What is the so called “Urban Doom Loop” and why does it matter

Thanks for joining us this morning. Over the past year, the concept of an impending “urban doom loop” has occupied an increasing share of policy and media focus.

What is the urban doom loop, how might it affect North Carolina, and – most importantly – is it even a real problem? We offer analysis on these questions below. Thanks for reading.

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Stijn Van Nieuwerburgh, a Columbia University professor, reportedly coined the term urban doom loop in a 2022 academic paper.

He forecast a series of related events that, taken together, spell death for urban centers, particularly in small and midsize cities.

That event sequence goes something like this:

1. Post-pandemic work trends and a labor shortage increase the proportion of employees who work from home, causing companies to cut back on their office space. Commercial real estate holdings earn less revenue and borrowers begin to default on their loans.
2. Meanwhile, the dearth of office workers and the empty commercial buildings cause downtown areas to lose their vibrance. People stop frequenting commercial corridors. Smaller businesses, like restaurants and bars, also close.
3. With fewer businesses and fewer workers, local governments lose tax revenue. They cut back on government services, causing the downtown environment to deteriorate even further.
4. Regional banks that hold commercial real estate debt become less stable as the proportion of bad debt increases even more.

It’s true that post-pandemic work trends have strained the commercial real estate sector. The Federal Reserve’s May 2023 Financial Stability Report highlights commercial real estate as an area of concern.

“The shift toward telework in many industries has dramatically reduced demand for office space, which could lead to a correction in the values of office buildings,” the report says. “Moreover, the rise in interest rates over the past year increases the risk that commercial real estate mortgage borrowers will not be able to refinance their loans.”

Trepp, a research firm, reported in August that commercial mortgage-backed security delinquency rates for office space increased yet again to 5.07%, up from just 1.50% twelve months ago. Additional Trepp data reported by the Washington Post showed midsize cities have much higher delinquency rates, with Charlotte leading the field at 30%.

These data trends suggest that Nieuwerburgh’s “urban doom loop” may soon become a reality – that we’re seeing the beginning of a multiyear spell that will crush downtowns and destabilize regional banks.

But an alternative view sees the “urban doom loop” as a media-driven scare – a headline-grabber caused by nothing more than a catchy turn of phrase slapped onto an academic paper with just enough supporting data to sound dire.

Indeed, over the past three decades, media reports have diagnosed the urban center’s death, resurrection, and now terminal outlook once again. There has certainly been some truth buried in there, but it’s rarely been as bad (or as good) as media reports suggest.

In that context, the “urban doom loop” may just be the latest overwrought fad in the natural urban development cycle.

A more careful reading of Charlotte’s commercial real estate stability, for example, reveals some nuance to its highest-in-the-country delinquency rate. Just three uptown buildings are mostly responsible for the delinquencies, according to Charlotte Business Journal: One Wells Fargo Tower, Charlotte Plaza, and the Wake Forest University Charlotte Center.

A spokesperson for Trepp told the paper, “You can have a couple of buildings (delinquent), and that makes those percentages seem really high, so, it’s not as negative as the number may make it see.”

What’s more, in order for the “urban doom loop” to be an actual “loop,” no countervailing forces – like an increase in the number of workers in a jurisdiction – can enter the mix to break the cycle.

But Charlotte is one of the fastest growing job markets in the country. Mark Vitner, a retired economist at Wells Fargo, told Carolina Journal last month, “In the south there’s only one metro area that added more jobs in the last year than Charlotte, and that’s Miami-Ft. Lauderdale-West Palm Beach. That colossal metro area is almost the size of the state of North Carolina and it’s 2.5 times larger than Charlotte.”

Even if remote work trends continue, then, the inflow of companies and employees to the area may put a floor on how bad the environment for commercial real estate can become.

Vitner also argued that a macroeconomic downturn might prove another countervailing force on the “urban doom loop.” Higher unemployment will give workers less leverage in demanding a work-from-home arrangement, allowing employers to shift more people back to the office.

Of course, like every other economic prediction, only time will tell who is right. It seems a safe bet, though, that North Carolina – named back-to-back best state for business, with billions in state rainy day reserves – will weather any future shock better than most.