services firm. The real estate picture was mixed, with leasing falling 17% from the third quarter, but rent costs per square foot rising by 4% year over year.

Working from home has also impacted local businesses that rely on daytime traffic from commuters and office workers to stay in business. Earlier this month, Tisane Euro-Asian Café, once a staple of the dining and party scene in Hartford's west end, closed earlier this month after 24 years in business. In its note to customers about the closure, Locals 8 Hospitality Group, the operator of Tisane and several other restaurants, directly referenced remote work as a challenge it could not surmount.

"Tisane used to be open from 7 a.m. to 2 a.m. prior to Covid and served four day parts. People would have meetings over coffee that rolled into lunch, lunch meetings that rolled into happy hour, or dinner that rolled into cocktails and music. Its central location on Farmington Ave served as the perfect meeting space for many. Unfortunately, with more people working remotely and fewer coming into Hartford, it has impacted the business we had before the pandemic," the restaurant group said in a statement.

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