Anyone who has strolled through the business districts of San Francisco, Chicago, New York or any number of other large, old-line US cities can sense the lingering effects of the pandemic. Commercial office space available for lease is at record highs in the US, as cities — particularly large ones in the north — have struggled to bring workers back to the office full time. The trend, which may well get worse before it gets better, threatens to create an urban doom loop that puts the future of some large cities themselves into question.
Mobile phone data collected from city centres tells a dismal story. According to the private equity firm Apollo, phone activity in San Francisco is at 31 per cent of pre-pandemic levels, New York is at 74 per cent and Chicago at 50 per cent of 2019 levels. Boston is at 54 per cent of pre-pandemic levels. This has implications not only for office vacancy rates, but for the shops, restaurants and services around big commercial centres. Once bustling areas, such as San Francisco’s Union Square, now seem down at heel. Petty crime is rising, as are homelessness and open drug use.
All of this further discourages efforts to get workers back to city centres. Given that commercial tenants are typically the largest taxpayers in urban areas, public budgets are suffering too.
This is where the doom loop comes into play. The quality of city services, such as transit systems and public schools, is decreasing. Yet, it is likely taxes will rise, particularly on residential real estate, as public officials look for ways to plug looming budget gaps. This would exacerbate a cost of living crisis in major urban areas. Cities such as New York, for example, have been struggling for years with a lack of affordable housing.
The big worry is some of America’s largest cities are headed back to a 1970s-style period of blight and decay. Back then, some mayors successfully combated problems with urban renewal efforts and downtown renovation. Today’s challenges are different, in part because they require a total rethink of how large commercial real estate buildings are used. Turning giant office buildings into apartments or mixed-use spaces is neither easy nor cheap. This points to yet another challenge for commercial real estate, which is that rising interest rates will make financing and debt repayment harder.
Not every big city is in trouble. Many parts of the west and the south — such as Nashville, Dallas, Austin, Raleigh and Phoenix — are thriving, and indeed sucking people away from cities elsewhere. Americans are being attracted to them because they offer warmer weather, lower real estate prices, and low taxes.
There are also signs, according to recent research from Goldman Sachs, that newer buildings in central business districts and smaller offices in suburbs around the country may be insulated from the stress experienced by larger cities. These are the places where people seem to want to work and live post-pandemic.
But America’s largest urban areas are in for what may well be years of slow-moving economic, political and social challenge. While the pandemic and interest rate rises are the catalysts, the problems of large US cities have built up over years. Substance abuse, homelessness, a shortage of affordable housing, gaps in the mental health system, and budgetary problems have been decades in the making.
Fixing them will require not just well-crafted public and private partnerships, but creative thinking. If the downtown areas of large cities aren’t places to work in full time, could they be reimagined in a way better suited to the post-pandemic world? The fate of America’s largest urban areas hinges on the answer to that question.
